Hectic activity is being witnessed on the Tata Tea counter of late, following hopes that the company's plan to restructure Tetley's debt may improve its financials.

The stock of Tata group tea major has risen by over 13% to Rs 21 February from a recent low of Rs 157.05 touched on 30 January 2003, on renewed buying support. Interestingly, average daily volumes on the counter have more than doubled to over 73,000 shares from 27,000 in the same period, indicating rising investor interest.

The recent rise on the Tata Tea counter was attributed to the company's plans to refinance its £150-million debt – incurred during its March 2000 acquisition of the UK-based Tetley Group – by March 2003, in order to take advantage of the present low interest rate scenario.

The precise nature of the refinance deal was not known. But analysts feel that the new strategy will have a single-tier debt structure, replacing the existing three-tier one.

With this, the company will accomplish the task of refinancing its debt in two years on the balance sheet of Tata Tea GB, the special purpose vehicle, which owns 100% in the Tetley Group. This would pave the way for the eventual merger of TTGB with Tata Tea.

Tetley Group is the second largest branded tea company in the world and is the market leader in tea products in Canada, the UK and a number of other European countries.

Tetley was a highly leveraged buyout. Of the total acquisition cost of £271 million, £70 million was through equity with £201 million in debt. At the time of acquisition, TTGB was a 100% subsidiary of TTL. Since then, the Tata Group has acquired a 1.4% stake while TTL has a 98.6% stake in the SPV, with the additional capital inflow of £30 million (Tata Sons put in £20 million and Tata Tea put £10 million). With the infusion, the equity capital of the company increased to £100 million.

The infusion of funds was to further strengthen the Tatas' commitment to the acquisition and to retire very high-cost debts incurred for the acquisition. The infusion replaced quasi-equity with equity and did not replace debt in the traditional form.

Tata Tea has plans to merge the SPV with itself after TTGB repaid its obligations. At the time of acquiring Tetley, TTGB's debt-equity ratio stood at 3:1, which has reduced to 1:1.75 currently and is expected to come down to 1:1.6 by end of the next financial year following the infusion of fresh funds. A certain segment of the debt is expected to be paid through internal accruals.

TTGB's interest burden, which was £26.11 million in 2000-01, reduced to £23.33 million in 2001-02. It is likely to fall further next year with replacement of high-cost debt with lower cost.

Meanwhile, TTL's recent financial performance was not very impressive. For the quarter ended 31 December 2002, it posted a 17.90% drop in net profit to Rs 16.97 crore on total income of Rs 191.41 crore (Rs 1.91 billion). For the nine months ended 31 December 2002, the company's net profit stood at Rs 67.10 crore on total income of Rs 567.22 crore (Rs 5.67 crore).

TTL's operating margins have been under pressure on account of falling realisations, particularly in the auction centres.

The tea industry has been undergoing very tough times in the past three years on account of sharp and sustained fall in prices. As a result, many tea plantations are deep in the red as the realisations are not enough to offset the rising costs.

BSE code: 500800