Tea stocks surge on hopes of higher realisations as prices rise

McLeod Russel tops with 11.49% surge; other gainers include Rossell India (7.73%), Goodricke (5.23%)

After a period of prolonged uncertainty in tea producing companies, optimism suddenly seems to have returned in the industry as the scrips of tea producing firms rallied on the Bombay Stock Exchange today with hopes of the balance sheet getting better in the near term.

Shares of McLeod Russel surged by 11.49 per cent at Rs. 192.15 apiece while Rossell India's shares surged by 7.73 per cent at Rs. 119.15 per share on the BSE. Goodricke Group's scrip went up by 5.23 per cent at Rs. 405.15 per share and James Warren Tea's shares jumped 4.70 per cent to close at Rs. 137.1 each share.

The optimism, as per industry officials, is on account of tea prices improving as production is poised to decline.

In September this year, owing to heavy torrential downpour, tea production in Assam, which accounts for over 50 per cent of the annual tea production in the country, fell by 27 per cent at 81.75 million kg (mkg). Production in West Bengal's Dooars region also dipped by around 19 per cent at 43.01 mkg in the same month.

November again, is expected to see a shortfall of 10-15 per cent when compared to the previous year's similar month's production of 109 mkg and owing to the early onset of winters, the periodic two-month-long garden closure will be expedited by a fortnight.

"This year, I think the total production will be less than that of the previous year and the opening season, as a result of this, will be good", C S Bedi, managing director at Rossell India said.

Historically, tea prices surge in the auctions as well as private sales whenever the industry is faced with production shortfall and a similar expectation prevails now as well. According to McLeod Russel, the world's largest tea producer, prices in India have increased by Rs. 5 per kg due to increased demand from both domestic and export market and lower production.

Kamal Kishore Baheti, director at McLeod Russel, the world's largest tea producer expects price to remain strong in the coming three years.

"Once prices start moving up, it continues to do so for sometime till it stabilises. Prices are now improving and I believe there'll be a 10 per cent increase this year on a cumulative basis", he said.

Higher prices translate into better topline for the companies. For the quarter ended September 30, both Rossell India and Goodricke Group posted a 10 per cent increase in their topline at Rs. 51.66 crore and Rs. 200.55 crore respectively. McLeod Russel, however, took a marginal hit of 0.7 per cent at Rs. 468.63 crore in its net income.

Moreover, after a dull start to export prices this year, things have started to look brighter in the past 2-3 months as export prices, particularly of Assam tea surged.

Azam Monem, chairman at the Indian Tea Association (ITA) opined that demand has been increasing both at the domestic and international markets.

Domestic demand for tea is estimated to have surged past 1,000 million kg in the last fiscal year as against 951 mkg in the 2015-16 fiscal year.

A second optimism in the sector arises from the tea majors diversifying into packet tea which will not only mitigate risks arising from the vagaries of nature but will also help strengthen the bottomline as it ensures Rs 10-15 additional margin for every kilo sold.

While McLeod Russel expects its newly announced packet tea joint venture with Eveready Industries to fetch Rs. 300 in the near term, Camellia Plc-owned Goodricke wants the revenue share from packet tea to increase from the current 26 per cent to 40 per cent. TGBL's subsidiary, Amalgamated Plantations, which recently launched its own brand, also expects Rs. 30-75 lakh of additional profit each fiscal year from the packet tea venture.