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Rediff.com  » Business » Africa adds flavour to Indian tea firms' profit margins

Africa adds flavour to Indian tea firms' profit margins

June 20, 2018 18:31 IST

Production cost in Africa varies between $1 and $2 a kg while in Assam it is $1.9 and in West Bengal over $2

Even as tea companies in India are grappling with lower yields and an unfavourable cost structure, which are taking a toll on profitability, their operations in Africa have proved to be more remunerative and cost efficient.

 

The overseas operations are helping firms like McLeod Russel, Dhunseri Tea and Industries, Jay Shree Tea and Industries and several others boost their margins.

Compared to the average margin of Rs 15-20 per kg from the sale of Assam tea during a good season, these companies are able to make a whopping Rs 40-90 per kg from sale of their produce in Uganda and Rwanda.

The favourable margins led McLeod to post a record profit of $19.5 million in 2017-18 from sale of 30 million kg (mkg) tea from its gardens in Africa and Vietnam while Jay Shree Tea and Industries registered a Rs 220 million ($3.38 million) net profit.

Lower production cost in Africa

McLeod’s production in Uganda last year fetched it a turnover of $32 million with an average tea price of $1.98 per kg, which was 21 per cent higher as compared to 2016-17.

From Rwanda, two of its subsidiaries sold a total 5.17 mkg of tea between $3.20 and $3.96 per kg which again was 24 per cent higher on a year-on-year basis.

“One of the primary reasons for higher margins in Africa is that there is more mechanisation in Africa while the estates in India are labour intensive,” Azam Monem, director at McLeod Russel, said.

Company officials said while the cost of production in Rwanda is anywhere between $1 and $2 a kg, the selling price stands at $4.5 a kg.

In Uganada, against a production cost of $1 per kg, the selling price is anywhere between $1.8 and $2 a kg.

Prices also increase in case of better quality of produce or due to crop scarcity.

In India, the cost of production adjusted against the dollar stands at Rs 1.9 a kg while the average price realisation is nearly the same or a shade higher.

“Margins have always been better in Africa and may continue to remain so,” RK Ganeriwala, president, CFO and secretary at Jay Shree, said.

“In Africa, there are outgrowers who are tied to factories and paid as a percentage of revenue. Everyone’s interest is aligned to ensure that the prices are higher and the quality is good,” said Rudra Chatterjee, managing director of Luxmi Tea, which owns the Makaibari brand. Luxmi has a 4,500-hectare greenfield tea project in Rwanda.

Expansion in Africa

Promised with a lucrative profit margin, producers like McLeod Russel, Jay Shree, Dhunseri and others are looking to buy tea estates while at the same time strengthen their existing operations.

Jay Shree, which has invested $6 million over four estates in Uganda and Rwanda, has lined up another $1 million to expand its operations and take over gardens.

It has already purchased 300 acres each in these countries which will be converted into tea estates to raise production capacity, which stands at 7 mkg currently.

“We are also open to purchasing gardens in Africa, including Tanzania and Kenya,” Ganeriwala said.

Dhunseri, which commenced Africa operations by acquiring two gardens in Malawi in the east African coast, producing 9.45 mkg of tea, is also looking to expand its reach.

“Considerations for expansion into African gardens is underway but we have not narrowed down on purchase of particular estates. The valuation will depend on the quality of the produce,” CK Dhanuka, chairman, Dhunseri, said.

At the same time, Kamal K Baheti, director, McLeod Russel, said, while this company has already sold off 12 premium gardens in Assam, it will consider buying gardens in Africa at the right time.

McLeod - the world’s largest tea producer - sold estates to pare its debt burden as well as generate funds for strengthening its Africa operations.

“We need funds to boost our African plantations where revenue as well production has been good compared to our Assam estates,” Monem said.

The roadblock to expansion

The problem, however, is over availability and pricing of tea estates and land availability for greenfield expansion.

“No one is interested in selling estates in Kenya while the land availability in Rwanda is limited. The estates in Uganda are expensive,” Ganeriwala said.

It is estimated that on an average Ugandan gardens are valued at $7-8 a kg while in Rwanda, it is between $9 and 12 a kg.

Despite these challenges, these companies are interested to grow their Africa portfolio.

Avishek Rakshit & Ishita Ayan Dutt in Kolkata
Source: