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McLeod Russel India Ltd, the world’s biggest tea grower, predicts a rebound in profit growth from a three-year slump as declining output and stockpiles drive leaf prices to a record high.

Prices may climb 9% to an average 200 ($3.2) per kilogram in 2015 as dry weather and pest attacks cut production, while consumption rises in a recovering economy, chief financial officer Kamal Baheti said in an interview. The price touched an average 183 a kilogram this year compared with 168 in 2013, he said.

“Next year looks promising," Baheti said. “With low inventory already in the system, not only will prices remain firm for this year, opening prices next year will be very strong even if there is normal crop next year."

The Kolkata-based company is counting on higher prices to end the slide in earnings growth as geopolitical conflicts dented exports and wrecked Baheti’s earlier forecast for a 15% jump in net income for the year ending 31 March. India is the world’s largest consumer of tea after China, and demand totalled 911 million kilograms in 2013-2014, according to India’s state-run Tea Board.

Local demand

McLeod’s output may decline as much as 9.8% to 101 million kilograms this year, while exports may drop as much as 30% to 16 million kilograms, Baheti said.

“If we lose any further crop next year, then the prices can go anywhere," he said.

Signs of a recovery in India’s $1.9 trillion economy may boost demand for the beverage, helping bolster local prices as well, he said. The country’s gross domestic product may rise 6.3% in the 12 months through March, the International Monetary Fund says, compared with last year’s 4.7%, which was near the slowest in a decade.

Tea usage in India will rise by 25-30 million kilograms this year, while production will decline to between 1.17 billion kilograms and 1.175 billion from 1.2 billion kilograms in 2013, Baheti said. Output totalled 860.2 million kilograms in the nine months through September, boar data showed.

“So, going by a production drop and consumption growth, the industry should be lower in inventory by 35-40 million kilograms by end of the year," he said.

A price surge in India alone may not be adequate to reverse the company’s sliding performance as input and labor costs would eat into the margins, said Jignesh Makwana, an analyst at Quantum Securities Pvt. Ltd, by phone from Mumbai.

No takers

McLeod Russel, which traces its origin to a partnership formed by two Englishmen in 1869 in the city formerly known as Calcutta, owns 39,542 hectares (97,710 acres) of tea plantations in India, Vietnam, Rwanda, and Uganda.

Falling consumption in top markets including Russia, Middle East, Pakistan and Egypt caused prices in Africa to tumble as much as 20 percent this year, hurting overseas sales of McLeod Russel’s tea.

“Globally all agricultural commodities are seeing an oversupply, so it is difficult to see prices rising," said Naveen Vyas, Kolkata-based head of research at LNB Group. “There are no takers for McLeod shares. Every time they predict higher prices, that isn’t showing on their revenue and bottom line. We may see some recovery next year, but not a major one."

Net income at McLeod Russel dropped 30% to 190 crore in the six months through September from a year earlier, the company said in a statement on 21 October.

Tea shares

Group sales rose 7.2% to 1,790 crore in the year ended 31 March, compared with the 15% increase the previous year. Net income fell 6.1% to 260 crore last financial year, versus a 4.9% drop and a 17% increase in the previous two years, according to data compiled by Bloomberg.

Shares of the company have slid 24% this year versus a 34% gain in the benchmark S&P BSE Sensex. Jayshree Tea and Industries Ltd, another producer, declined 3.7% in the same period, while Harrisons Malayalam Ltd advanced 16%.

“If the geo-political issues improve then exports will increase and that will create a bigger shortage," Baheti said. “So, we are very positive on prices next year." Bloomberg

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