Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of the promoters: The Terai group, incorporated in 1973, is a partially integrated player in the tea segment. Over the years, the group acquired seven tea estates, mostly sick units, and successfully turn them around into profitable entities. Regular capital expenditure (capex) incurred to acquire new plantations and refurbish the old machinery, has helped the group maintain a strong position and record substantial growth in revenue.

Moderate Financial risk profile: Financial risk profile is moderate marked by net worth and gearing of around Rs.203 crore and less than 0.3 times, respectively for the group in FY24. Further, in the absence of any major debt funded capex plans and consistent accretion to reserves, capital structure is expected to remain moderate. Debt protection metrics continue to remain comfortable with interest coverage and net cash accruals to total debt (NCATD) of 1.9 times and 21%. Respectively for the group in FY24. The same is expected to improve going forward with no major debt funded capex plans.

Weaknesses:

Modest operating efficiency amidst exposure to risks posed by volatility in tea prices: As tea is a seasonal product, its yield depends on weather conditions. Production could be hampered significantly in case of any variation in rains, humidity, and temperature. In case of poor weather conditions, decline in production and quality levels causes volatility in realisations. Moreover, plantation operations are fixed cost in nature, with labour accounting for 50-60% of total cost. Presence of several labour laws and unions restrict the scope to reduce manpower. Hence, in case of a drop in production or realisations, the group may witness a fall in its profitability. EBITDA margin for the group has remained volatile at 3.4% in FY24 against 6.3% in the previous fiscal 2024.

Susceptibility of profitability to fluctuations in tea prices: A significant portion of the sales is through auctions in Northern West Bengal. Auction prices are determined at the centres based on demand-supply dynamics. Global demand-supply factors impact exports, where realisation prices are superior to domestic sales. For instance, the realisation price could not match the increase in production cost of tea in fiscals 2013 and 2024, leading to reduced profitability or losses for many West Bengal-based tea manufacturers.