Lower production, higher export demand supporting domestic auction averages of orthodox tea: ICRA
KOLKATA: In the current calendar year, lower production in South India and better export demand for orthodox tea have supported overall domestic auction averages. This has negated the adverse effect on prices, stemming from increased availability of tea from Kenya and, to a lesser extent, from North India, according to ICRAB
However, continuing cost pressures, attributable to the increase in wage rates, kept margins and debt coverage indicators under check, ICRA added. The capital structure of large companies in the sector, nonetheless, is expected to remain conservative, given the healthy profits earned by the industry between FY2008 and FY2014. The long-term domestic demand outlook, too, remains favourable, given India’s low per capita tea consumption at present, combined with the low cost of the beverage, which makes it suitable for mass consumption.

Global production of bulk tea increased by around 2.5%, during 10M CY2016, largely on account of higher crop in Kenya, despite the decline in Sri Lankan production. The surplus Kenyan tea production in the current year led to higher availability in the global market, leading to a decline in export volumes from India and consequently higher availability in the domestic market as well. Despite the increased availability of tea, Indian auction auction averages grew by 9% in the current year.

Mr. Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, ICRA, said: “Geographical variations in supply have determined domestic price levels in the current year. South Indian auction prices witnessed a significant increase during the period, due to a steep decline in production in the region. North Indian auction prices too, witnessed an increase, although marginal, despite growth in production from the region, with realisations being primarily supported by the domestic demand for CTC tea.” Increased export demand for orthodox tea of both North Indian and South Indian origin, given the downtrend in Sri Lankan production, which is largely of the orthodox variety, further supported the overall price trajectory.

Tea being a fixed cost-intensive industry, labour costs accounted for a major portion of the total cost of production. Over the last two years, the cost of production of bulk tea players in North India, accounting for nearly 80% of the bulk tea production in the country, has increased by nearly 23% on account of increased labour costs. The same is attributable to a steep rise in wage rates, which increased by around 25% in both Assam and the Dooars during FY2014-16. In the current year, wages
 

Source: ECONOMIC TIMES