Tea stocks up on expectations of better margins

Tea stocks bucked the broad market trend and jumped by 10 per cent on Tuesday due to expectations of better realisation this year on a sharp decline in its production.

While share price of Dhunseri Tea & Industries Ltd jumped by 10.67 per cent to Rs 302.80 apiece, that of Jay Shree Tea & Industries shot up by six per cent to Rs 84.15 apiece. Share price of other tea producers and exporters jumped today when the benchmark Sensex declined by nearly one per cent or 219.73 points to 25,310.33. Nifty also fell by 63.70 point to 7,701.70 point on Tuesday following selling pressure by bears.

"Tea output in India is likely to decline by 17 million kgs this year due to vagaries of nature. Tea plants got affected by heat waves first and then floods thereafter. Since, the plantations require intermittent rainfalls on regular intervals, both heat waves and flood damaged plants," said Sujit Patra, Additional Secretary, Indian Tea Association (ITA).

ITA estimates India's tea output at 1,190 million kgs this year as against 1,207 million kgs reported during last year. Erratic weather condition in Assam, India's largest tea producing state, is likely to plummet its output in the state by over five per cent. Based on September 2015 data, Assam contributes nearly 60 per cent India's overall tea output. Assam reported five per cent decline in tea production in 2014.

In fact, India's tea production has started declining since September, fourth consecutive month in a row. Data compiled by the Tea Board of India showed India's tea production at 148.81 million kgs in September this year as compared to 157.33 million kgs in the same month previous year. Tea production was also lower by seven per cent in August at 152.71 million kgs this year as against 164 million kgs in the comparable month last year.

"While we estimate tea output in October 2015 to remain almost similar to last year, the same in the next couple of months is likely to remain lower due to unfavourable climatic condition," said Patra.

In fact, the trend has started reflecting on its prices. Tea prices have jumped by up to 20 per cent in the last two months. In the latest auction on November 28, average tea prices were quoted at Rs 132.18 a kg in Siliguri, a rise of 19.21 per cent from the average price quoted at Rs 110.88 per kg on October 3 there.

Similarly, average tea prices in Coonoor auction centre were quoted 10.57 per cent higher at Rs 75.52 a kg towards November end from their level at Rs 68.30 a kg early October.

A top industry official said that average margins of the industry might improve to 18 per cent from the existing 11-12 per cent on rising tea prices across the year.

Interestingly, cost of tea production has also risen proportionately to rising prices. But, for companies having high volumes, profit would improve. share price of Jayshree Tea went up on expectation of its volumes going up which is expected to yield better profit this year, explained the industry official.