Kolkata: According to India Ratings and Research (Ind-Ra), the performance of Indian orthodox tea players is likely to get a boost because of the strong tea prices and increase in export opportunities owing to the production disruptions in Sri Lanka, the largest exporter of the orthodox tea variety.
"Tea companies had witnessed a strong improvement in EBITDA margins in FY21 as the pandemic affected production, leading to a rise in tea prices, However, with an increase in production in FY22, prices started to fall, which coupled with an increase in wage rates in early 2021, affected profitability. Orthodox players are likely to see a margin expansion in FY23 while crush-tear-curl (CTC) variety margins are likely to remain range-bound, with cost pressure emanating from the wage hikes announced by the governments of key tea producing states," said the credit rating agency, in a statement.
Ind-Ra added that tea production in Sri Lanka fell nearly 20% YoY to 171.4 million kg in 8M2022, lowest since 1996 when the country produced 169.7 million kg. In recent years, the production in Sri Lanka has been affected by the restrictions on the use of fertilisers, pesticides and herbicides,. but the decline has been exacerbated in 2022 with the shortage of fuel and fertilizers affecting the output resulting in a decline in production at all elevations.
Production in August 2022 remained 23% lower YoY, indicating a continued weakness. Orthodox tea accounts for around 90% of the country’s tea production, most of which is exported. This results in the country accounting for around half of the global orthodox tea trade. Iraq, Russia, UAE and Turkey have been among the key countries importing Sri Lankan tea. Production in Kenya was down marginally to 270 million kg in 6M2022.
The disruption in Sri Lankan production has resulted in a significant increase in orthodox tea prices with average India auction prices at around INR320/kg in August 2022 surpassing the 2020 high of INR280/kg. Notwithstanding some softening in the last couple of weeks, prices averaged 22% YoY higher in September 2022 and are likely to remain higher in FY23.
Ind-Ra believes the strong prices are likely to offset the cost pressures emanating from the recent hikes of INR27-30/day in the basic wages announced by the Assam and the West Bengal governments and support the EBITDA margins of the orthodox players. After a fall in FY22, prices of the CTC variety also recovered 7%yoy in 2QFY23, on a lower-than-expected output, which is likely to provide some cushion against the impact of wage hike in FY23.
source: The Economic times