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Goodricke Group: Monsoon's child - Outside View
 
 
Goodricke Group: Monsoon's child

The corporate name Goodricke 'Group' appears to be a misnomer as its operations presently comprise only of tea plantations - all under one roof. It has a few subsidiary companies - tea and investment outfits -but they are of little or no consequence. Its uniqueness however lies elsewhere. With a planted area of 9,670 hectares (23,885 acres) comprising 17 tea gardens and located in the 2 states of Assam and West Bengal, it must rank as one of the last big erstwhile sterling tea companies in India still basking under British colonial rule and which is listed for trading on the Indian bourses. Its 74% equity owner Camellia Plc, the ultimate holding company, also has agricultural operations in Bangladesh, Africa and Brazil. Goodricke's incorporation into the Indian scheme of things materialized in 1975 when it reluctantly melded within the Indian Companies Act.

The directors' report tries to cram in too much of data and the writer of the report gets totally confused along the way. Page 15 of the report states that the Indian tea industry is witnessing the initial steps towards the path of prosperity after 7 long years of difficulties. Page 16 of the report however has a different take on the matter. Here, it states that only in 2008 after 9 long years did the average price per kg cross the 1998 price. The Directors 'report on the whole makes for very shoddy reading..

The company makes three brands of tea, Darjeeling teas (with a very low yield of 561 kgs per hectare) with its distinctive flavor, Assam orthodox with its liquor and Dooars CTC (both gardens giving an average yield of 2000kgs per hectare). It also makes and sells packet tea and instant tea - but the latter 2 remain mere bit players in the overall scheme of things.

The operations of tea companies is difficult to comprehend at least from the way production, consumption, purchase and sales data is presented. The presentation has to made in a manner which can be made sense of, or the whole purpose is lost. The whole exercise in its present form is only to confound. It grows tea for one--16.16 m kgs, it consumed green tea leaves --90 m kgs of it including 19 m kgs that it bought---it produced tea and instant tea---20m kgs, it purchased tea -6m kgs, and it sold tea including Packet tea and Instant tea---26m kgs. And it also appears to import tea leaves or some such. As one can see, no cross comparisons are possible whatsoever.

The manufacture of high grade tea is a complex and capital intensive exercise too. A gross fixed asset base of Rs 1.7 bn (the value of land is a piffling Rs 67 m in the overall valuation) could just about help the company to rustle up a turnover of Rs 3.7 bn in 2009. But tea economics is still primarily the domain of the weather gods on the one hand and the disastrous end product of the inability of tea growers to get their act together and try to match production with demand. Why is it that tea growers globally cannot produce just that quantum of tea to meet with the demand? What is the magic mantra here please? After all, tea is grown primarily only in the Asian and the African continent.

In 2008, tea prices finally went North after a long hiatus as the mismatch in the supply /demand of tea globally finally evened out, while in 2009 tea prices rose exponentially due to the global crop deficit arising from drought like conditions in Africa leading to another severe supply/demand mismatch. In India, the erratic monsoon also played its part. This affected overall Indian tea production--to which Goodricke contributed its mite. However helping Goodricke garner higher prices than the industry average, the company claims, was the superior quality of the teas that it produced and the good tidings emanating from its continued spending on fixed assets. The net result was a record pretax profit of Rs 530 m. Strangely enough, inspite of producing less tea it chose to export more in value terms in 2009, though exports brought in a gross margin of only 10% against a domestic sales margin of over 19%.

There are other reasons too that enabled it to record the highest profits ever in the last many years. The sharply higher 'other income' at Rs 132 m constituted a neat 24% of pretax profits. Not all of this other income was of the positive kind. Close to Rs 55m constituted write back of provisions no longer required and is strictly speaking a below the bottomline book entry. However to be fair, Rs 52 m of this other income was also simultaneously expensed out under the heading of 'Expenses'. Why this dual entry for the same amount please?

But full marks also to the management for the deft handling of its priorities with the bountiful cash that it generated from operations. It moved swiftly to close out its working capital borrowings of Rs 240m and also reduced long term borrowings. It also added a neat Rs 170 m to its fixed asset base. Dividend payout including tax was limited to 24% of post tax profits.

The directors' report has a few interesting asides. The global mismatch in demand / supply is expected to continue into the current financial year the report states. It also adds that there is a noticeable change in the climatic conditions with erratic rainfall distribution and precipitation levels due to global warming. This it states will play an important role in tea cultivation in the coming years. If so, will this amount to a good luck charm for the tea industry in terms of higher tea prices? Definitely, not good for the economy though.

Disclosure: Please note that I am not a shareholder of this company

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.

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