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Tata Tea may benefit from lower input costs

Tata Tea may benefit from lower input costs
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First Published: Wed, May 26 2010. 10 00 PM IST

Updated: Wed, May 26 2010. 10 00 PM IST
Tata Tea Ltd’s profitability in the March quarter was hit by a sharp rise in raw material costs. Last year, along with other food commodities, tea prices, too, soared as a poor monsoon lowered output. Tata Tea did hike prices along with other companies, but it also had to contend with customers shifting to cheaper products in markets such as India. In developed markets, its main consumers are organized retail stores, which use their superior bargaining position to hold off price hikes.
In the March quarter, Tata Tea’s consolidated net sales rose by a smart 23% to Rs1,570 crore, over the year-ago period, much higher than its full-year sales growth of 19%. But input costs rose by a steep 40% during the quarter. The domestic consumer market is seeing rising competition and slackening demand due to rising food inflation. Large companies are stepping up advertising spends to sustain growth. Tata Tea spent 40% more on advertising for its domestic operations, which contribute to around 30% of sales. At the global level, advertising expenses and employee costs grew by just 11% each. Other expenditure, however, rose by 24%. As a result, operating profit margin fell by around 2 percentage points in the March quarter.
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The company’s profit before tax and exceptional items rose 13%, due to lower depreciation and interest costs and higher other income. Tata Tea has done well to improve growth in its key markets, with sales in the US rising by 15% and in South Asia by 24%. Sales in the UK and Africa grew by just 9%. Tata Tea’s efforts to improve its position in key markets worldwide appear to be working.
Looking ahead, tea price movements will play a key role. Prices at the Kolkata auction have fallen 6% between January and end-April. Initial production estimates coming in from Kenya are showing a 68% jump in tea production to around 111 million kg. If these trends hold up and other leading tea producing nations, too, report a sharp increase in output, then tea prices will trend lower in fiscal 2011. This will play out differently for Tata Tea’s domestic and international markets. In the domestic markets, margins will improve initially. Of course, competition could also see companies give discounts or free volumes, or plough back profits into higher advertising. Margin improvement may be lower in that case. Internationally, retailers will demand and get a reduction in prices. So the benefits there will be much less. Lower tea prices give Tata Tea more flexibility to drive growth in 2011, even while maintaining margins. Lower profitability in the March quarter appears to have disappointed investors, with the Tata Tea share price falling 2.2% on a day when the markets rose by 2.3%.
Graphic by Yogesh Kumar/Mint
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First Published: Wed, May 26 2010. 10 00 PM IST