ICRA notes that the credit profile of NI bulk tea players has been severely impacted in the past few years, owing to a significant increase in the cost of production without commensurate increase in tea prices.
Tea makers continue to struggle in the Indian market largely due to a downtrend in the CTC tea market, reports rating agency Icra. However, in the first five months of FY20, prices of the orthodox variety witnessed a sharp rise of about 15% on the back of healthy demand, primarily from Iran.
Prices of the CTC variety of tea continued to be under pressure with prices of tea, produced in factories, witnessing a decline of about 10%, while prices of tea produced in the estates remained flat. As a result, overall tea prices in North India (NI) remained soft in H1 FY20. As for prices at the South Indian (SI) auction centres, these saw a continuous dip after remaining firm till the beginning of July 2019, following the crop recovery in June and July 2019. However, on a cumulative basis, SI prices rose 4% during 5M FY20, again driven by better orthodox prices.
Commenting on the likely impact, Icra vice-president and sector head for corporate sector ratings Kaushik Das said, “Better orthodox tea prices would have a limited impact on the overall financial performance of the bulk tea players based out of North India, given that the orthodox variety accounts for only around 10% of the total production. However, organised bulk tea players which have a high proportion of orthodox tea in their overall production would stand to benefit substantially with such price trends sustaining.”
According to ICRA, the divergent trend in prices between orthodox and CTC tea is from the difference in the underlying supply-demand scenario of the two varieties.
While Kenya which is primarily a CTC producer reported a decline in crop in 7M CY19, the record production witnessed in CY18 has continued to keep international CTC prices depressed in the current year.
Increased availability of Kenyan tea in the global market, which is relatively cheaper than Indian CTC tea, hit CTC export volumes from India. Domestic CTC prices particularly in NI remained soft on account of an 8% rise in the current year so far. This was driven by an 11% rise in the output by small growers, while the production from estate factories grew 6% in 7M CY19.
On the other hand, orthodox tea prices firmed up considerably in the current year, supported by healthy demand from Iran. Indian tea exports to Iran grew 125% in 7M CY19. While a favourable payment mechanism with Iran supported the offtake of Indian orthodox tea, Sri Lanka — the other major orthodox tea exporter — faced issues pertaining to export of orthodox tea to Iran. This, in turn, has led to a softening of Sri Lankan prices in the current year. Currently, Indian orthodox tea is trading at a premium over Sri Lankan orthodox tea, contrary to trends.
Notwithstanding the considerable uptick in prices of orthodox tea, the overall prices for NI bulk tea players are expected to witness only a marginal increase in the current year. Thus, while higher production would lead to better absorption of costs, the overall soft price trends are likely to limit the improvement in financial performance in the current year.
ICRA notes that the credit profile of NI bulk tea players has been severely impacted in the past few years, owing to a significant increase in the cost of production without commensurate increase in tea prices. “In this scenario, any further increase in wage rates would lead to a further deterioration in operating margins and debt-coverage indicators of NI bulk tea players, making their credit profile weaker,” Das added.