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Indian tea companies in acquisition mode

— PHOTO: AFP

RECOVERY PHASE: A worker plucks tea leaves in the Dagapur tea garden on the outskirts of Siliguri

Having recovered after a prolonged period of recession, the Indian tea industry is now in the acquisition mode. Most of the major companies and even some of the smaller ones think that this is a good opportunity to acquire a garden - within the country or outside.

India is the largest producer and consumer of black tea in the world. However, now it is becoming clear that neither would it be possible to increase the acreage under tea cultivation nor bring any quantum leap in the production of this agro-commodity which is among India's top foreign exchange earner, without a change in the ageold technology and introduction of mechanisation.

Labour shortage

Labour shortage is already an acute problem in the South and the estates in the North too have begun to face shortage of skilled hands with increased migration of the younger workforce. Thus, acquisition of gardens assumes importance.

According to McLeod Russel India Ltd (MRIL), which is billed as the largest producer of bulk tea, with an output of 74.8 million kg in 2008-09, the company is looking at not only increasing the acreage of the Phu Ben Tea company in Vietnam which it bought from a Belgian owner in March 2009 but also at making fresh buys. Phu Ben produces around 4.5 million kg of tea out of its three factories in Vietnam. An MRIL board member said that while at present 2,000 hectares were with the company, the government had been moved for an additional 1,000 hectares of tea-land.

MRIL has, of course, been on an acquisition spree for sometime now. It made no less than four acquisitions, including Phu Ben, and is hungry for more. Beginning with the acquisition of Williamson Tea Assam's 17 gardens from Borelli Tea in 2005, it went on to purchase Doomdooma Tea from the erstwhile Hindustan Lever in 2006, before sipping up Moran Tea. All the gardens are in Assam where MRIL has a major presence with 47 gardens. It made the acquisitions at a time when a lot of companies, mostly trading outfits, sought to either withdraw from the plantation sector altogether or at least de-risk their business through formation of joint ventures. Within Vietnam the B. M. Khaitan group company is now looking for fresh opportunities and in this case it has the advantage of an earlystarter.

Now another big tea company B. K. Birla-controlled Jayshree Tea Industries Ltd has said that it was keen to make acquisition, with the grand old man himself saying that Vietnam and Uganda were the countries of choice. It was learnt subsequently that preliminary level talks have already begun with a company in Uganda.

Funding

With improved industry status, acquisitions are now being funded through a mix of debt and internal accruals as against the earlier debt route, which dented the bottomline of many companies. Companies like Jayshree Tea prefer their internal accruals and reserves to fund buyouts. It may be noted here that in the world tea scene, Vietnam's progress is seen as remarkable. Since 2001, while its average tea production increased by 11.5 per cent, it has been exporting increasing portions of tea and currently about 75 per cent of its output is exported. Uganda is seen as another success story though its political situation may throw up a case for concern.

Prices look up

The Indian tea industry had seen major changes in its operation during the last decade pressured as it was by the unprecedented crisis due to over-supply on the one hand and a prolonged period of low price realisations on the other. Prices, depressed since 1999, have begun to look up since 2007 and have been on an upswing.

This coupled with the fact that after a long while a consumption growth is evident in most Asian countries, particularly China, India, Pakistan, Iran and the Russian Federation, has created buoyancy in the tea industry.

However, although there are a sizable number of sick gardens in West Bengal, very few companies seem to be interested in acquiring such properties, even when they go scouting for acquisitions. "The size of their labour force, the legal complications and their liabilities do not make them worth the effort," said the senior executive.

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