In 2010-11, Indian tea plantation companies benefited from higher tea prices, but a production shortfall because of poor weather hit output. As a result, they could not reap the full benefit of higher prices. In the current fiscal, domestic tea output is trending higher, but prices are showing signs of slackening.
During April-July, production rose by about 10% year-on-year (y-o-y) in north Indian tea plantations, and 2% in south Indian plantations, according to data from the Tea Board of India. North India accounts for over three-fourths of the 397 million kg tea that has been produced in these four months, explaining the 8% growth in overall production. Auction data, available till August, shows a deceleration in prices on a y-o-y basis since end-July. The last available weekly auction data for August with the tea board shows an 8% y-o-y decline in the average yield in north Indian auctions, while south Indian auctions yielded an 8% increase.
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Global market conditions are, in fact, conducive for prices to trend up. Kenya’s tea output has fallen 12% y-o-y between January and August, according to a Bloomberg news report. However, tea production in the country has improved in recent months. The Tea Board of Kenya expects output to decline by 8.5% in 2011, down from the 10% fall that it was expecting earlier in July.
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Sri Lanka’s tea output, too, has been affected, and during January-August, total tea production fell by about 1% to about 221 million kg, chiefly because of a 2.4% decline in orthodox and 7.4% decline in green tea varieties, while a 27% increase in crush, tear and curl varieties propped up the total figure.
Though two leading tea growing countries are seeing a drop in output, a sharp rise in Indian production seems to be capping the increase in prices in the domestic market. Also, global prices have not risen sharply, indicating that supplies appear adequate to meet the current demand, and buyers are not expecting a significant shortfall in the near future.
Higher output is a positive for listed tea plantation companies, such as McLeod Russel India Ltd and Jay Shree Tea and Industries Ltd, but if realizations dip, their margins could come under pressure. Costs are likely to increase as higher output translates into higher operational costs, in addition to annual wage inflation. Investors should keep a watch for signs of such pressures in the forthcoming quarters, especially if prices in north Indian auctions continue their downward trend.
In the domestic market, packet tea marketers such as Hindustan Unilever Ltd and Tata Global Beverages Ltd will benefit from a softer trend in prices, as input cost pressures will ease. It may help them win back customers in the mass market segment, who may have migrated to loose tea because of high prices. In the premium segments, they may be able to improve margins. Tata Global’s overseas business, too, will benefit from lower costs, but its main worries will be the impact of the US and Europe’s economic woes on demand for its products.