Tea producer McLeod Russel India Ltd is spreading its wings in key tea-growing regions.
Last year, it acquired Phu Ben Tea Co. Ltd, a Vietnamese tea producer. Vietnam is the fourth largest producer of black tea in the world while India holds first position.
It has now acquired a stake in a tea plantation in Rwanda, in East Africa. Rwanda’s tea production of about 20 million kg comes nowhere close to its neighbour Kenya’s production of 346 million kg or Vietnam’s 140 million kg. But its tea fetches good prices in the Mombasa market, a little below what Kenyan tea of similar quality gets.
McLeod gets a foothold in the African tea market through this acquisition.
It is paying $2.75 million (Rs13.42 crore) to acquire a 75% stake in Olyana Holdings Llc. Olyana had recently acquired a 60% stake in Gisovu Tea Co. for $2.4 million.
The government retains a 30% stake in Gisovu, held by the Rwanda Tea Authority, while local farmers will own 10%. Thus, the indirect stake of McLeod in Gisovu will be 42%.
Olyana will invest to improve the quality and output from these estates. It also proposes to negotiate with the government for other tea plantations too.
While McLeod will get to participate in these projects, it may be required to increase its investments also.
Gisovu produces about 1.7 million kg of tea, while McLeod had produced 74.8 million kg in India and 4.5 million kg in Vietnam.
The environment is right for fresh investments. FY09 was a good year for McLeod, with average tea realizations jumping by 27% to Rs111 per kg. But FY10 will see realizations trend higher, as poor weather has affected output in major tea producing countries.
Bank of America Merrill Lynch estimates that McLeod’s average realizations will rise by 13% during FY10. Higher realizations will ensure a much better performance from the tea gardens it has acquired.
It will also generate more cash, which it can use to repay debt and invest further in Vietnam and Rwanda. No wonder the stock price is up 34% from its level a month ago.
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