Why a non-tea player like Carbon Resources is eyeing McLeod Russel

With a crop of 44 mkg across 31 estates in Assam and two in Dooars, McLeod is a Goliath in the world of tea. It has estates in Africa and Vietnam and its total output worldwide is 73 mkg

Rising costs and stagnating tea prices have been major issues in the tea industry. So why is a non-tea player looking to buy a giant like McLeod Russel India and embrace the troubles is the question doing the rounds in tea circles.

Abhishek Jalan, director, Carbon Resources, says, it is a pure business decision. “We believe that this business has value. They have been EBITDA-positive even in the worst of times. They have been bleeding only because of a huge debt cost.”

Jalan’s company, Carbon Resources, which is into manufacturing input materials for ferro alloys, steel and aluminium industries, has made a non-binding offer to McLeod's bankers to settle dues and take a controlling stake in the tea producer.

The size

But the Khaitan family-controlled McLeod is not just any tea company. With a crop of 44 million kg (mkg) across 31 estates in Assam and two in Dooars, it’s a Goliath of sorts in the world of tea. There are estates in Africa and Vietnam. With India, the total production is about 73 mkg.

But it used to be bigger and was the world’s largest before it started selling gardens to pare debt. McLeod ran into debt while extending financial support to group company, McNally Bharat Engineering Company.

In 2015-16, the company’s peak production had stood at about 117 mkg from 64 estates. But between FY19 and FY20, it sold off about 18 gardens, mostly in Assam, and realized about close to Rs 800 crore. The company also sold the profitable operations in Rwanda.

Touch-and-go

The move was aimed at bringing down debt, but it hasn’t quite ring-fenced the company from troubles. Last year, the New Delhi Bench of the National Company Law Tribunal (NCLT) passed an order admitting an application by Techno Electric & Engineering, a power infrastructure company owned by a former merchant banker, P P Gupta, for initiating corporate insolvency resolution against McLeod. However, a settlement with Gupta saved the day for McLeod.

The gardens

In the world of tea, the Khaitans are a name to reckon with. “The gardens are all good, have good yield and are capable of making money. The group is just weighed down by debt,” said an industry expert.

It may be mentioned that McLeod’s EBITDA margin between 2009-10 and 2013-14 stood at 33.26 per cent and 20.91 per cent.

But apart from being dragged down by debt, the industry also went through a down cycle between CY14-FY19.

Tea prices

But this year has been good. Orthodox tea prices peaked as demand surged following the economic crisis in Sri Lanka, the world’s largest supplier of the variety. Quality CTC is also fetching good prices this season.

The average price for orthodox tea in 2022 is Rs 319.69 per kg compared to Rs 241.11 per kg in 2021 and Rs 288.45 in 2020. The average for CTC is Rs 229.29 per kg as against Rs 207.58 per kg in 2021 and Rs 287.29 per kg in 2020. Quality CTC teas are getting higher prices.   

“Only common CTC where there is an oversupply, the market and industry is subdued. Wherever there is a quality or orthodox angle this year, things are different,” the expert said.

That should augur well for McLeod, which has a mix of both. The company is looking at 10-15 per cent higher exports this year and the major destinations would be UAE, UK, US, Canada and Germany.

McLeod Russel India at a glance

• Crop: 44 mkg
• Estates: 31 in Assam, 2 in Dooars
• Area: 21,942 hectares
• Group production across India, Africa, Vietnam: 73 mkg