With price hike on cards, tea companies gain on bourses

Companies eye a retail tea price hike of around 10-15% on lower tea production estimates

Tea processors and marketing companies are sailing high in anticipation of a hike in retail tea prices amid lower crop estimates. Share prices of leading tea companies witnessed heavy gains on the bourses on Friday with increased buying from investors.

Since last three weeks, that is from October 30, 2012 shares of tea companies have outperformed the benchmark index, Sensex. Considering the base of 100, tea index (comprising of tea companies listed on bourses) surged to 15% between October 30 to November 16, 2012, while that for Sensex remained mostly flat at 99.34 points.

As per the industry estimates, tea production for the current year 2012-13 is feared to fall by around 10-15 million kg at less than 950 million kg against around 980 million kg reported for the year 2011-12. Erratic climate during the early part of the current year is believed to have dampened the tea crop prospects for the current year.

 

"We started off with a drought, followed by excessive rains in second quarter. This led to erratic climate conditions hurting tea crop. However, we are hopeful for some recovery in production during the months of November and December. Still, tea production may fall by around 10-15 million kg this year," said Azam Monem, director, McLeod Russel India Ltd.

According to Monem, the industry would face a crop shortage, thereby leading to a possible price rise in the leaf commodity.

"There will be a price rise to the tune of around 20%, but most of the companies will absorb a part of this. However, retail prices will increase by around 10-15%. But this is still below the inflation rate," added Monem.

It is evident from the fact that a price hike buzz has helped most tea companies' shares rally on the bourses in the past one month. On Friday, major listed tea players including Bombay Burmah and Goodricke Group witnessed heavy buying. The share prices jumped by 7.67% and 2.03% respectively.

Analysts maintained that tea companies would show attractive gains going forward. "Tea company such as McLeod Russel has positive side. Also, there are other attractive tea stocks, which can yield good returns. On one hand, tea crop is likely to fall short, while on the other, there is a possibility of tea companies increasing prices, which would increase their revenue potential and reduce cost burden," said an analyst with India Infoline Ltd.

Also, Goodricke Group is has turned positive as the company is aiming to diversify in the dairy business.

"Indian tea crop for the first six months of the current fiscal (April-September) is higher by around 1.64 million kg for the period at around 690.31 million kg against 688.67 million kg of 2011-12. However, despite higher production from last year, we see prices to stay firm for good quality tea due to early winter in tea growing areas," said an industry source associated with Federation of All India Tea Traders Association (FAITTA).

Tea prices at Guwahati Tea Auction Centre hovered in the range of Rs 200 to Rs 250 per kg in the early part of this month.