Anticipating a higher requirement of cash in wake of the second flush, the stressed tea companies are increasingly opting for the loan moratorium offered by the RBI, which they believe will help improve cash flow.
The requirement arose after plantation companies lost an estimated 110 million kg (mkg) of tea during March-May, which is around 85 per cent of the usual produce during this timeframe. The production loss led to a loss of revenue at a time when the harvesting season in north India started and which direly affected the cash flow of companies.
“We need considerable cash at hand so that the production of second flush remains normal or is the least affected. Deferring interest payment to the banks is one way of boosting the liquidity position of the company”, Vivek Goenka, executive director at Warren Tea said.
Usually, during May-July, tea companies need a higher cash flow to ready the bushes for the second flush. This harvest is the most important in Assam and the second-most important in West Bengal. Estates usually employ additional temporary workers as well to increase production during this period.
A healthy second flush provides enough room for tea companies to improve their revenue and cash position.
Usually, Assam teas from this season are sold at exorbitant prices. For instance, last year, a kg of Dikom Tea Estate’s Golden Butterfly tea fetched Rs 75,000, while Maijan Orthodox Golden Tea created a record of Rs 70,501 per kg. Manohari Gold Estate in Assam also sold teas at Rs 50,000 per kg.
Given the weather conditions and the Assam government allowing 100 per cent deployment of workforce in tea estates, plantation companies are optimistic about this year’s second flush harvest. West Bengal, however, till now has allowed the deployment of only 50 per cent workforce in tea gardens.
Like Warren Tea, Jay Shree Tea and Industries has also opted for the loan moratorium.
“On one hand, bank credit has dried up in the sector and on the other hand, there were practically no earnings during the first flush (March-mid May) season. Faced with these constraints, what else can one do other than opt for the moratorium”, said D P Maheshwari, managing director and CEO at Jay Shree Tea an Industries.
Ratings agencies have already downgraded the ratings for various tea companies, which sources said, had influenced the flow of credit to tea firms.
Various factors like successive losses by certain companies, repayment obligations, projections of lower income and overall group stress were factored in the ratings revisions apart from the overall stress in the tea sector, which has been impacting the financial health of the tea firms.
“Under such a scenario, tea companies are increasingly opting for the loan moratorium even though they understand that the final repayment will be higher as interest will be accrued during the moratorium period”, Sanjay Bansal, chairman at the Ambootia Tea Group said.
Tea prices however, have been improving owing to the scarcity and tea companies believe that a quality produce can help them pay for the extra amount which will be incurred in the moratorium period.
Sources in Guwahati said that average prices have already soared by Rs 20-30 compared to last year and better-quality teas are being sold at Rs. 30-50 higher than last year’s prices.
- Loan moratorium helps improve liquidity situation
- Owing to production loss, tea companies’ cash flow has been direly affected
- Tea companies need good cash flow in May to prepare tea bushes and pay for extra workers
- Tea companies expect prices to be healthy which will help in loan repayment