Regional supply-side dynamics support average realisations for Indian tea, although cost pressures keep margins under check; long-term demand prospects favourable: ICRA
In the current calendar year, lower production in South India and better export demand for orthodox tea have supported overall domestic auction averages. This has negated the adverse effect on prices, stemming from increased availability of tea from Kenya and, to a lesser extent, from North India. However, continuing cost pressures, attributable to the increase in wage rates, kept margins and debt coverage indicators under check. The capital structure of large companies in the sector, nonetheless, is expected to remain conservative, given the healthy profits earned by the industry between FY2008 and FY2014. The long-term domestic demand outlook, too, remains favourable, given India’s low per capita tea consumption at present, combined with the low cost of the beverage, which makes it suitable for mass consumption.
Global production of bulk tea increased by around 2.5%, during 10M CY2016, largely on account of higher crop in Kenya, despite the decline in Sri Lankan production. The surplus Kenyan tea production in the current year led to higher availability in the global market, leading to a decline in export volumes from India and consequently higher availability in the domestic market as well. Despite the increased availability of tea, Indian auction averages grew by 9% in the current year.
Mr. Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, ICRA, said: “Geographical variations in supply have determined domestic price levels in the current year. South Indian auction prices witnessed a significant increase during the period, due to a steep decline in production in the region. North Indian auction prices too, witnessed an increase, although marginal, despite growth in production from the region, with realisations being primarily supported by the domestic demand for CTC tea.” Increased export demand for orthodox tea of both North Indian and South Indian origin, given the downtrend in Sri Lankan production, which is largely of the orthodox variety, further supported the overall price trajectory.
Tea being a fixed cost-intensive industry, labour costs accounted for a major portion of the total cost of production. Over the last two years, the cost of production of bulk tea players in North India, accounting for nearly 80% of the bulk tea production in the country, has increased by nearly 23% on account of increased labour costs. The same is attributable to a steep rise in wage rates, which increased by around 25% in both Assam and the Dooars during FY2014-16. In the current year, wages are scheduled to increase by an additional 8-9% across the tea-growing regions in North India, resulting in continuing pressures on the profit margins of bulk tea companies, despite the increase in domestic average auction realisations. The credit-worthiness of large companies in the sector, however, continues to be supported by a favourable capital structure.
Over the long term, increasing domestic demand, and limited increase in production are likely to support a positive price trajectory. “The continued firmness in North Indian prices, in spite of increased availability of tea from Kenya and North India, reflects the inherent domestic demand for such tea” Mr Das added. Nonetheless, the industry’s export performance would also continue to be a crucial factor determining the overall supply-demand balance and price levels going forward.
India is the largest producer as well as the consumer of black tea in the world. However, the per capita consumption of tea in India, of around 730 gm, is lower than that of almost all other major black tea consuming countries globally. It has the potential to witness further growth going forward.
Your email address will not be published. Required fields are marked *
Save my name, email, and website in this browser for the next time I comment.
Copyright © 2014 - 2021 The Global Indian New Network (TGINN)