Business
Tea units on a sticky wicket
By Ramnath Subbu
MUMBAI, DEC. 8. The Indian tea industry is going through a difficult time with dropping prices and adverse weather conditions affecting growth. Tea prices have, in fact, been ruling low for the second consecutive year with excess supply leading to lower prices at auctions. The domestic market is also growing slowly and consumption of tea grew only 1.5 per cent last year as against a steady 5 per cent a couple of years ago.
The unbranded tea industry is likely to fall short of export of 205 million kg which it recorded last year. This follows weaker prices and lower realisation for Indian tea in the international market.
Assam accounts for more than 50 per cent of the annual production of around 800 million kg of tea. In fact, at weekly auctions, top quality Assam tea was selling between 15 and 20 per cent below Rs. 90-100 a kg achieved two years ago. The woes, apart from poor quality teas flooding the market, is the proliferation of cheaper quality tea from Sri Lanka, Kenya and Bangladesh in the international market. This has put paid to India's export target of 225 million kg as foreign buyers have opted for the cheaper varieties.
Typically, there are four crops, flushes, in a year. The first flush of premium quality is available in the market around April and quality deteriorates with every subsequent flush. The industry is dependent on the rains and the climate, humidity to a large extent.
A drought in early 1999 in West Bengal and Assam affected the first flush and thus the production target for 1999 was revised to 805-810 million kg against 870 million kg in 1998. But after a brief recovery, the last two years have not been good for the industry.
Internationally, prices are affected by what happens to Kenyan, Sri Lankan and Indian tea as they are the largest producers accounting for a little over half of world production.
This season, an excess supply in the domestic market resulted in a significant drop in auction prices, particularly in the North. However, in the South, prices were more or less stable.
The good news for the tea industry is that the Centre has allowed futures trading in tea under Sec. 14 of the Forward Contract (Regulation) Act, 1952. This is likely to benefit farmers, stockists, consumers and exporters. With futures being allowed in tea, market players would be able to avail themselves of the facilities of hedging and hence manage their price risk. Consumers are likely to gain on account of the consequent price stabilisation. It is expected that futures trading will commence within 6-8 months.
The branded tea market is of 350 million kg now, of which more than 40 per cent is with Hindustan Lever (HLL) and the other major being Tata Tea (TTL).
The branded tea industry went through a difficult period from mid-1998 to mid-1999 following the introduction of an excise duty of 8 per cent ad valorem. The adverse impact was reflected in most companies businesses and with appeals from industry, the duty was subsequently withdrawn from March 1999.
About three years ago, the Indian branded tea industry underwent a period of consolidation with Hindustan Lever (HLL) picking up Rossell Industries for a consideration of Rs. 175 crores and Tata Tea acquired Tetley's global tea business for pound sterling 271 million, then the largest overseas acquisition by an Indian company.
This year, there is a fall in market share of the leading players due to a large number of low-priced regional players in the branded segment. In fact, in the current year, HLL's market share declined by 3 per cent and that of TTL's also declined.
HLL is test marketing Lipton Iced Tea and is expanding the out-of-home consumption by setting up vending machines. The company will be investing in better blends, brand building and quality. Since 1999, HLL has been taking a number of initiatives based on an aggressive innovation programme to reverse the downward trend in volumes. The company has identified out-of-home as an important channel to drive growth during the current year and has established a strong presence in this growth segment.
Tata Tea is the second largest in India with a 20 per cent plus market share. TTL has plans to launch Agni brand to cater to the economy segment. The company's strategy is to launch a variant of existing brands every two months. The company is losing market share to regional brands and in the six months ended September 2001, it lost 0.4 per cent market share to regional players and export volumes were down 9 per cent.
For the second quarter ended September 2001, TTL's sales fell 18 per cent to Rs. 186.01 crores (Rs. 227.40 crores) and net profit to Rs. 33.44 crores (Rs. 36.14 crores). But Tata Tetley has performed better and while it sources only one million kg of tea from TTL, things would improve once it sources larger amounts from TTL which should take care of TTL's exports.
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