"Bulk tea players have already witnessed pressures on operating margins over the last few years, driven mainly by increased labour costs and inadequate increase in realisations. With this sharp increase of around 22 per cent in cash wages, organised bulk tea players are likely to witness further contraction in operating margins, unless there is a commensurate rise in tea prices," Icra vice president and sector head, corporate sector ratings, Kaushik Das said.
With wage rates increasing in Assam, West Bengal, the other major producer of bulk tea, is also likely to implement an increase shortly, given the historical alignment of wage revisions in the two states.
As per an order by the governor of Assam, the state government will notify an interim enhancement of wages of tea plantation workers by a minimum amount of Rs 30 per day with retrospective effect from March 1, 2018, Icra said.
This steep increase is expected to have a significant adverse impact on the operating cost of bulk tea players, given that Assam and West Bengal are the two largest tea producing states in India, accounting for almost 80 per cent of India's bulk tea production.
Tea is a fixed cost-intensive industry, with labour costs accounting for around 60 per cent of the total cost of production.
In the past, wage rates were finalised for a period of three years at a time, with a fixed annual escalation rate. The escalation rate typically used to be the highest in the first year and used to taper off in the subsequent two years.
In Assam, the last wage agreement was applicable till December 2017, while for Dooars and Darjeeling in West Bengal, the last wage agreement expired in March 2017, and an interim wage hike of Rs 17.50 per day was implemented from January 2018.
Apart from daily wages, tea plantation workers receive a host of other benefits, which include free housing, medical facilities, ration and firewood.
Considering these facilities as well as other benefits of bonus, provident fund, gratuity and leave with pay, the total benefits per day in CY2017, as per Icra estimates, worked out to be more than double the cash wage rate.
The increase of Rs 30 in cash wage is estimated to result in an increase of around 16 per cent in overall cost of labour per day for tea estates.
"Based on a productivity of around 2.8 kg of tea produced per man day for tea estates in Assam, this translates into an increase of around Rs 17 per kg," Das added.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)