is seeking shareholders’ approval to sell additional tea estates to raise funds to cut its debt burden and fund a share buyback plan, which is currently underway.
The proposal will be placed at its annual general meeting (AGM), scheduled for August 9.
According to Kamal Baheti, director at McLeod Russel, shareholders’ approval is needed for the company to execute sales when their worth exceeds 20 per cent of the value of the firm’s fixed assets. Under the proposal, the company will suggest offloading a maximum of 35 per cent of its fixed assets, which translate into Rs 7 billion.
Its standalone fixed assets account for around Rs 20 billion while total assets account for over Rs 33 billion. They exclude tea gardens in Vietnam and African countries. Under its plan to sell tea gardens, the Willamson Magor Group (WMG) company has so far concluded agreements to sell 12 estates in Assam for Rs 4.72 billion in the current fiscal year. However, Baheti said those sales accounted for around 18 per cent of the fixed assets, and thus the consent of the shareholders was not needed for that. “But if we proceed with sales of gardens in the Dooars, the 20 per cent limit will be breached and hence we need the shareholders’ consent to go ahead,” he said.
Earlier the company had planned to raise Rs 5 billion through garden sales but the new proposal to be placed before the stakeholders ups the maximum target by another Rs 2 billion.
One of the objectives of the sale is to pare group debt. McLeod’s consolidated debt, which stood at Rs 10.21 billion as of March 31, 2018, would be reduced to Rs 500 million. Additionally, the share buyback, estimated at Rs 1 billion, would be financed.
The rest of the proceeds will be used to finance its upcoming retail tea venture with Eveready Industries, another group company. The overall debt of WMG is at Rs 42 billion, of which Rs 30 billion is on account of McNally Bharat
Engineering. The projected reduction of debt and generating additional money for other targets will imply that McLeod will have to prune its 67 million kg (mkg) production portfolio by 10-15 mkg.
Last month, it sold eight prime tea estates to M K Shah Exports for Rs 3.31 billion, which pruned its production capacity by 16.16 per cent while a second round of sale of four Assam gardens to Luxmi Tea for Rs 1.41 billion further brought down its production capacity. The world’s largest tea producer has four estates in Dooars, which make an estimated 5.22 mkg of tea annually. In the last financial year, McLeod sold the Bhatpara Tea Estate in the Dooars, a loss-making entity, for Rs 132 million.
Earlier Baheti had said the sale of gardens will help the tea arm of WMG balance its portfolio of Indian and foreign production with produce from bought leaf factories as well as boost its entry into the packet tea business with Eveready.
In the last 2-3 years, the bought leaf segment, which accounts for 20 mkg of sales and the overseas gardens in Africa and Vietnam which accounts for 30 mkg of production while earning a $ 19.5 million profit, has been the largest revenue as well contributors for the company. On the other hand, its Indian operations faces huge rise in cost of production while tea prices remained softer in the recent past. “It is better to reduce the exposure just to make a little rebalancing of the portfolio. So the board decided to downsize our operations a little bit in Assam and exit Dooars,” Baheti added.