McLeod Russel India Ltd., the world's largest tea producer, is facing one of the worst crises in its corporate history, according to some experts.
Last week, the National Company Law Appellate Tribunal postponed a ruling on whether or not to stop insolvency proceedings against the company, which had been begun due to an alleged loan default. The tea industry is wondering how this development would affect the industry, which hasn't been doing well recently.
The insolvency petition was accepted by a New Delhi tribunal in early August, despite McLeod Russel's objections.
While McLeod Russel, based in Kolkata, has challenged the formation of a creditors' committee to handle the insolvency process, the tribunal will decide on the stay after receiving a response from Techno Electric & Engineering Ltd., the company that sued McLeod Russel for allegedly defaulting on a Rs 100 crore loan. On September 8, the next hearing will take place.
Experts attribute McLeod Russel's problems to a combination of market issues and the company's growing debt. Some believe the conclusion of the proceedings will end in a change of ownership for McLeod Russel, while others believe it is just a blip in the company's 150-year history in the tea business.
The McLeod Russel bankruptcy, according to N Dharmaraj, a trustee of Tea Vision, an independent think tank of retired tea industry specialists, will have a medium-term influence on tea production and supply.
“It's preferable if someone else takes over, but I doubt any single company will buy. If it is sold, only people engaged in operating plantations will buy,” said Dharmaraj, the former director and CEO of Harrisons Malayalam Ltd. “With the tightening of land reforms, it's becoming increasingly difficult to use plantation land for anything else. Gone are the days when estates were purchased solely for their asset value.”
Ownership of the company will change hands, according to Kaushal Dugarr, founder of startup Teabox, and among the applicants would be Indian corporations that bought estates sold by McLeod Russel during the last few years to service its rising debt.
According to Dharmaraj, the tea sector in India, the world's second-largest, has not done well in recent years, with the exception of 2020, which was an exception with prices skyrocketing after the Covid-19 lockdown. Until the 1980s, India's tea business was run by independent enterprises that reinvested their profits.
“However, beginning in the late 1980s, plantation ownership changed, with business groups taking over. They put more money into businesses that provided them with higher returns on investment. Almost 80% of the groups were opposed to the plantation business, which provided lower returns on investment. According to Dharmaraj, this resulted in a structural deformation in the industry.
Unilever and the Tata’s were among the first to abandon captive tea production.
“Why buy a cow when milk is so cheap?” Dharmaraj inquired as to why the changes occurred.
The Aditya Khaitan Group, which owns McLeod Russel, bought a 51 percent share in Union Carbide Ltd. in the mid-1990s and renamed it Eveready Industries India Ltd. For several years, the group continued to operate the tea and battery operations before demerging them into distinct divisions.
Following the foundation of McLeod Russel, the corporation went on a tea estate purchasing frenzy in India and beyond.
However, Anshuman Kanoria, chairman of the Indian Tea Exporters' Association, said the incident was a sad occurrence involving a continuing business and would have no bearing on the sector.
“All of its operations are normal,” he continued, “and we are hopeful that a glorious old company like McLeod Russel will emerge from this crisis.”
It's time for a change. Dugarr believes the industry needs to adapt current marketing tactics in order to add value, and that the occurrence is a wake-up call.
“There are numerous structural issues in the industry that must be addressed. Such instances would continue to occur unless that is done, not just to McLeod Russel, but to other tea firms as well,” he said. “On a smaller scale, we've seen a lot of estates change hands in Darjeeling. People acquire estates, discover they can't run them profitably and sell them after a year or two.”
On higher tea prices in the latter half of FY21, McLeod Russel, a part of the Williamson Magor Group, recorded a net loss of Rs. 52.4 crore on consolidated net sales of Rs. 1,438.4 crore in FY21, compared to a loss of Rs 147.8 crore and sales of Rs. 1,142.7 crore a year earlier.
Since FY18, when it reported a net profit of Rs. 219.2 crore on consolidated sales of Rs.2.055.3 crore, the company's financials have been declining.
Since 1869, McLeod Russel has been in the tea business. The company has 31 tea farms in Assam Valley and two in West Bengal's Dooars district, three factories in Vietnam, six estates in Uganda, and management control of Rwanda's Gisovu estate. The firm's total production exceeds 80 million kg of black tea annually.
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