McLeod Russel’s Crash

McLeod has been in troubled waters for a while now. Company’s shares continued to reel under pressure, hitting over a decade low on the BSE on back of heavy volumes due to it faced its second credit rating downgrade on 6th May’19.


ICRA downgraded the company’s term loans and fund-based bank facilities from ICRA A- to ICRA BBB- with a negative outlook, the non-fund based bank facilities has been revised from ICRA A2+ to ICRA A3. The latest rating revisions have factored in further deterioration in McLeod’s liquidity profile due to slower-than-anticipated progress on asset monetization and continued pressure on the profitability of the company’s core tea operations. Input cost pressure would continue to impact the operating profitability and cash flows from operation, which along with higher debt would keep coverage indicators depressed and liquidity stretched. Prior to this downgrade, the agency had revised credit rating and outlook on the company on 2nd April 2019.

Why the stock crashed?

Debt– piling all the time

Company’s debts are continuously increasing; from Mar’15 to Sept’18 it had increased from 374 cr to 1360 cr while their finance costs stood at Rs 170.5 cr in Sept’18 against Rs 66 cr in Mar’15. In the last 5-odd years, input costs also rose by about 11% (CAGR) but the growth in tea prices had been below 2%.

While looking at its Gross fixed assets, it only grew 300 cr in the same period. So less improvement in GFA as compare to its Debt. Adding to that as on March 31, 2018, exposure to group firms was Rs 650 cr, which increased to Rs 1,000 cr by March 31, 2019.

Impact of International Tea Supply

Kenyan and Sri Lankan prices had driven the International tea prices, which are largely dependent on the production trends in some countries. Over the 3-4 years,bumper crop production in Kenya, which is a major tea producer, has resulted in excess supply and lower tea prices in the international market. On account of severe competition from Kenya and Sri Lanka, contribution of exports to revenue has dropped to 20% in FY18 vs30% in FY13 for the company, resulting in reduced sales figures. Export realizations for the company were up by about 30% compared to domestic realizations. Global tea production in 2018 was up by 60 million kg (mkg) on a YoY basis due to surge in Kenyan crop by about 52 mkg on account of continuous rainfall in the east African country, which may result in muted tea prices for foreseeable future.

Slow consumption in domestic market

Domestic tea production has been increasing well but the increase in consumption is slow due to abundant availability of alternatives. Tea production in India has grown at 3% CAGR in last five years whereas consumption has increased at only a CAGR of 2%. This unhealthy demand-supply situation is one of the primary reasons for falling prices in auctions.

Liquidity position under stress

To reduce its elevated Debt levels, they have been selling their tea estates in India. Last year, company sold 20 tea estates in India for Rs 795 cr while signing preliminary agreements to sell more tea gardens in Assam and Africa.

Recently, Company signed an agreement to sell three tea estates (Addabarie Tea Estate, Mahakali Tea Estate and Dirai Tea Estate to the city-based Luxmi Tea Company for 150 cr. While Addabarie, with a turnover of 25 cr in 2017-18, contributed 1.6 %, Mahakali with 18-cr turnover accounted for 1.2% and Dirai with 34 cr turnover had a 2.2% share in company’s turnover.In spite of sale of tea estates,debt continues to remain high and is an area of concern.

So far, it is estimated to receive Rs 940-950 cr from sale of gardens. In the process, it lost its crown of the world’s largest bulk tea producer to Goodricke Group’s parent Camellia Plc.

It is noted that while a majority of the proceeds from the sale of the second tranche of tea estates has been received recently with a delay, McLeod’s overall leveraging remains high. Moreover, its high exposure to weak group firms, including McNally Bharat Engineering, has been largely funded by short-term debt which has further aggravated the tight liquidity position and exposed McLeod to major refinancing risks.Going forward, sale of estates will also result in lower sales for the company.

Industrial Factors

Tea is a cost-intensive industry as labor constitutes 60% of total production cost. In March 2018, tea estate workers’ wages increased significantly by 22-25% in north India. In every two-three years, the wages of workers are revised. The last revision agreement expired on March 31, 2017 and the tea industry is under pressure as wages are determined by the government, independent of tea prices and company revenues. Strong labor unions, strikes and unavailability of workers during the peak season further incense the situation.

Pledging of shares

Pledging of shares by promoters has increased. According to exchange filings, around 98.5% of the entire remaining promoter shareholding of the company is pledged with the banks and other financial institutions.


We believe McLeod’s continued deterioration in earnings in the backdrop of rising production costs along with high debt exposure is structural in nature. The liquidity pressure is expected to continue as short-term debts used to fund group exposure would come up for maturity in the upcoming period.


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