Price rise boosts margins of tea companies

Tea companies are likely to see 2017-18 as one of the best years in recent times, in terms of profit.

There was a sharp improvement in their realisation, with a rise in product prices and stagnant cost of production. North-based (in this segment, that is all of India other the south) companies would reap more benefit, due to a sudden price increase in tea auctions at local markets since August, reflected in the financial results for the September quarter. Barring Tata Global, most companies reported loss or negligible profit in the June quarter, due to subdued prices until August. The second half of the financial year would see a turnaround in profit margin. “A large carryover stock, on account of surge in production towards the end of the previous season, had weighed on prices at the beginning of the current season. With stagnant production, higher export with the shortfall in Kenyan production and healthy domestic demand, prices firmed up considerably for North Indian producers as the season progressed,” said Kaushik Das, vice-president at ratings agency ICRA. The upward march in prices since August is likely to continue till March 31. The Tea Board of India data showed a Rs 2.2 a kg increase in price between April and November. However, with seasonal factors which led to quality deterioration, prices in auctions declined this month.

Realisation for north-based tea companies have been higher this year over last year. It was the other way round for south-based ones.

“Prices plunged abnormally in January last year due to unusual climatic conditions, unlikely to repeat this year. Also, lower production is likely to keep tea prices elevated in the months to come, resulting in higher margins for producers,” said a senior company official.

The extent of improvement would, however, be tempered by cost pressure, mainly due to increasing wages. Prices at South Indian auctions have been impacted by higher production but most of the large players there are unlikely to see a material contraction in operating profit, as the output rise would largely negate the impact of lower prices.

The overall rise in output during the first 10 months of this calendar year was 1.4 per cent, to 1,089.9 million kg, primarily driven by the increase in southern production. North Indian crop levels, 80 per cent of total production, was marginally less after a considerable crop loss in September.