Tepid Brew

Updated: Jun 30 2002, 05:30am hrs
Falling domestic demand for tea, despite lower prices and contraction in exports, have made life miserable for players in tea industry.

Tea, as a drink, has not stood up to growing competition from coffee and commercial beverages at home.

The Indian tea in the overseas markets has bowed to better quality teas from SriLanka and Kenya which also score on productivity. Moreover, branded tea players like Tata Tea have to counter the problem of a heavy discounting practice indulged in by small regional players at the lower end of the market.

Tata Teas (TTL) poor performance during the year to March 2002 has to be viewed against this background.

Although the fourth quarter performance is even worse, a strong seasonality factor plays a big role.

Owing to seasonality, loss from operations in the North-East in the last quarter of the year occurs when production ceases during winter months but fixed costs are nevertheless incurred.

Financials

TTLs financials are not strictly comparable with the previous years figures consequent to the amalgamation of Bambino Investment & trading Company Ltd with the company effective 1st October 2001.

TTL could succeed in restricting the fall in topline to 7.4 per cent at Rs 779.4 crore, which is appreciable as the tea industry continues to suffer from problems such as poor auction prices and oversupply.

The company has done well on the cost front too. Raw material consumption (adjusted for variations in stocks) was brought down to 16.5 per cent (19.8 per cent) of sales.

This was made possible through a greater usage of its own garden teas and lower purchases from auctions. Marketing expenses of the fourth quarter in particular were higher by two per cent owing to successive launches of several new products in the domestic market.

Still, other expenditure was curtailed by 1.8 per cent to Rs 313.8 crore through various cost reduction measures.

However, a five per cent increase in staff costs to Rs 243.6 crore was primarily responsible for a 23.9 per cent drop in operating profit to Rs 29 crore. OPM dipped to 12.0 per cent (14.6 per cent).

TTLs efforts to bring down working capital seems to have paid off as interest outgo was 14.6 per cent lower at Rs 21.4 crore. Profit after tax (after factoring in income from dividends and profit on sale of shares) was down 28.2 per cent to Rs 71.9 crore thanks to a 53.8 per cent fall in dividend at Rs 20.2 crore.

The profit on sale of shares includes one time profit worth Rs seven crore relating to the sale of shares in Tata NYK (a joint venture with NYK of Japan).

Acquisition Of Tetley

TTLs acquisition of Tetley Group is proving successful. Tetley is now number one in Canada and number two or three in the US.

It enjoys a prominent position in France, Poland and Australia, making it the second largest tea brand in the world after Levers.

The improving cash flow, plus a Rs 20 million loan from Tata Sons and a Rs 10 million loan from TTL, have enabled Tetley to bring down its debt-equity ratio from 3:1 at the time of acquisition to 1.75:1 now.

Tatas have extended a loan at seven per cent to enable Tetley to retire high-cost debt at a coupon rate of 17-18 per cent. This is helping Tetley to improve its cash position.

FDI Factor

The governments decision to allow up to 100 per cent foreign direct investment (FDI) will inject a new lease of life in the tea sector that has been a victim of endemic fluctuations in output and prices.

In the end, modernisation or expansion suffers in the absence of adequate cash flow. Auction prices of tea have failed to cover cost of production.

FDI route will enable foreign players to enter tea sector and revamp it through modernisation and new methods of cultivation.

Market Dynamics

The company says its market share has contracted a negligible to 20.1 per cent from 20.5 per cent during September 2000 to August 2001 while that of HLL to 36.2 per cent from 39 per cent.

This is in sharp contrast to the four per cent gain made by regional players in their market share at 23.7 per cent (19.7 per cent). Data indicates that the branded tea sellers have not been very successful in penetrating rural markets.

Future Growth Potential

Indias per capita tea consumption is around 645 grams as against UKs 2,500 grams, which indicates a high growth potential in domestic market.

The country has been exporting around 20-25 per cent of the tea output. But it has been losing to countries like Sri Lanka and Kenya in overseas markets.

India can recapture export market if tea output is stabilised through yield improvement techniques and quality upgradation.

Teas share in the countrys total exports is less than one per cent down from 19.3 per cent a few years ago.