Shyam G. Menon
Latha Venkatraman

Mumbai, April 8

ON Dalal Street, the country's leading packaged tea players showing signs of leaving the plantation business, was interpreted as a sign of more such exits to follow.

By selling their plantation business both Tata Tea Ltd (TTL) and Hindustan Lever Ltd (HLL) would be able to invest behind their brands more heavily.

"Even if they were to buy tea at higher price from the open market, the profit profile would be better than continuing in the plantation business,'' Mr Hemant Patel, Research Analyst, Enam Securities said.

Greater likelihood of exit from the business was attached to players with strong brands.

"Those who do not have strong tea brands will stay invested,'' Mr Nikhil Thacker, AVP (Research), Asit C. Mehta Investment Intermediates Ltd, said.

Tea industry sources claimed that the February-decision of Tata Tea Ltd (TTL) to transfer its 17 south Indian tea estates to a new company and today's announcement by Hindustan Lever Ltd (HLL) to transfer its entire tea plantation business to wholly-owned subsidiaries, do not signal the beginning of the end of the integrated tea business model.

Both companies are major players in the packaged tea segment with backward integration into plantations. "Large corporations in the tea plantation business typically receive the short end of the stick,'' a senior industry said on condition of anonymity.

According to him, the estate transfers were happening due to the cost structure large companies in the field have to bear, under the traditional method of plantation ownership with additionally no exit clauses available.

"Tea has therefore become a small grower, entrepreneurial business. It is not lucrative for big companies,'' he said. It is a cost pressure that is palpable in the present times of tea imports, which brings closer home the economics of cultivation at more efficient producers abroad.

Explanations for its move from HLL revolved around maintenance of garden equity, otherwise diluted in the presence of large captive consumers.

With the main owner-consumer distanced from the estate, the latter has better freedom to leverage the uniqueness of its name and command its due premium.

Two of the biggest packaged tea players switching to greater outsourcing also need not mean corresponding increase in auction prices because those prices are a function of global demand-supply.

The sum totals at play in the sector are not changed by shifts in sourcing pattern at individual companies so went the argument.

Besides, there is global sourcing and long-term contract with plantations as further cushion to open market price increase.

This similarity in overall rationale between the moves essayed by TTL and HLL is only one half of the picture.

On the other hand, the two companies implemented their intent differently. TTL transferred its south Indian estates to a new, largely employee-owned company.

By late February, at least one large competitor was unsure how this model would work because it appeared short in settling buyers' concerns.

Would buyers be comfortable sourcing teas away from the owner-driven model and from an experiment featuring employee-ownership?

TTL is confident that it can tackle these issues. HLL's solution has been less radical and more in tune with convention. It points to eventual joint ventures with parties having expertise in international sales and marketing, besides the possibility of an outright disposal.

Further unlike TTL, which moved first in south India and has yet to disclose a similar plan for its north Indian estates, HLL's action has been total, tackling both geographies. In the aftermath of TTL's step, some in the trade had wondered why the axe fell first on south Indian plantations when operationally Assam was reckoned to be the industry's tougher half.

This view was rooted in the perception that social overheads had to be duplicated under Assam's laws, not to speak of labour laws, which required a constant headcount at estates there making VRS possible but redundant in practice.

However, Assam's teas were less susceptible to replacement by foreign strains as was the weakness with southern teas.

So with all these likely exits happening and more expected, what is the profile of prospective interest from fresh investors given FDI now permitted in the sector?

Some time ago, there was talk that the Kerala Government was moving to allow non-tea use for erstwhile tea estate land, thus opening it up for newer applications.

FDI is not the differentiator; it is potential land use, a senior tea industry official said.

And the reason for that is funds, Indian or foreign, would seek the sector less for tea, more for real estate.

One thing is however certain; there is more action to come.

If not exits, then what happens to the new companies and subsidiaries into which the tea estates are transferred?

(This article was published in the Business Line print edition dated April 9, 2005)
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