Higher wage costs, lower price realisation add to tea companies' woes

Higher wage cost and lower price realisation weighed on the performance of tea companies in the three and nine-month periods ended December 31.

Both West Bengal and Assam hiked wage rates from June and October 2023, respectively.

Moreover, tea prices took a hit in 2023. This showed up on the financial performance of tea players.

For the nine months of FY24, most companies reported a sharp drop in profitability.

In Q3FY24, at least two listed tea producers, Goodricke Group and Dhunseri Tea reported losses. For McLeod Russel, the loss widened in Q3FY24 compared to Q3FY23.

ICRA senior vice-president Jayanta Roy said wage is the primary cost driver for the tea industry.

He added, “The impact of wage hike by Assam and West Bengal governments last year is to the tune of Rs 9 per kg of production. Moreover, the price of CTC tea was down by almost Rs 9 per kg and orthodox tea by Rs 55 per kg in 2023. That has had a negative impact on all tea companies.”

“Given that there is no production in North India during winter, we believe that FY24 is going to be a weak year for the tea industry,” he said.

According to an ICRA report dated December 2023, the cumulative North India orthodox price in 10 months of 2023 declined sharply by 25 per cent year-on-year (Y-o-Y). Prices of South India orthodox fell 5 per cent during the period. The cumulative North India CTC auction price declined in 10 months of 2023 by 5 per cent.

The stress

Chandra Kumar Dhanuka, chairman, Dhunseri Tea, said that five estates were added during the year.

“They were acquired towards the end of January and we couldn’t do the core season work. So, there was a significant loss in crop. But this has now been taken care of and hopefully the coming year will be good,” said Dhanuka.

However, he also said that only a floor price for tea would ensure good times for the industry.

Goodricke Group managing director (MD) and chief executive officer (CEO) Atul Asthana attributed the drop in profitability to the drop in tea prices and higher cost.

“During the nine-month period, the company’s own crop was higher by 7.5 per cent over the corresponding period of the previous year. But sale prices were lower and wage cost increased, impacting profitability.”

Vikash Kandoi, executive director, Jay Shree Tea & Industries, said tea had been very badly hit, especially Darjeeling.

He said, “Our revenue from Darjeeling is small, but the losses are significant at Rs 100-200 per kg. This has been a challenging year for the industry with geopolitical issues impacting exports. But we hope that next year will be better.”

Jay Shree Tea’s numbers are showing an improvement in performance, but it’s on the back of income from related activities.

Rossell India’s performance in nine months of FY24 shows a sharp drop in profitability on the back of a drag in the performance of its tea division. Nirmal Khurana, director (finance), said this was one of the bad years for the tea industry. He said, “The crop is down, realisation is less and wages are up.”