After McLeod Russel, Apeejay lands in hot tea

It's not just McLeod Russel, the crisis in the tea industry is running deep and is impacting several top-notch plantation companies.

McLeod Russel, country's largest tea plantation company, suffered rating downgrade in March over tightening liquidity crunch, which has reached such a level that the company was forced to defer salaries of senior level management staff for March and April, an unheard of situation for the conglomerate, which also owns country's largest dry cell battery maker Eveready.

The crisis is not afflicting just McLeod Russel alone.

Country's third-largest tea producer, Apeejay Tea, which owns UK's well-known tea brand Typhoo, is also seeing liquidity issues and high level of debt with rating agency Icra converting stable outlook to negative over concerns like poor profitability and worsening liquidity situations.

"The long-term outlook change is owing to extraneous circumstances hitting the tea sector," a source in Apeejay Tea told DNA Money, adding that the long-term rating is reflective of the company's strengths.

Owing to cost pressures, Apeejay Tea has now transformed the business model away from the cheaper CTC to Orthodox variety and are looking to be the largest Orthodox producer in India.

"With current price trends, the company's expanded Orthodox production and tightening of belt for efficiencies in cost of production, outlook in the short term is also positive," the official said.

McLeod Russel sees the scenario improving with the conclusion of the first tea season of the year where cash collections are highest.

"Price realisation is higher than previous year which will lead to higher cash flows this season," a senior McLeod Russel official said.

"In FY2020, while improvement in profitability and cashflows of the tea business is expected on the back of higher realisations, given the company's focus on improving the quality of its produce and increasing the share of orthodox teas, cashflows from operations would need to be supplemented by fund infusion and/or debt refinance to meet its debt obligation," Icra said in its rating note on Apeejay Tea.

Despite a positive outlook for this year, tea plantation business as such is undergoing a major structural change with erratic weather patterns impacting quality of output, high percentage of fixed labour costs and limited upside in realisation improvement because of mandatory requirement of selling tea through the auction route as against private sale at lucrative prices, sources within the industry said.

NO GREEN SHOOTS

• Owing to cost pressures, Apeejay Tea has now transformed the business model away from the cheaper CTC to Orthodox variety
   
• FY2020, improvement in profitability and cashflows of the tea business is expected on the back of higher realisations