Declining production, lower exports hit tea companies’ profits

Bhagyashree Pande, FE Research Bureau

Indian tea industry is seeing declining exports as can be seen in the latest report of the Tea Board, which shows tea exports down by 10 per cent from January - September 2001 to 133.23 m kg as against 148.02 m kgs during the same period last year.

The tea industry’s exports are declining from 1999 onwards when the exports fell by 8 per cent to 190.20 m kgs as compared to previous year’s 206.10 m kgs. The year 2000 saw a marginal recovery of 4 per cent to 197.8 m kgs.

In value terms, the yearly exports of 7 major tea companies in 2000-01 totalled to Rs 146.69 crores which has steadily declined from Rs 259.86 crores in 1998-99. AFT Industries, Rossell Industries and Tata Tea were major losers.

Declining exports is a major cause of concern as this industry is the leading foreign exchange earner. Falling production, lack of demand in foreign markets, low price realisation and removal of quantitative restrictions are some of the major causes.

Drought in northern India led to a fall in production in 1999 which was short of 64.8 m kgs totalling to 805.6 m kgs as compared to the 1998 production of 870.4 m kgs. But the year 2000 saw only a marginal recovery wherein the production rose to 875 m kg. In the current year between January - September, the production has grown by 1.66 per cent to 633.83 m kgs as compared to 623.51 m kgs last year same period.

Lower exports have hit the profit margins of top tea companies, the profit of 7 companies fell by 68.2 per cent from Rs 226.45 crores in 1998-99,to Rs 72.03 crores in 2000-01. The companies that were hit the hardest were Goodricke Group profit fall by 97 per cent, AFT Industries by 71 per cent, and Tata Tea by 22 per cent.

A fall in demand of Indian teas in the foreign markets is due to severe competition from cheaper teas of Sri Lanka and Kenya. The adverse economic conditions prevalent in the Russian countries, which was the biggest exporter of Indian teas, has led them to buying cheaper Orthodox teas from these countries. India also lost a very vital market of Pakistan to Kenya.

Indian teas are expensive due to higher production costs, and increasing labour wages. The cost of production such as fuel, fertilisers, transport have been constantly rising. Tea planting and plucking are labour intensive activities and wages of labour are determined according to industry wide settlement entered periodically.

The families that are involved in plucking and planting are moving away from plantations as younger generation believes that it has better opportunities of work elsewhere and cannot sustain itself on plucking tea leaves. This has not only led to labour shortage and but has made the existing labour more expensive.

With import liberalisation and removal of restriction from the Saarc (South Asian Association of Regional Cooperation) countries there has been a surge of cheaper imports in the country. Sri Lanka is already exporting tea at a concessional rate of 7.5 per cent to India, this has not only dampened market enthusiasm but has also depressed prices.

The average tea prices in 1999 was Rs 71.80 per kg which was 6.6 per cent lower than Rs 76.91 per kg in 1998. These prices further fell by 15.5 per cent in 2000 to Rs 71.80 per kg.

The tea manufacturing industry in India is already fragmented with a lot of smaller players in the fray. These smaller producers cut costs considerably thereby affecting the overall prices of tea in the domestic market.To add to this the Government’s decision to impose value-added tax (VAT) from April 2002, would increase the price of the tea and adversely affect the already low domestic consumption levels.

The only way that the Indian tea industry can compete in the international markets is through production of better quality Orthodox teas and by finding newer and better methods of reducing inputs costs.

Besides this the Indian tea companies will have to tap newer markets of Americas which have a large potential and will also get better prices for tea produce.