Prices of orthodox variety of teas are likely to witness a firmer trend compared to last year while the prices of CTC teas are expected to be softer than last year, Icra said in a report.
In the first five months of FY20, prices of the orthodox variety of teas witnessed a sharp increase of around 15 per cent on the back of healthy demand, primarily from Iran. Prices of the CTC variety of teas, however, continued to be under pressure with prices of tea produced in the bought leaf factories witnessing a decline of around 10 per cent, while prices of tea produced in the tea estates remained flat.
As a result, overall tea prices in North India (NI) remained soft in the first half of FY20.
As for prices at the South Indian (SI) auction centres, after remaining firm till the beginning of July 2019, they witnessed a continuous decline, following the crop recovery witnessed in June and July 2019. "However, on a cumulative basis, South Indian tea prices increased by around four per cent in the first five months of FY20, again driven primarily by better orthodox prices," said Kaushik Das, Vice President and Sector Head, Corporate Sector Ratings, ICRA.
Overall, prices of both varieties would witness a seasonal decline going into Q4 of the current financial year, according to the Icra report. The drop happens because the quality of tea produced declines towards the end of the season subsequent to supply-demand situation. If tea production till October is substantially higher year-on-year, the decline is sharper.
On an average, a decline of around 35 per cent from the highest prices is witnessed in a financial year. The highest tea prices are usually seen in June, July and lowest in February and March.
According to the ICRA report, the divergent trend in prices between orthodox and CTC teas is on account of the difference in the underlying supply-demand scenario of the two varieties. While Kenya, which is primarily a CTC producer, reported a decline in crop in the first seven months of CY2019, the record production witnessed in CY2018 has continued to keep international CTC prices depressed in the current year.
Increased availability of Kenyan tea in the global market, which is relatively cheaper than the Indian CTC tea, impacted CTC export volumes from India. In addition, domestic CTC prices particularly in North India, remained soft on account of an 8 per cent increase in North Indian (NI) production in the current year thus far.
On the other hand, orthodox tea prices firmed up considerably in the current year, supported by healthy demand from Iran. Indian tea exports to Iran grew by 125 per cent in the first seven months of the current year. While a favourable payment mechanism with Iran supported the offtake of Indian orthodox tea, Sri Lanka, the other major orthodox tea exporter, faced issues pertaining to export of orthodox tea to Iran. This in turn has led to a softening of Sri Lankan prices in the current year. At present, Indian orthodox tea is trading at a premium over Sri Lankan orthodox tea, contrary to historical trends.
Notwithstanding the considerable uptick in prices of orthodox teas, the overall prices for NI bulk tea players are expected to witness only a marginal increase in the current year, the report said. Thus, while higher production would lead to better absorption of costs, the overall soft price trends are likely to limit the improvement in financial performance in the current year.
Tea which is sold in the "loose form" i.e non packet / non tea bag teas is referred to as bulk tea. The tea estates / bought leaf factories manufacture and sell tea primarily in the "bulk" form. These teas are then purchased by the packet tea companies (Tata Global, HUL etc) who then pack the teas into packets / tea bags. Some of the tea produced by the estates are also sold by some local retail shops to end consumers in the "bulk / loose" form.
ICRA notes that the credit profile of NI bulk tea players has been severely impacted in the last few years owing to a significant increase in the cost of production without commensurate increase in tea prices.
“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 variety accounts for only around 10 per cent of the total production. However, organised bulk tea players who have a high proportion of orthodox teas in their overall production, would stand to benefit substantially with such price trends sustaining,” Das said.
“In this scenario, any further increase in wage rates would lead to a further deterioration in operating margins and debt-coverage indicators of NI bulk tea players, making their credit profile weaker,” he said.
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