The Hindu Business Line : Tata Tea: Plantation business still has flavour

Yet, steps taken in-house, comments by officials and the changing texture of its results - courtesy the impact of consolidating accounts with Tetley's, cast a question mark over plantations continuing centrestage at Tata Tea.

Tea prices have been under pressure due to several factors. According to broking circles, Indian production estimate for 2003 was up by 30.89 million kg (mkg) over 2002 level, while export for January-December 2003 was 164.86 mkg, lower than 2002's 201 mkg. Growth in domestic consumption, on the other hand, is a contested claim.

Average auction price was depressed through last year. Same time, branded tea sales came under pressure from cheap, low priced teas. In June 2003, at a press briefing on the company's FY03 results, Tata Tea disclosed its branded tea and plantation businesses were in separate profit centres.

Against sectoral decline and government permitting foreign direct investments, such status to plantations triggered speculation about eventual company form as prelude to divestment. Officials denied it. "This is for enhanced focus,'' Mr Homi Khusrokhan, former Managing Director, Tata Tea, had said, drawing a parallel with the pharma sector's bulk drugs and formulations businesses.

In Tata Tea's segment results, tea revenue is a composite of cultivation and branded inflows. Industry sources recommend Parry Agro as test for pure estate play, some 10 mkg of tea sold wholly at auctions. The Rs 85.9 crore-company closed FY03 with an Rs 3.38-crore loss, rising to Rs 6.70 crore by FY04 third quarter.

Year 2004 began positively for the tea industry, best news being little stocks carried over from last year. Export business is trickling back, according to trade talk referring to Iraq, West Asia and Commonwealth of Independent States. But production prospects point to continued good supply. Tea is strong in Sri Lanka, Kenya, China, Vietnam and Indonesia. Closer home, Nepal is into tea cultivation.

Last month, while reporting December quarter results, Mr P. Siganporia, Deputy Managing Director, said Tata Tea, which produces 58-59 mkg of tea, was raising its quantum of outsourced green leaf from small growers to four mkg. Previously, it was 2.8 mkg.

Small growers had come to possess a viable business model given knowledge of their modest land holdings and work on variable remuneration basis. "It is an important development in the industry,'' he said. In the 2004-2005 Interim Budget, small growers who contribute about 18 per cent of the national tea production were allowed to take working capital loans of up to Rs 2 lakh at 9 per cent interest rate.

Loss of sheen to big plantations is fuelled by another angle too. With its acquisition of Tetley, the world's biggest integrated tea company evolved into the world's second biggest branded tea player. In consolidated accounts, 85-86 per cent of Tata Tea's turnover came from branded tea sales, only 15 per cent from estate operations.

Tetley maintains no estates. So, is there more than just new flavour to income stream, in the diluted share of plantations in Tata Tea's consolidated results? The likely emergence of a Tetley model here?

Compared to other commodities, tea prices are not very volatile. "I would place it somewhere in the middle,'' a tea broker said. This means, outsourcing is tenable. Godrej Tea works on that basis.

Mr Siganporia said, outsourced green leaf from small growers, far from hinting at any switch in sourcing, bridged the gap between demand and supply. "It is supplemental rather than substitutive.''

Brokers say, less than 50 per cent of the production reaches auctions in North India, while it is 70 per cent in the South. In 2003, South India accounted for only a quarter of the total Indian crop of 857.05 mkg.

The small grower-big company equation works because green leaf at small growers' lacks scalability and, therefore, has a compulsion to sell against good price or consistent purchase.

For processors like Tata Tea, the filler quantum of green leaf keeps factories running at high capacity utilisation. Still, big companies have to worry about workforce, assets and structured costs, while small growers are free of these headaches.

Is it rewarding to be in huge estates when low tea prices demand light overheads? Hindustan Lever saw acreage rise over the years.

The Vice- Chairman, Mr M.K. Sharma, acknowledged the overheads, but saw merit in ownership. Among them, getting fine tea estates and relating sourcing mix to prices. "Don't forget 1998, when it was attractive to own tea estates,'' he said on the sidelines of HLL's recent FY03 press briefing.

Tata Tea has no plans to exit plantation business. Or, transfer the business to other agriculture-focussed companies in the Tata Group such as Rallis or Tata Chemicals.

What can happen at best is occasional churning of estate portfolio, Mr Siganporia said.

Besides, as a RPG Group official pointed out, greater outsourcing from small growers is restricted by current cash flows at tea companies.

Small growers' ascent is also not uniform. In Kochi, they talk of 20-23 small players in Vandiperiyar who shutdown owing to very low tea prices. Small or big, profit is tied to viable price bands.