In March 2018, tea estate workers’ wages increased a significant 22-25% in north India, which accounts for almost 80% of the country’s total tea production.
Profit margins of domestic tea planters are expected to contract in the coming two financial years due to wage hike, increasing production and muted export realisation, a research report by Crisil said on Wednesday. Tea is a cost-intensive industry with labour constituting almost 65% of the total production cost and 50% of the revenue. The report adds that ability of tea producers to sell at remunerative prices and manage costs would be critical for the industry’s overall performance. India is the second-largest producer of tea in the world and makes up 23-26% of the global tea production.
In March 2018, tea estate workers’ wages increased a significant 22-25% in north India, which accounts for almost 80% of the country’s total tea production. In addition, labourers in Assam have demanded a further hike of Rs 17 per day (another ~10% revision), which is being discussed and, if implemented, would add to the burden of planters, the report said. The wages of workers are revised every three years. Crisil Research expects profit margins of Indian tea planters to contract 140-170 basis points (bps) in fiscal 2019 and a further ~100 bps in fiscal 2020. The margins of integrated players are expected to contract 200-240 bps and a further ~90 bps.
According to the report ,tea production in India logged 3.2% CAGR over 2012-2017. However, consumption ran up only at 1.7% CAGR. The domestic market is saturated, with penetration as high as 99% among the tea-drinking population (above 10 years). This has limited the growth potential and has increased the players’ dependence on exports to maintain the overall demand-supply balance in the domestic market and thereby prices. “We expect record tea production of 1,328 million kg in 2018 and 1,339 million kg in 2019, driven by higher yields in Assam and West Bengal. “However, the share of exports is estimated to continue at 18-20% in volume terms. Thus, healthy supplies due to higher production and limited scope for growth in domestic consumption and exports will cap any rise in prices for Indian players,” a Crisil source said.
Crisil Research expects prices at tea auctions across the country to close calendar 2018 at Rs 145-146 per kg on an average, 3-4% higher year-on-year, compared with a compound annual growth rate (CAGR) of 1.4% logged over calendar 2012-2017. Despite this, the players’ margins are expected to be impacted adversely as the export-driven uptick would not be enough to offset a significant increase in labour cost. In 2019, the auction prices are seen range-bound, with a marginal improvement to Rs 147 per kg, given the price sensitive market. The last five years have seen marginal uptick in tea prices , the report added.
Crisil further reports that export realisations of Indian tea producers dropped at ~2% CAGR over 2012-2017. In 2018, growth in realisations is expected to have remained muted, though 2019 could see a marginal increase of 1-2%.