Bulk tea players to continue to face challenges in short term: ICRA.

KOLKATA: ICRA has said that domestic bulk tea players to continue to face challenges in the short term but long term demand prospects remain favourable. The domestic tea industry lately has had to cope with a substantial increase in employee costs - largely driven by a sharp increase in wage rates - over the past two years. In the current year too, labour wage rates are scheduled to increase further, as per wage agreements, keeping profitability and debt coverage indicators under pressure. The capital structure, however, is expected to remain conservative, given the healthy profits earned by the industry between FY2008 and FY2014. The long-term domestic demand outlook, too, remains favourable, given India's low per capita tea consumption at present.

Labour costs have accounted for around 45% of the total cost of production, tea being a fixed cost-intensive industry. Over the last two years, the cost of production of bulk tea players in North India, accounting for nearly 80% of bulk tea production in the country, has increased by nearly 23%, mainly on account of increased labour costs, attributable to a steep increase in wage rates. Wages increased by around 25% in both Assam and the Dooars during the period FY2014-16. In the current year, wages are scheduled to increase by an additional 8-9% across the tea-growing regions in North India, resulting in further pressure on the cost structure of bulk tea players. The extent of the impact on profitability would, however, be largely determined by the trend in tea realisations and production.

Mr. Kaushik Das, Vice President, Corporate Sector Ratings, ICRA, said: "While the long-term domestic demand outlook remains favourable, challenges persist in the short term. A normal monsoon in the current year is likely to have a positive impact on disposable incomes in rural India, which would in turn, support domestic demand. Thus, prices are expected to remain firm with some upward bias during the year. Nonetheless, cost pressures would limit any appreciable improvement in operating profitability of the industry as a whole."

Over the long term, however, increasing domestic demand, and limited increase in production are likely to support a positive price trajectory. The performance of the industry in terms of exports would be a crucial factor determining the overall supply-demand balance and price levels going forward.

India is the largest producer as well as the consumer of black tea in the world. However, the per capita consumption of tea in India, at around 730 gm, is lower than that of almost all other major black tea consuming countries globally, and has the potential to witness further growth going forward.

Domestic tea production has remained largely range bound for the past three years, with the total production witnessing only a nominal increase over the period, primarily on account of the limited availability of land for incremental tea plantation. In the current year, till June, production is likely to be up by 2% in the country.

India exports only around 20% of the black tea produced domestically. During CY2015, while total exports of tea from India in volume terms witnessed a YoY increase of around 10%, the average realisation of Indian exports recorded a decline. In the current year, till June, exports are up by around 6% in volume terms. However, the ability to maintain the trend at remunerative prices, given the increase in global tea availability on the back of higher production in Kenya, would be critical to the overall financial performance of the tea industry in the current year.

While increase in wage rates and other input costs would continue to have a negative impact on the cost structure of bulk tea players, the creditworthiness of companies in the sector would, however, continue to be supported by the favourable capital structure.

Mr. Das further added: "Most of the large bulk tea players have utilised the healthy cash accruals during the period FY2008-2014 to fund their capital expenditure programme as well as repay their debt. As a result, financial leverage of such players is at comfortable levels at present."

Source : economictimes.indiatimes.com