Financial performance of bulk tea firms to be under pressure in 2019-20: Report

Even as there was marginal improvement in financial performance during the first half of 2019-20, profit margins for bulk tea players are likely to remain under pressure due to tepid tea price movement in the current financial year, according to a report.

"The marginal increase in overall tea prices together with muted growth in tea production for the large bulk tea players are likely to constrain any improvement in the operating profitability of bulk tea producers in 2019-20," Icra Vice-President and Sector Head (Corporate Sector Ratings) Kaushik Das said.

This is despite the fact that labour cost is unlikely to witness any material increase in the current financial year, he added.

"However, organised players with a high proportion of orthodox tea volumes could be an exception and are likely to see some improvement driven by significant increase in orthodox tea prices," he added.

In the first eight months of 2019-20, tea auction prices in North India (NI) remained flat, owing to continued pressure on CTC tea prices.

Though firm orthodox tea prices provided some respite, limited volumes of orthodox teas in total NI production curbed the overall improvement in North India auction prices.

Icra also noted that while CTC tea prices for the organised segment witnessed an improvement of around 5-6 per cent during August-October 2019, owing to estimated crop loss during August 2019, the same seemed to have tapered down in November 2019.

In addition, the increase in production by the organised players based out of NI remained muted at around 1.8 per cent with major increase only happening in the bought leaf segment to around 6.5 per cent.

Prices at the South Indian (SI) auction centres, after remaining firm till the beginning of July 2019, witnessed a continuous decline for the past 3-4 months, following the crop recovery in June-August 2019.

On a cumulative basis, the SI's auction prices declined by around 3 per cent during 8 months of 2019-20 because of higher supply.

Meanwhile, the overall global tea production declined marginally by 0.6 per cent during the 10 months of the calendar year 2019, primarily due to a fall in Kenyan production (around 8 per cent), which offset the increase in Indian production to a large extent.

The softer trend in global tea prices also impacted India's export prospects, primarily for the CTC variety.

Overall, the total Indian export volume remained stagnant during the first 10 months of 2019, however, there has been a considerable growth of around 10 per cent in the export realisation due to healthy demand, particularly from Iran.

However, going forward, sustainability of such trends for orthodox teas remains uncertain as of now.

The industry also continued to face headwinds in controlling costs, primarily after the significant increase in wage rates during 2018-19, it added.