A committee set up by the Securities and Exchange Board of India (Sebi) has recently arrived at a broad set of definitions which would help bring under the regulator collective investment schemes.

Thanks to the collapse of the fixed deposit market where investors have lost crores of rupees, the spotlight has now shifted to plantation schemes. The economics of plantation schemes is far more complex compared to the fixed deposit market. The investments, unlike in an FD, are very long-term, usually 20 years - an investment period usually associated with insurance schemes and PFs, where your money and return are guaranteed.

If a finance company promises 36 per cent return on your FD you may not believe it. Certainly not now after the collapse of the NBFCs. If a plantation company says it will return over Rs one lakh after 20 years on an investment of say Rs 1,000 now, will you take it on face value, the claims and promises apart? What about the projections like "we propose to sell 200 trees at the end of 20 years?" What are the assumptions and what is the ground reality?

While these questions may be directly relevant to rating agencies, answers to some of them may provide investors with insights into the business of plantations.A committee headed by P B Gangopadhyay, appointed by the ministry of environment and forests, has brought to light the economics of plantations and the tall promises made by these companies. The committee has looked into the input cost, site quality, soil condition, management practices, growth data, timber strength and projected returns. The committee also studied the schemes of five plantation companies.

Projections and ground reality

The committee feels that the projections made by the companies are far from reality. Money is realised from the investors on a per tree basis. The economics of the scheme depends on the number of trees retained for the investors upto the harvesting time.

The growth of the tree depends on the space provided to the trees throughout the rotation. If more trees are retained per acre, the volume of production will be larger.

But that will be at the cost of size reduction per tree. The committee says for best quality in India, the number of trees retained upto 20 years is 153 per acre.

The volume of stem timber will be 975 cft per acre or 6.37 cft per tree. The second quality will have 215 trees per acre for 20 years, a timber volume of 400 cft per acre or 1.86 cft per tree.

For the third quality, the figures are 298 trees per acre, 90 cft timber per acre or 0.30 cft per tree. The report says that most companies have not mentioned the number of trees to be retained upto rotation age.

Most plantation companies have a 20-year rotation period and have projected a return of 35-40 cft per tree of commercial timber. But the committee finds that a 40 cft return can be obtained at the age of 35 years, with retention of 61 trees per acre. For a 20-year rotation period a retention of 153 trees per acre will translate into 6.37 cft volume of timber per tree.

The investor should look for the number of trees to be retained, which is a key factor for both physical and financial calculations. "The investment should be collected for the trees which will be retained at the rotation age and not for the trees planted initially.

There should be clear disclosure by companies about the investment collected, trees planted and trees to be retained at rotation age." The committee concludes that "if the number of trees is higher, which is the case with most of the companies, the yield per tree will be correspondingly reduced."

Grey areas and the risks

Though most companies declare that the plantations raised are insured, the committee found that insurance covered the input cost only and not the promised return. "The insurance cover provided by the companies should invariably include the promised return."

The committee found that the cost of the land is charged towards the project for which the investor is actually paying.

"Since the land is ultimately owned by the company at an appreciated value at the end of the rotation, it is logical that the company should bear the cost or share the cost of land." In most cases, "....the appreciated value of land does not accrue towards the promised return."

What price will the timber fetch?

The companies have projected an escalation of two to three times over the current price. The rate of timber depends on place, quality, grade, size etc. Higher the length and grith, higher the grade (quality) higher is the price.

"The current rate of Rs 1,000 per cft timber assumed as the base price by most companies actually correspond to good quality timber and can never be applied to timber of smaller size or branch wood." The price of teak timber after 20 years will depend on demand-supply position, imports, etc and "cannot be predicted with certainty."

Most companies have raised investments ranging from Rs 4.44 lakh to Rs 10.75 lakh per acre. The committee examined the norm of investment cost per acre. It works out to Rs 12,000 per acre.However, this does not include administrative cost, maintenance beyond 10 years and the cost of land or rent. "Even if the cost of all additional inputs are considered, the total cost of planting and maintenance of one acre of teak plantations appears to be on a very high side."