Rising costs, muted realisations may hit tea cos bottomline

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Rising costs and muted realisations are expected to dent the profitability of tea companies, says a report.

"We expects profit margins of domestic tea planters to contract by 140-170 basis points (bps) in FY 19 and a further by around 100 bps in FY20. The margins of integrated players are expected to contract 200-240 bps and a further around 90 bps, Crisil said in a report.

It expects prices at tea auctions across the country to close calendar year 2018 at Rs 145-146 per kg on average, 3-4 per cent higher on-year, compared with a compound annual growth rate (CAGR) of 1.4 per cent logged over calendar 2012-2017.

"Despite this, the players' margins are expected to be impacted adversely as the export-driven uptick would not be enough to offset a significant increase in labour cost," it said.

In March 2018, tea estate workers' wages increased significantly by 22-25 per cent in north India, which accounts for approximately 80 per cent of the country's total tea production, Crisil noted, adding that labourers in Assam have demanded a further hike of Rs 17 per day (another 10 per cent), which is being discussed and, if implemented, would add to the burden of planters.

The rating agency observed that the domestic market is saturated, with penetration as high as 99 per cent among the tea-drinking population, which has limited growth potential and increased the players' dependence on exports to maintain the overall demand-supply balance in the domestic market and thereby prices.

The agency expects record tea production of 1,328 million kg in 2018 and 1,339 million kg in 2019, driven by higher yields in Assam and West Bengal.

"However, the share of exports is estimated to continue at 18-20 per cent in volume terms. Thus, healthy supplies due to higher production and limited scope for growth in domestic consumption and exports will cap any rise in prices for Indian players," it said.

In 2017, India accounted for 23 per cent of the global production. However, its share of exports was only 13 per cent due to stiff competition from Kenya and Sri Lanka, and high domestic consumption.

Both Kenya and Sri Lanka accounted for only 13 per cent of global tea production, but cornered 39 per cent exports share during the year. Those two countries also enjoy much higher realisation compared with India, given better-quality tea.

"Export realisation of Indian tea producer's dropped at around 2 per cent CAGR over 2012-2017. In 2018, growth in realisation is expected to have remained muted, though 2019 could see a marginal increase of 1-2 per cent," it said.