The almost 15% increase in prices of orthodox teas in the first five months of this fiscal is unlikely to translate into improved financials for the bulk tea players, according to a report prepared by ICRA.
According to ICRA, the credit profile of major tea players in north India has been severely impacted in the last few years, owing to significant increase in the production cost without matching price increase. Many of the listed companies were in losses in 2018-19 which continued in the first quarter of this fiscal.
“Better orthodox tea prices would have a limited impact on the overall financial performance of the bulk tea players based out of north India, given that the orthodox tea variety accounts for only around 10% of the total production,” said Kaushik Das, vice-president and sector head, corporate ratings, ICRA.
Orthodox tea prices increased by 15% between April and August 2019 on the back of demand from Iran. Mr. Das said that companies with substantial amount of orthodox tea output would benefit.
However, prices of CTC tea, which has a larger share in the product basket, remained under pressure with estate tea prices (produced by the organised sector) remaining flat and prices of bought leaf factories (the output of the small growers) declining by 10%.
As a result, prices remained soft in north India. In South Indian auction centres, prices slid after remaining firm till July 2019. The ICRA report attributed this reversal to crop recovery adding that the initial increase, coupled with better orthodox tea prices led to an overall increase of about 4% during the period under review. South India accounts for about 25% of India’s tea crop.
Looking forward, ICRA said that overall prices for north India bulk tea players are expected to witness only a marginal increase in the current year, limiting any improvement in the companies’ financial performance.