Tuesday, June 14, 2022

High Price Premium For Top Quality CTC Tea Sustains; Uptick In Orthodox Demand And Price Likely, Going Forward: ICRA

* ODX tea prices in India has started firming up and is expected to maintain an uptrend going forward given the production loss in Sri Lanka, the largest exporter of ODX tea in the global market

* Overall domestic production in Q1 CY2022 remains flat at 100 Mkg; production in the current year to improve, although the extent will be determined by the cropping levels during the peak producing months of June to October

* Wage hike in NI in Q4 FY2021 along with increase in tea production in FY2022 are estimated to have pulled down the operating margin of bulk tea producers; any further wage hike will impact financial profile of players

ICRA in its latest quarterly report on bulk tea, has highlighted that prices of new season teas have demonstrated a mixed trend in recent auctions – while prices of orthodox (ODX) teas have firmed up considerably, that of Crush, tear, curl (CTC) teas have witnessed a largely softening trend. Within the overall CTC teas also, while prices of quality teas have witnessed a firm trend, that of plain / medium category teas, particularly made from purchased green leaf, have witnessed a softening trend. This is a continuation of the trend witnessed in CY2021/FY2022, wherein producers of quality CTC teas witnessed significant price premium, compared to industry average prices, which helped such producers to cushion the impact of a sharp increase in wage rates from January/ February 2021.  

Commenting on the same, Mr. Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, said, “Notwithstanding the likely moderation, on the back of sharp increase in wage rates, in financial performance of bulk tea producers in FY2022, compared to FY2021, it would be substantially better than FY2020. Moreover, players focused on producing quality teas are estimated to have witnessed a much lower decline in operating profitability last fiscal, as average auction prices of such players witnessed a much firmer trend than the industry average. An analysis of auction prices indicates that prices of CTC teas, manufactured by the top 100 estates of Assam and Dooars, increased by ~2.5% against a decline of ~25% for the overall auction average during FY2022.”  

As for the production trends, after the sharp decline in domestic production, by 9.7%, in CY2020 on the back of Covid-related restrictions and adverse agro-climatic factors, production increased in CY2021. Notwithstanding the increase in CY2021, the overall production still remained lower than pre-pandemic levels as adverse weather conditions impacted production in the first few months of the last fiscal too. During Q1 CY2022 all India tea production remained flat at ~100 Mkg on a Y-o-Y basis. However, NI production during Q1 of any calendar year generally constitutes ~5% of the annual production. Although the overall production in CY2022 is likely to improve, after two consecutive years of lower-than-normal production, the same will be determined by the cropping levels during the peak producing months of June to October. 

Regarding domestic tea prices, the same had witnessed a considerable uptick in FY2021 due to a significant supply-demand mismatch. While tea prices remained strong in Q1 FY2022 as well, it softened following an improvement in production during the peak production months of FY2022. The price decline has, however, been more in the bought leaf segment as teas of relatively better quality (primarily made from own estates) continued to fetch a high premium. In CY2021, the price premium for the CTC teas produced by the top 50 tea estates in NI widened to Rs. 122/kg from Rs. 84/kg in CY2020. 

At the SI auction centres, tea prices softened significantly in FY2022 (particularly from Q2 FY2022) due to higher growth in supply relative to demand. The average price of SI CTC teas was down by ~Rs. 33/kg (~24%) on a cumulative basis in FY2022 compared to FY2021. Price premium for top quality CTC tea is likely to sustain going forward, given the limited supply base of the same. Recent auction trends show firming up of ODX prices in India, which is likely to continue going forward, given the drop in production in Sri Lanka since November 2021 on a Y-o-Y basis. 

On the global front, production in Kenya, one of the major black tea-producing nations (primarily of the CTC variety), though down by ~32 Mkg (a contraction of ~6%) in CY2021, remained significantly high compared to the historical average. Given the huge carryover stock from previous year, Kenyan auction prices continued to be negatively impacted till 7M CY2021 on a Y-o-Y basis. However, the prices improved subsequently due to imposition of reserve price of $2.43/ Kg in July 2021 by Kenyan Tea Development Agency for the smallholder/bought leaf subsector and lower production in CY2021. 

In Sri Lanka, monthly auction prices have firmed up in the recent months vis-à-vis the previous year due to declining tea production since November 2021. Impact of the ban on use of imported chemical fertiliser in May 2021, which has been partially revoked in November 2021, coupled with the current economic crisis in the island nation has resulted in a ~19% decline, on a Y-o-Y basis, in tea production during the six-month period between November 2021 and April 2022. Going forward too, production is likely to remain lower on a Y-o-Y basis. Given the lower production, Sri Lankan auction price (in USD/kg) during Jan-Apr 2022 improved by ~8%, on a cumulative basis, compared to the previous year level.

Export from India during CY2021 fell by ~7%, in volume terms, on a Y-o-Y basis. This follows the ~17% decline witnessed in CY2020. However, while volumes declined, improvement in quality of teas exported led to higher realisation. Export realisation improved by ~8% to Rs. 268/kg in CY2021 on Y-o-Y basis. Consequently, overall value of exports remained flat at ~Rs. 52.5 billion in CY2021 compared to corresponding period of previous year. 

In FY2021, owing to material improvement in tea prices, the debt coverage indicators of NI bulk tea players improved significantly with interest coverage and Total Debt/OPBDITA of around ~3.0 times (~0.9 times in FY2020) and ~3.4 times (~11.9 times in FY2020) respectively of companies in ICRA’s sample set. In FY2022, with a moderation in tea prices and increase in cost of production, OPM of bulk tea players is estimated to have been pulled down. Nevertheless, the impact on the coverage indicators is unlikely to be significant. 

“Going forward producers of quality CTC teas would continue to benefit from the premium pricing. In addition, ODX tea producers are likely to gain from the expected firmer trend in ODX prices, given the drop in production in Sri Lanka. Consequently, financial performance of quality producers is unlikely to witness any material moderation, on a Y-o-Y basis, in FY2023. However, any material increase in wage rate would have an adverse impact on the operating profitability,” said Mr. Sujoy Saha, Vice President and Sector Head, Corporate Sector Ratings, ICRA.

About ICRA Limited:

ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder.  

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