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Bulk Tea Prices Seen a Jump Due to Supply Constraints: ICRA

ICRA expects that ODX tea prices in the domestic market will remain significantly higher for the remainder of the year compared to FY2022 levels, as Sri Lanka is likely to suffer further production losses, albeit at a slower rate, for the remainder of the year.

Shivam Dwivedi
Cumulative prices of SI CTC teas remained lower during the first seven months of FY2023
Cumulative prices of SI CTC teas remained lower during the first seven months of FY2023

In its most recent quarterly report on bulk tea, rating agency ICRA stated that three consecutive years of sub-normal production from 2020 to 2022, combined with a higher volume of export from India, are expected to result in a significant tightness in pipeline stock, which is likely to provide some support to bulk tea prices heading into the new season.

The economic crisis in Sri Lanka has resulted in production losses in the island nation, which is the world's largest exporter of orthodox (ODX) tea. This has kept supply tight in the international market in CY2022, leading to higher volumes of export from India and ODX tea prices in the domestic market.

Cumulative prices for North Indian (Assam and West Bengal) and South Indian (SI) ODX teas increased by 32% to Rs. 300/ kg and 9% to Rs. 154/ kg, respectively, during the first seven months of FY2023. Because of the superior quality of North Indian (NI) ODX teas, the price increase was much higher than for SI ODX teas.

ICRA expects ODX tea prices in the domestic market to remain significantly higher for the full year compared to FY2022 levels, as Sri Lanka is likely to suffer further production losses, albeit at a decreasing rate, for the remainder of the year. Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, commented on the matter, saying, "The shortfall in production in Sri Lanka has enabled Indian producers to increase exports to meet the steady demand for ODX teas in the global market."

In volume terms, tea export increased by 16% in the first nine months of the current calendar year, while ODX volumes increased by 22%. While the value of crush-tear-curl (CTC) export is slightly lower, the value of ODX export has increased by 22%. In the short term, export prospects for ODX teas appear promising; however, the long-term viability of high volumes remains to be seen."

Compared to ODX prices, the cumulative prices of North India CTC teas in the first seven months of FY2023 increased by Rs. 12/kg (6%). The rising trend in NI CTC prices is supported by rising demand for high-quality teas, which is expected to continue in the future given the limited supply base. However, the cumulative prices of SI CTC teas remained lower during the first seven months of FY2023, compared to the previous two fiscals, due to sustained production levels from purchased leaves in NI, a direct competitor of SI CTC teas in terms of quality.

On a year-on-year basis, cumulative all-India bulk tea production increased by 21 million kg (2%) to 985 Mkg in the first nine months of CY2022. Profitable ODX tea prices resulted in a partial shift in production from CTC to ODX tea varieties, as evidenced by a 12% increase in ODX tea production year on year to 100 Mkg. However, production in North India in October 2022 is expected to be lower than in October 2021 due to the festive season, which is likely to keep overall production in CY2022 at a level comparable to 10M CY2021.

ICRA anticipates that annual production in CY2022 will remain flat year on year, as no significant recovery is expected for the remaining two months, which typically contribute 15% to annual production.

Globally, aggregate black tea production (India, Kenya, and Sri Lanka) is down by around 54 million kg in the first seven months of CY2022, reflecting a 5% year-on-year decline, primarily due to production losses in Sri Lanka. With Sri Lanka likely to suffer further losses, albeit at a slower rate, for the remainder of the year, global output is expected to fall by 3% in CY2022. This has enabled Indian exporters to broaden their product offerings in international markets.

As a result, exports from India increased by 16% in volume terms during the first nine months of fiscal year 2022. Earlier in FY2022, bulk tea players' operating margin (OPM) in the ICRA sample set had been impacted by a moderation in domestic tea prices due to a YoY increase in production and an increase in wage costs compared to FY2021. As a result, interest coverage and total debt/OPBDITA ratios fell to 1.4 and 8.8 times, respectively, from 2.6 and 3.9 times in FY2021.

Despite the wage increase in CY2022, buoyant tea prices, particularly of high-quality CTC and ODX, would lead to an improvement in the margins of North India (NI)-based bulk tea players in FY2023. Flat production and strong demand for quality CTC and ODX teas bode well for the long-term viability of NI tea estates until at least H1 CY2023.

Apart from the sharp increase in ODX prices, the price premium for NI CTC for the top 50 estates remained high at Rs. 116/ kg in 10M CY2022 versus Rs. 80/ kg in CY2019. As a result, despite another round of wage increases in CY2022, bulk tea players' operating profit margin (OPM) is likely to improve in FY2023," said Mr. Sujoy Saha, Vice President and Sector Head, Corporate Sector Ratings, ICRA.

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