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Corporate Report

Published on: Oct. 21, 2022, 2:57 p.m.
McLeod Russel’s cup of woes overflows
  • Khaitan: trying times; Photos: Sajal Bose

By Sajal Bose. Executive Editor, Business India

The Williamson Magor group-owned McLeod Russel India Limited (MRIL), the largest bulk tea producer in the country, has been in severe financial distress -- a classic example of being in a debt trap for excessive betting with one’s fortune. The company had been lending to the ailing McNally Bharat Engineering – a group company -- beyond its financial means and has ended up in a serious financial mess, with its debt today becoming larger than its total asset value.

MRIL has been struggling to work on restructuring debt with lenders for the last few years. The tea producer had defaulted on the repayment of the principal and interest to its lenders. To add to its woes, it is now facing hostile takeover too.

Last month, Carbon Resources, a company which is not in the tea business, had sent a non-binding letter of intent to the lenders to acquire a controlling stake in the company. The offer came after Carbon Resources picked up over 5 per cent stake of the tea company from the open market – a move to gain confidence of the stakeholders of debt-laden tea major and show that it is keen to revive the company from the financial mess. 

“We believe tea is a good business and entry into the tea segment with MRIL will be an ideal opportunity for us,” says Abhinav Jalan, director, Carbon Resources, commenting on its plan to foray into the tea business. “MRIL has good assets in the industry; its problems are not related to tea business. We are ready to settle all the debts and manage the company efficiently.” The Giridih (Jharkhand)-based Rs2,400 crore Carbon Resources group is a leading producer of critical carbonaceous raw materials and has its corporate office in Kolkata.

Carbon Resources has suggested an upfront payment of Rs1,245 crore to the creditors. “The secured creditors will get cent per cent dues, which is about Rs650 crore, while unsecured lenders would get Rs600 crore out of Rs1,100 crore – they will need to take a 45 per cent haircut. This will be a win-win situation for the lenders,” says Jalan. ICICI, SBI, Indian Bank, Axis Bank, UCO Bank, Punjab National Bank, IndusInd Bank, RBL Bank, Yes Bank and HDFC Bank are the lenders to MRIL. The company’s current debt stands at Rs1,700 crore. The Khaitans holds just over 6 per cent stake in the company and is vulnerable to takeover attempts. 

Bad business judgement

Incidentally, earlier this year, the Khaitans had lost control of Eveready Industries, the country’s largest dry cell battery-maker, to the Burmans, who own Dabur India. As and when the Khaitans had pledged their shares for funds, the Burmans have been scooping up Eveready shares from the market. In 2020, they became the largest shareholders of Eveready, as the Khaitans’ shares, pledged with the banks, were sold in the market due to a breach in the loan agreement. 

Similarly, in MRIL, Khaitans had borrowed heavily by pledging their shares to save the group’s ailing engineering company McNally Bharat, engaged in turnkey solutions for infrastructure projects. According to an industry insider, some key senior management people, who had been running the day-to-day affairs of McNally Bharat, had misguided Aditya Khaitan, painting a rosy picture of the EPC industry and the over-ambitious Khaitan felt that infra could be the next business to be in for the group and started funding. It finally turned out to be a bad business judgement and dragged down MRIL. Last year, MRIL also escaped insolvency proceedings by clinching a settlement with Techno Electric over Rs100 crore inter-corporate deposits.

  • McLeod’s estates produce high quality tea, which commands premium

While the bidding for takeover from Carbon Resources had surprised the tea industry, there was a counter-offer from the largest orthodox tea producer M.K. Shah Exports, which extended support to the Khaitans. “Our offer is only to purchase MRIL estates, which the current promoters and lenders of MRIL are comfortable divesting. We are not looking at distress purchase or trying to get a back-door entry,” says Jaydeep Shah, director, M.K. Shah Exports. 

Shah is prepared to invest Rs550 crore for buying MRIL’s estates. He believes that the company can pare its debt significantly through this offer and support the ongoing restructuring plan. “MRIL is an institution with a rich history and we have over two decades of business relationship with the Khaitans, to the extent that we hold each other in high regard,” adds Shah.

The Mumbai-based M K Shah Exports has got several offers to buy gardens in Darjeeling, Assam and South India, but the company was interested to buy only MRIL’s gardens. A majority of its gardens has come from the Khaitans over the years. Shah produces about 18.5 million kg of tea from its 13 estates in Assam and I million kg from its two estates in Congo, Africa.

“Growing tea is a delicate process,” says a veteran tea planter. “It requires great amount of knowledge, involvement and dedication. It is difficult for a non-tea player with zero experience and commitment to grow quality tea”. MRIL has created immense trust in the tea trading community.

“Despite all the problems the company have been facing, the tea trading community continues to have faith in the Khaitans because of their ethical practices and transparency,” says a senior executive of a tea company.

MRIL produces high quality tea, which commands a premium. It has involved a continuous process of modernisation and upgradation programme of its factories, which are among the most modern in the business and, with export markets in mind, conform to the strictest conditions set by the EU and American markets, such as no chemical pesticides, no stray germs, vacuum packing, no man handling the product, etc.

As a quality producer, the company has been holding on even through the crisis period. It has been following all ethical practices and sustainable processes in tea manufacturing. Its gardens and the infrastructure created around it are ahead of what normally prevails in the industry and high calibre professionals under the leadership of the Khaitans have been managing the company. McLeod operates 33 gardens in India, including two in Bengal and 31 in Assam, producing about 44 million kg of tea.

  • Neither Carbon Resources nor M.K. Shah Exports has received any responses against their offers

Awaiting clearance

MRIL chairman Aditya Khaitan has informed the company’s shareholders during its virtual annual general meeting held on 30 September that the banks have been supportive. “The banks have put in the terms of what the debt restructuring resolution should be,” he says. “It is now awaiting the clearances of the rating agencies.”

The committee formed by the lenders have appointed credit rating agencies. But he has not mentioned anything about the offers from Carbon Resources and M K Shah Exports during the AGM. When contacted, an MRIL director declined to offer any comments on the recent developments. 

Neither Carbon Resources nor M.K. Shah Exports has received any responses against their offers. “Lenders are happy with our offer,” Jalan claims. “But we also see some reluctance, because they believe the promoter might litigate.” The carbon product manufacturer is unhappy on the role of SBI Capital Markets, the adviser, to carve out a resolution plan and suggest a possible solution for recovery. Sources say that Carbon Resources is now preparing for a binding offer and is likely to announce it soon.

“It is too early to draw conclusions on the new acquirers of MRIL,” says Pankaj Singhania, founder, Lakewater Advisors, an equity research firm in Kolkata. “The company holds rare assets that cannot be created or built in a short span of time. As demand for good tea is growing and I am sure a fresh offer soon be there, giving McLeod a real worth.” The financial results of the company have become irrelevant now. In 2021-22, MRIL had reported a loss of Rs136 crore on a turnover of Rs1,108 crore.

The Khaitans are optimistic of the bankers’ support in the debt restructuring resolution to a sustainable level, so that it can ward off the takeover attempt. However, the creditors will take the final call and, till such time, the fortunes of the Khaitans in MRIL will continue to be challenged.

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