TEA - TO BRING 'TAAZGI' IN H2FY15

By Ruma Dubey

At a time when it is a persistent endevour to make our humble cup of chai into a ‘national drink’, chai itself seems to be unhappy.

Tea production has been on a decline this year due to erratic weather. All-India production of tea so far this year compared to the corresponding period of last year is lower due to lower production of tea in Assam. In fact May production numbers released by Tea Board of India shows a drop of 12% (YoY) in northern states due to extremely dry weather.  This is worrying because last year, Assam alone produced 618 million kg tea, which is more than 50% of India’s total production of 1,200 million kg. Tea output in Assam is likely to fall by 10% in 2014 due to scanty rainfall and a sharp rise in temperatures, hitting exports of premium grade leaf from the world’s biggest black tea producer

If there is a shortfall in supply, price has to go up, right? But here, it is currently working other way around. In the latest auction, Darjeeling tea prices have fallen by Rs.100/kg though overall production is down 20%. The tea planters have blamed the price fall on lower offtake by big buyers like Tata Global, HUL and enquiries from the European Union has also dropped. This auction was for the second flush and those in the sector say this has been a consistent trend, of falling demand with corporate buying directly from private planters and in EU, they say there is a growing preference for organic tea. Another allegation is that many feel quality of tea, especially Darjeeling tea has been declining and almost 70% of production is said to be of below average to poor quality. Currently tea companies are looking towards East Europe for newer markets.

But over the long run, due to fall in production, price is expected to go up. McLeod Russel, the largest tea grower of the world has said that tea prices are expected to rise and hence new higher prices could be seen from second quarter.

This anticipation of higher tea prices, in the coming days could keep tea stocks in the green. Though this is good news for companies with their own plantations but for those in the packet tea, this is not very good news as they will have to pay higher procurement prices and how of that cost they will be able to pass on to the consumers, in India and abroad will be questionable.

But before stocking up on all plantation tea stocks, it is pertinent to keep in mind two facts. Firstly, a shortfall in production will mean a higher price but it might not necessarily result in as much spike in topline when volumes go down.  And secondly, in plantation companies a very important issue to be considered is the mounting wage costs. Effective 1st Jan 2014, the agreement is that workers of the tea estates would receive daily wages per head at the rate of Rs 94 till 31st Dec’14. McLeod Russel, for Q1FY15, of the total expenses of Rs.140 crore, employee cost was at Rs.137 crore and in FY14, it ate away over 36% of the net sales of the fiscal.

H2FY15 looks much better in terms of higher price realization for tea companies and that’s something to look forward to. And tea becoming a national drink? There are voices from all over India – why not lassi, or chaas, or kanji or coffee? Now that’s a debate for another day…..