The one point that comes out very clearly about the financials of plantations companies is that irrespective of the quality of their manufacturing facilities, the viability aspect is ultimately decided on by three basic factors. The geographical spread of the plantations coupled with the rainfall pattern and, plantation crops being bushwhacked or not by nature induced plant fatalities. Put differently, a simple factor of demand - supply equation, which the plantation sector can never get right. I say this in the context of the Goodricke Group having laid out a cool Rs 450 m in the last two years just sprucing up three of its tea factories. (The plant and machinery is a study in contrast. It boasts a gross book value of Rs 868 m and a post depreciated value of Rs 247 m). The annual report however states that the production costs of made tea are lower following the up gradation of its factories.
The directors' report states that the company was able to show a better top-line and bottom-line in 2010 as compared to the preceding year due to several favourable factors. It produced more tea during 2010 than in the preceding year, aided by favourable weather conditions at its tea gardens, and compounded by lower all India production for the second year in succession, due to unfavourable weather conditions and pest attacks at the Assam gardens. This in turn led to firming up of tea prices glocally, juxtaposed with the company's ability to wrest significantly higher prices for its Darjeeling, Dooars and Assam teas at tea auctions relative to the price realised by other quality teas on offer. Among the interesting titbits of information that one gleans from the annual report is that India teas commanded the second highest price per kg in the global auctions conducted in the five international centres including Kolkata in 2010. The average price of US$ 3.28 per kg was recorded at Colombo followed by Kolkata with US$ 2.85 per kg. The other auction centres include Kenya (Mombasa), Malawi (Limbe), and Bangladesh (Chittagong).
Limited land availability
Plantations companies have to make do with the acreages that they presently control as additional lands for cultivation are difficult to come by. Therefore, on the one hand, they have to strive to increase the production per hectare by resorting to judicious replanting of existing cultivated lands, and on the other, to get a higher mark-up for what they have on offer. Goodricke for example makes do with 9,700 acres in toto but the tea yielding area over the last five years is on the downswing while the replanted ‘young tea' area is on the upswing. The latter is up from 776 hectares in 2006 to 1,128 hectares in 2010. This also implies that at some point in the future and depending on the replantation exercise that it is carrying out, the production per hectare should see a spurt. The company incidentally boasts of 17 tea estates - 15 in West Bengal and 2 in Assam. The most productive estates are in the Dooars in west Bengal, while the least productive are the Darjeeling estates.
On the mature area of 8,582 hectares, it plucked 76 m kgs of tea in 2010 against figures of 8,616 hectares and 71 m kgs previously. That works out to a production of 8,832 kgs per hectare against 8,280 kgs previously. The company also purchased 18 m kgs of green leaf against 18.7 m kgs previously. To the company's credit, the cost of purchased green leaf tea in 2010 was lower at Rs 14.4 per kg against Rs 15.6 per kg in the preceding year. (In all probability this entire stock of green leaf tea was sourced from some of its fellow subsidiary companies, or so the footnotes indirectly aver. The company has 8 fellow subsidiaries). Thus the total amount of green leaf tea in stock for production was 93.8 m kgs against 90 m kgs previously. It produced 20.6 m kgs of tea against 19.9 m kgs previously. That is to say for every 4.6 kgs of green leaf tea that it consumed it produced 1 kg of made tea against a factor of 4.5 kgs in the preceding year. In other words in spite of the modernisation of some of its factories, it had to make do with a lower output per capita of made tea, on the basis of per kg of green tea that it consumed! Modernisation of tea factories apparently does not lead to higher productivity or some such. Production and sale of instant tea remains lacklustre at around Rs 73 m.
Higher price realisations
Besides the made tea that it manufactured, the company purchased another 6.7 m kgs of made tea against 5.7 m kgs previously. That makes for a total of 27.3 m kgs of made tea (excluding opening stock in hand) against 25.6 m kgs previously for sale. The made tea that it purchased was at an average price of Rs 128 per kg against Rs 119 per kg previously. Curiously enough the company sold less tea in 2010 than in the preceding year, inspite of higher demand following lower all India production. (This in turn led to higher value of inventories at year end). Total tea sales came to 26 m kgs against 26.1 m kgs previously. But it realised an average price of Rs 151 per kg sold against Rs 139 per kg previously. On a rough basis, it would have made a gross margin of Rs 148 m against Rs 115 m previously on sale of the outsourced teas. The good news here is that the employee strength in the last five years has remained constant at around 25,000 personnel-though the average cost per employee is on the upswing. The average salary paid out per employee has risen to Rs 50,000 from Rs 45,500 in the preceding year. Having state of the art manufacturing facilities or not, the tea industry is a very labour intensive one.
Thanks to higher realisations the gross sales rose 8% to Rs 4 bn from Rs 3.7 bn previously while the pre-tax profit rose 22% to Rs 646 m. The tax man was a big gainer with the tax provision rising to Rs 181 m from Rs 111 m, while the shareholders had to do with a marginal dividend gain to Rs 108 m (Rs 86 m). For a tea plantation company the management follows a rather tight-fisted policy on the dividend payout front, especially in the light of the fact that the principal shareholders, the England based Camellia Plc holds 74% of the outstanding equity.(The immediate shareholders of the 74% holding are Western Dooars Investment and Assam Dooars Investment).
Its funds flow management
Inspite of the substantially higher gross cash flow generated from operations of Rs 739 m (Rs 620 m previously), it has not led to any large increase in cash holdings nor has it been pumped into any liquid investments. The excess cash generated has been ploughed into inventories, fixed assets, repaying borrowings of Rs 93 m and becoming debt free, and into supporting a substantially higher net current assets holding. At least this is the position as on balance sheet date. Whether this is deliberate or it reflects some weakness in the management of its cash flow is not known. The management's bonus issue policy is also unknown and in an academic sense the company is under capitalised relative to the scale of its operations. Against a paid up equity of a mere Rs 216 m (21.6 m shares of Rs 10 each), the reserves and surplus amounts to Rs 1.2 bn.
The company's biggest nest egg is its land bank which is valued in its books at a mere Rs 68 m!
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.