During 2008 to 2013, black tea production in India increased at a compounded annual growth rate (CAGR) of 1.6 per cent while consumption rose at a CAGR of 2.3 per cent.

As a result, inventory levels more than halved over the last five years to about 2.6 months of consumption in 2013. Consequently, average pan-India tea prices increased by 9 per cent CAGR during the same period.

Even in 2014, Crisil Research expects all India tea production growth to remain muted at 1 per cent. North India tea production is estimated to increase by 1-1.5 per cent mainly due to improved yields on account of replantation of older bushes (age>50 years) over the last few years. On the other hand, production in South India is expected to decline by 0.5-1 per cent due to lack of area additions and insignificant replantation. The replantation in South India has been insignificant given presence of several small tea growers, lower realisations and erratic weather conditions. Among different varieties of black tea, we expect production growth of orthodox tea to outpace that of CTC as players would continue to opt for conversion to capitalise on rising global orthodox tea prices.

Consumption, on the other hand, is expected to grow at 2-2.5 per cent in 2014 led by increase in population and steady per capita tea consumption. Thus, consumption is expected to outpace production resulting in a further drop in inventory levels in 2014, which, in turn, will lead to a rise in prices.

Crisil Research expects pan-India tea prices to rise by 8-10 per cent to Rs.140-145 a kg in 2014. Our view is driven by the continuing drop in inventory levels to 2.5 months of consumption, which we believe is a critical level since it is required to sustain consumption during non-producing months. In the first few months of 2014, prices are expected to remain lower on account of stocking at the end of December. However, once the production season begins in April, output is expected to be low and prices are estimated to rise.

As compared to North India, auction prices in South India are estimated to increase at a faster pace on account of continued decline in production in 2014.

On account of rising tea prices and healthy domestic demand, players are expected to focus on the local market. Moreover, import demand from few countries is anticipated to be subdued. Consequently, India’s tea exports are estimated to decline further by 5 per cent to 195 million kg in 2014. In particular, CTC exports are estimated to decline sharply by 14 per cent to 100 million kg on account of muted global prices and weak demand from Egypt and Middle Eastern countries due to political uncertainties. On the other hand, exports of orthodox tea, consumption of which is insignificant in India, are expected to rise by 5 per cent to 95 million kg primarily on the back of healthy demand from countries including CIS (Commonwealth of Independent States) and Turkey. In addition, global orthodox tea prices are estimated to increase by 10 per cent due to flat global production, particularly from Sri Lanka, the largest exporter of orthodox tea.

Despite rising tea prices in India, Crisil Research expects profitability of tea planters to improve only marginally by 50-100 basis points to about 19 per cent in 2014. This is on account of an anticipated increase in labour and power and fuel costs. Labour costs, which account for 40-45 per cent of total operating costs, are slated to rise by 7 per cent in 2014 in line with latest contract signed with labour unions. Power and fuel costs, amounting to 10-15 per cent of total operating costs, are also estimated to rise in 2014 led by increase in grid power tariffs.

Profitability of branded players is also expected to increase, as players will be able to completely pass on the increase in auction prices due to healthy demand.

The author is Director, Crisil Research, a division of Crisil

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