Home / Industry / Retail /  Increase in tea prices to offset wage rate hike in north India: Icra

New Delhi: Demand-supply mismatch is expected to keep prices of orthodox tea or ODX at higher levels, supporting its prices even in the Indian market, rating agency Icra said in a report on Tuesday.

According to the agency’s latest quarterly report on bulk tea, prices of ODX teas are ruling at an all-time high level on the back of a demand-supply mismatch in the international market due to production disruptions in Sri Lanka, a fallout of the current economic crisis in the island nation, the largest exporter of ODX teas globally.

The production loss in Sri Lanka is likely to continue for some more time and would keep supply tight in the international market, thus supporting prices of Indian ODX teas, the report has said.

Prices of North India (NI) CTC (crush-tear-curl) tea in 5M FY2023 is also up by 5% (Rs. 9 a kg) on a year-on-year basis, primarily driven by the sharp rise in auction prices in August 2022. The uptrend in NI CTC prices is supported by lower-than-expected production, particularly of quality estate teas, in the current season and increasing demand for good quality teas.

Price premium for top quality CTC tea is likely to sustain going forward, given the limited supply base of the same, Icra said.

Prices of SI CTC teas during 5M FY2023, however, remained lower compared to the previous two fiscals due to sustained production levels from bought leaves in NI, a direct competitor of SI CTC teas in terms of quality.

“With ODX prices expected to sustain at a significantly higher level on a YoY basis, some quality producers have increased ODX production. Consequently, production of quality CTC is likely to remain flattish, which will continue to support prices of such teas as well. An analysis of tea prices indicates that the price differential of NI CTC teas, manufactured by the top 50 estates over average auction prices, increased to 137/kg in 8M CY2022 from Rs. 122/kg in CY2021," said Kaushik Das, vice president and co-group head, corporate sector ratings, Icra.

Till May 2022, cumulative all-India production was up 16% to 320 Mkg on a YoY basis. However, crop loss in June and July 2022, due to unfavourable weather conditions and floods, led to a 2% drop in the all-India production to 614 MKg in 7M CY2022 on a YoY basis. Given that 54% of the annual production typically takes place during the last five months of any calendar year, ICRA expects the overall production in CY2022 to remain flat compared to last year, although the same would remain dependent on the cropping levels till October, after which production will start to fall.

In CY2021, all-India production was up by 7% to 1,343 Mkg on a YoY basis, recovering from the lows of the pandemic-impacted CY2020 season. However, it still remained 3% lower compared to the record crop of CY2019.

 Cumulative prices for NI as well as SI ODX teas in 5M FY2023 have witnessed an upward trend on a YoY basis on the back of a demand-supply mismatch for ODX teas in the international market, arising from production disruption in Sri Lanka. However, the price rise of ODX teas in 5M FY2023 in case of NI (~34%) was much sharper than that of SI (5%), on a YoY basis, due to the formers’ superior quality. The full year cumulative prices are also expected to remain at a significantly elevated level compared to FY2022, the report by the ratings agency said.

 On the global front, although production in Kenya in 5M CY2022 was lower marginally by 2% (4 Mkg) on a YoY basis, it has been significantly lower (11%) compared to 5M CY2020. Limited supplies in the global market led to a sharp rise in cumulative Kenyan auction prices by 29% to $2.51/ kg for the period January to August 2022 on a YoY basis.

 In Sri Lanka, monthly prices at auction centres firmed up in the current year vis-à-vis the previous year due to declining tea production on the back of the current economic crisis. The cumulative Sri Lankan auction price in 7M CY2022 improved by ~16% to $3.69/ kg on a YoY basis. Sri Lankan production for the period January to July 2022 declined by 18% to 152 Mkg on a YoY basis. Going forward too, production is likely to remain lower on a YoY basis and the same would continue to keep the prices at an elevated level.

 Export from India during 6M CY2022 was up by 12%, in volume terms, on a YoY basis. While NI export volumes increased by 11.2 Mkg (~24%), the SI export volume contracted by 0.8 Mkg (~2%) in 6M CY2022. Although the export volume increased, realisation witnessed a marginal dip of ~2% to Rs. 261/ kg in 6M CY2022 on a YoY basis. Going forward, given the shortage in supply of ODX teas in the international market the export realisation is likely to improve on a YoY basis.

 In FY2022, softening of realisation, from the highs witnessed in FY2021, and increase in wage rates led to a decline in the operating margin (OPM) of players in the ICRA sample set. Consequently, interest coverage and total debt/ OPBDITA are estimated to have deteriorated to 1.5 times and 8 times respectively compared to 2.6 times and 3.9 times in FY2021. While there has been a further increase in wage rates in the current calendar year in NI, the impact of the same is expected to be nullified by the healthy realisations of teas, particularly producers who are focused on producing quality teas.

 “Notwithstanding the impact of higher wage rates, the financial performance of quality producers is likely to witness an improvement in FY2023 on a YoY basis. Increase in prices of quality CTC and ODX teas would enable the producers to absorb the higher cost of production due to the wage rate revision," said Sujoy Saha, vice president and sector head, corporate sector ratings, Icra.

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