From a legacy tea producer to world's largest tea producer, McLeod Russel India Limited (MRIL) has taken the road less travelled and succeeded at it. At a time when other biggies in the industry were exiting the plantation business deeming it unviable, in the middle of the last decade, the Kolkata-headquartered planter took the risk of expanding its empire on borrowed money.

The expectation was: tea would soon be in short supply due to constraints over land availability in India making plantation business more attractive.

Years down the line, with its strategies proving correct and a “nearly debt-free” balance sheet in hand, McLeod Russel is aiming at more acquisitions - especially in Africa – but, only through internal accruals.

“One should not get carried away by the fact that just because we were lucky and our judgements were correct,everything we do will be right,” Mr Aditya Khaitan quips. The company should not get into the “same leverage position” as it did in order to enhance sales from 42 million kg (mkg) in 2005 to 102 mkg in 2011-12.

New Beginning

Having de-merged from Eveready Industries in April 2004, McLeod went in for three acquisitions – Borelli, Doom Dooma and Moran - between July 2005 and 2007. The acquisitions added 24 Indian estates to its portfolio at a total consideration of nearly Rs 328 crore.

Of the three, the acquisition of the UK-headquartered Borelli Tea Holdings from the Magors at Rs 200 crore , brought home nearly 19 mkg of production from 17 tea estates in Assam. On the flip side, McLeod's gross borrowing increased to nearly Rs 440 crore, inclusive of Rs 275 crore term loan, at a debt equity ratio of 1:1 in 2006.

“We were fortunate to have got into expansion. Today the kind of assets, we acquired, are either not available or are too pricey to ensure similar returns as we generated,” Mr Khaitan says.

To further the benefits, the company invested in re-plantation bringing the average bush age below 50 years and extracting better yield than industry average. The result is telling in the balance-sheet. As in 2011-12, the Indian acquisitions have generated adequate cash to reduce the gross borrowings to Rs 170 crore – inclusive of Rs 110 crore working capital loan – at a debt equity ratio of 0.2:1.

Meanwhile, the company gained control over 22 mkg of production in Uganda, Rwanda and Vietnam between March 2009 and February 2011 at a total consideration of $42 million or Rs 216 crore at today's exchange rates.

The company may close the latest fiscal with approximately Rs 400 crore in consolidated operating profit (earnings before interest, tax, depreciation and amortisation) on sales of Rs1,500 crore.

“As on March 31, 2012 we have a bare minimum of Rs 60 crore term-loan. We have already made Rs 130 crore deposits in Tea Development Account Scheme, 2007. We will make higher contributions this year. In addition to the related IT benefits, this should take care of our annual Rs 40-50 crore capex (including re-plantation) and reduce the average bush age by 5 years in next five years,” the company's CFO, Mr Kamal Baheti, said.

Passage to Africa

With nearly 95 per cent of its production originating from Assam, McLeod set out for overseas buyouts in 2009 to hedge the climate risk and spread operations across different climate zones.

Though the first acquisition was in Vietnam, the company is not inclined to enhance its exposure in the country in the immediate future, as issues pertaining to pesticide residue and pest attack still dog the Vietnamese plantation sector. The focus is on Africa, where valuations are much more ‘reasonable'.

“We need to add another 20-25 mkg production overseas, to attain a better (climate) hedging ratio. Major focus will be in Africa, which fits with the present profile of our tea gardens,” Mr Khaitan says. He is hopeful of spotting the strategic buy in next two to three years.

Indian prices to go up

The company rules out that higher margins are a major attraction to go abroad. The overall operating profit margin in India is 27-28 per cent as against 31-32 per cent overseas. With labour cost frozen in India for next three years, the domestic margins should improve in next couple of years due to higher realisation, Mr Baheti says.

Mr Khaitan has a clear formula in mind. While world production is stagnant since 2007, black tea consumption is growing by 50-55 mkg a year. India being the world's largest consumer, there is a pressure on prices to move up.

“Prices should move up in next 1-2 years. If that does not happen, given the cost push, reinvestments into estates will get very difficult leading to closure as it happened in early 2000,” he says.

>pratim@thehindu.co.in

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