Tata Tea, HLL exit tea
plantations
10 June 2005
HLL
and Tata Tea, the two largest Indian tea companies exit the plantations
end of the business. Mohini Bhatnagar reports.
Munnar:
The two biggest Indian tea companies have in the past quarter divested
from their plantations to focus on their packaged tea business.
For
Tata Tea, the divestment has meant the formation of the Munnar-based Kanan
Devan Hills Produce Company, which will soon figure among the biggest participatory
management companies in the world. Its recently maiden offering, targeted
exclusively at its employees, was subscribed by 97.16 per cent of the company's
total workforce. The issue closing May 24 raised Rs9.04 crore against a
target of Rs8 crore.
The
entire management of the company along with 12,441 out of 12,770-strong
workforce subscribed to the issue. The workers' contribution now constitutes
74 per cent of the paid-up equity in the company and of the remaining equity,
19 per cent will be subscribed by Tata Tea, and 7 per cent by a trust set
up for the purpose.
According
to Tata Tea officials, the company handed over management control of 55,529
acres of its tea plantations in Munnar to the newly formed Kannan Devan
Hills Plantations Company Ltd in April this year and transferred 12,770
workers to it.
Tea
estate workers, field staff and supervisory staff have all benefited from
the divestment in a big way. ICICI Securities will extend debt to the new
company, which will be used to provide loan facilities to workers to participate
in the subscription process. Each worker of Tata Tea is entitled 300 shares
of the newly formed company. Workers and staff will have a representative
each on the board of the new company.
With
the divestment of its South India plantations, Tata Tea is rapidly transforming
itself from a commodity tea producer to a global tea marketer. At the end
of 2004-05 around 80 per cent of its revenues came from branded tea sales.
With the sale of its South India plantations, this proportion will rise
as these plantations produced half of the Tata tea crop.
Tata
Tea has yet to divest out of its plantations in the North-east. According
to the company, South Indian teas are of poorer quality, fetching lower
prices, and are even more exposed to the commodity cycle than North India
teas. Moreover, more than 90 per cent of the Tata Tea staff are employed
in the estates, and staff costs accounted for over a fifth of revenues in
FY04. For the company getting out of the plantations means lower overheads
and higher profitability.
Kanan
Devan officials say that with Tata Tea exiting plantations, it would be
possible to cut down on overheads and drop prices by over Rs8 per kg as
the new company would not need to maintain Tata Tea's high cost offices
in Kolkata and Kochi. This would enable to company to be more competitive.
Another
company which has exited tea plantations is Hindustan Lever Ltd. HLL recently
transferred its entire tea plantation business, comprising gardens and factories
in Assam (Doom Dooma division) and Tamil Nadu (Tea Estates division), to
wholly owned subsidiaries.
HLL's
Doom Dooma division consists of seven tea estates in Tinsukia district (roughly
3,100 hectares under plantation) and three tea-processing factories with
about 6,100 permanent employees. In the last three years, the division produced
17,100 tonnes of tea, though it incurred operating losses primarily due
to bad weather, excess supply leading to low prices at the auctions and
high social costs.
It
is believed that revenues from these two divisions were slightly below 1
per cent of HLL's 2004 turnover of Rs10,245.79 crore.
Doom
Dooma made an operating loss of Rs6.7 crore in 2002, Rs21.9 crore in 2003
and Rs7.6 crore in 2004. The Tamil Nadu estates made an operating loss of
Rs6 crore in 2002, Rs5.5 crore in 2003, but a profit of Rs80 lakh in 2004.
HLL has
been exiting businesses that do not align with its focus on FMCG businesses
and ,therefore, has exited from the plantations as well.
According
to the company, "This move would enable HLL to explore opportunities
for joint ventures with lead industry players with expertise in international
sales and marketing. The company would also consider an outright disposal,
if that is in the best interest of the business and all stakeholders,''
it said.
Both
companies are major players in the packaged tea segment with backward integration
into plantations. For HLL and Tata Tea, exiting plantations leaves them
free to deploy their resources in more aggressive brand promotion. Moreover,
switching to outsourcing does not mean having to pay higher prices at tea
auctions because these prices are a function of global demand-supply.
In
essence, Tata Tea and HLL's move to exit plantations sychronises the global
trend to increasingly rely on outsourcing and invest more on marketing and
brand building.
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