Tata Global Beverages Ltd’s portfolio evaluation may see it sell its 41% stake in tea plantation firm Amalgamated Plantations Pvt. Ltd, according to a Mint report. The move can benefit both. The tea plantation business is a tough one. Amalgamated Plantations made losses for three consecutive years till fiscal year 2017 (FY17) totalling Rs85 crore, according to its chairman’s statement made at its annual general meeting last August.
The speech talks about how proprietary small tea growers (STG) and bought leaf factories or BLF (who buy tea leaf and process it) are gaining share in the tea leaf market, with their share of output rising in FY17. It asks for a level playing field in terms of the cost base, alluding to regulations that determine the cost structure of regulated tea growers (RTG) such as Amalgamated Plantations.
Amalgamated Plantations itself bought 15.4 million kg of tea leaf in FY17, while its own plantation output was 41.2 million kg. Although its volume sales rose over the previous year, realizations declined and costs increased, contributing to a loss of Rs49.3 crore in FY17.
How could a separation benefit Amalgamated Plantations then? While the chairman’s speech talks about a level-playing field on the cost and regulation front with other plantation models (STG and BLF), it also says that the RTG market is a buyers’ market. Packet tea companies capture a bigger share of the value of tea sold in a packet.
The solution to this could be to market its tea directly. In August, Mint did report that Amalgamated Plantations intended to launch its own tea brand. It would sell in small markets where leaders such as Tata Global and Hindustan Unilever Ltd were not present. But these are national contenders, with a presence in most markets of any significance. Entering the packet tea market with such a constraint may affect its success. A separation can allow it to follow an independent strategy.
Even for Tata Global, with a 41% equity stake in Amalgamated Plantations (65% at the Tata group level), it would be strange to incubate a competitor for its flagship packet tea business. If the only way forward for Amalgamated Plantations is to enter the packet tea business, then it is better to set it free. Since bulk tea is a buyers’ market, Tata Global will have no problem in meeting its procurement needs. As it is, in FY17, its purchases from Amalgamated Plantations were Rs126 crore while its total tea purchases amounted to Rs1,530 crore.
If Tata Global can make a decent return on its equity (and also get back money invested in preference shares issued by Amalgamated Plantations) the funds can be deployed elsewhere.
Tata Global’s shares have done well in the past six months, rising by 83%. An improving financial performance and the post-goods and service tax rally in consumer stocks have lifted its shares. In the December quarter, the company is expected to see sales rise by 5% from a year ago while its Ebitda (earnings before interest, tax, depreciation and amortization) is expected to increase by 25%, benefiting from “robust margin expansion in domestic tea business, cost saving initiatives and incremental gain from divestment of select loss-making businesses", according to a preview report by Kotak Institutional Equities.