Profit margins of bulk tea players to be impacted in FY19

The profit margins of bulk tea players is likely to be impacted in 2018-19, due to increase in input cost and inadequate realisations, according to a report. Profit margins for bulk tea players are estimated to be negatively impacted during FY19, particularly for the north Indian tea producers following increase in labour expenses, which has not been adequately compensated by the rise in tea realisation, rating agency Icra said in a report.

After the decline in production in north India (NI) by around 20 million kg in December 2018 and 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 this move on cumulative average tea prices for the entire FY19 is going to be limited due 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 per kg higher over the previous fiscal, which is substantially lower than the estimated increase in the cost of production by almost Rs 17 per kg, following the wage rate increase announced in July 2018. "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 FY19.

Also, while average auction prices in FY19 are expected to increase by Rs 9 per kg, the increase is not consistent across all categories of teas," Icra vice president and sector head, Corporate Sector Ratings, Kaushik Das said. Meanwhile, the prices at the south Indian (SI) auction centres, which started off at a significant discount to the previous year, firmed up after June 2018, following the decline in tea production and recovered to almost the previous year levels of Rs 101 per kg during CY 2018.

On the production front, the overall global tea production went up by 1.8 percent during CY2018, due to a 12 percent growth in Kenyan tea production. Sri Lankan auction realisations also witnessed a decline of 12 percent 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 global market also impacted India's exports prospects, which cascaded on to the domestic price levels, it said. 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, the report added.

"Any further 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," Das added..

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