Tea players: Higher labour expenses hit margins of bulk tea producers in FY19: ICRA

Kolkata: Profit margins for bulk

tea players

are estimated to be negatively impacted during FY2019, particularly for the north Indian (

Assam

and

West Bengal

) tea producers, given the significant increase in labour expenses, which has not been adequately compensated by the increase in tea realisation, according to an ICRA report released on Thursday. The initial uptrend in north Indian (NI) auction prices was not maintained during the months of August to November 2018, thus adversely impacting the overall auction price trend for FY2019.

After the decline in NI production by around 20 million kg (mkg) in December 2018, given the Tea Board of India’s directive to stop plucking post mid-December, NI auction prices again witnessed an uptrend in recent months. However, the impact of such a movement on cumulative average prices for the entire FY2019 is going to be limited, owing to lower volumes in the last quarter of the financial year. As a result, ICRA estimates the average NI auction prices to be around Rs. 9/kg higher over the previous fiscal, substantially lower than the estimated increase in the cost of production by almost Rs 17/kg, following the wage rate increase announced in July 2018.

Commenting on the same, Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, ICRA, said: “The impact of the sharp increase in wage rates was exacerbated by higher energy costs during the peak production months. Consequently, operating profit margins of players are expected to decline by ~350 basis points on an average in FY2019. Also, while average auction prices in FY2019 are expected to increase by ~Rs. 9/kg, the increase is not consistent across all categories of teas. Hence, the extent of deterioration in operating profitability of individual players would depend on factors like the quality segment that it operates in and its scale of bought leaf operations.”

ICRA notes that while the prices of lower category of teas, at the lower end of the market, are expected to increase considerably, the medium-to-good category teas, at the middle level, is expected to witness only a marginal increase. This is on account of the different supply-demand dynamics across the various price points in the bulk tea industry. During 10M FY2019, while the average auction prices of teas produced in the Dooars and the Terai regions (mostly producing low to medium category of tea) are up by ~ Rs 11/kg, the auction prices of Assam teas, considered to be of high quality, witnessed an increase of only Rs 3/kg. Prices of orthodox teas were also affected during the September to November period, given the uncertainties related to exports to Iran, following the impending US sanctions. Clarity on the same has, however, supported prices from around December onwards.

As for the prices at the South Indian (SI) auction centres, which started off at a significant discount to previous year’s prices, firmed up considerably after June 2018, primarily following the decline in tea production, and recovered to almost previous year levels of Rs. 101/kg during CY2018.

On the production front, the overall global tea production witnessed an increase of 1.8% during CY2018, primarily because of a 12% growth in Kenyan tea production. Given the huge increase in supplies, Kenyan auction prices were negatively impacted, correcting by almost 13% during the year. Sri Lankan auction realisations too witnessed a considerable decline of 12% during CY2018, primarily led by uncertainties arising from the impact of the impending sanctions on Iran, a large consumer of orthodox teas. The increased supplies and softer trend in prices in the international market also impacted India’s exports prospects, which cascaded on to the domestic price levels. Aggregate Indian tea export volumes remained largely stagnant during CY2018, with the decline in NI export volume largely offset by the increase in SI export to an extent.

While in dollar terms, Indian export realisations remained muted, depreciation of the rupee resulted in a 4% increase in the value of exports from India in rupee terms to reach Rs. 51.3 billion in CY2018. Going forward, the ability to increase export volumes at remunerative prices would be a key factor in determining the overall supply-demand balance in the domestic tea industry. While the level of carry-over stock determines the price levels at the beginning of the season, the price trend during the peak production months, from June to October, would be critical in determining the overall financial performance of the domestic tea industry in FY2020.

“Any further material increase in wage rates, however, without a more-than-compensating increase in the prices of teas, would lead to further deterioration in credit profile of large organised NI bulk tea players, who have already witnessed a sharp contraction in operating margins and cover indicators over the last four years,” Mr. Das added.

Source

Author: Prakash Poojary

Business Analyst

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