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| Tea: Brewing gains |
| Vishal Chhabria & Puneet Wadhwa / Mumbai Dec 18, 2009, 00:42 IST |
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The continuing global shortage has resulted in improved sales realisation for Indian tea companies.
 With tea exporting countries continuing to see a fall in production, Indian tea continues to see good demand from major importing countries such as Britain, Pakistan and Egypt. While tea production in Kenya during October 2009 fell 7.4 per cent year-on-year (y-o-y), it is down 11 per cent y-o-y during January-October 2009.
Though the production in Sri Lanka during October 2009 improved 6.6 per cent y-o-y, the cumulative production for January-October 2009 was lower by 14.4 per cent y-o-y.
With Indian production remaining flat during the same period, the demand-supply gap in international markets continues to widen. Coupled with increased domestic consumption and rise in demand from international markets, tea prices have maintained their upward trend.
Tea prices at auctions in Kenya, Sri Lanka, Bangladesh and Indonesia were up 12-22 per cent during October 2009 compared with October 2008. In India, the average raw tea price was Rs 112.3 a kg in October 2009, around 13.5 per cent higher than Rs 98.9 a kg in October 2008. Although tea prices have taken a breather and were down marginally in November, analysts expect prices to remain firm on the back of global shortage.
According to Sharekhan Research, the year 2009 is expected to end with a production shortfall of 5-10 million kg in the domestic market and 75-80 million kg in the international market. The global shortage has resulted in improved sales realisation for Indian tea plantation companies. McLeod Russel and Jay Shree Tea saw operating margins jump 415 basis points and 1,063 basis points, respectively, in the first half of 2009-10, which, in turn, resulted in boosting their bottom lines. Most other tea plantation companies have also seen a visible increase in margins. Backed by high domestic and export realisations, these companies are expected to continue to maintain higher profitability in the coming quarters, feel analysts.
Companies selling branded tea have also seen their sales and profitability improve. Tata Tea’s consolidated net sales increased 18.2 per cent y-o-y to Rs 1,403 crore in the September quarter, driven by the price rise implemented to combat the increasing prices of raw tea. Operating profit margins (OPM) were also up 40 basis points at 12.4 per cent. Hindustan Unilever’s beverage segment contributes 11-12 per cent of its top line and saw its sales rise roughly 18 per cent during the first half as well as in the September quarter. Notably, margins have improved nearly 300 basis points in the quarter.
In the last one year, stocks of a majority of the tea plantation companies have outperformed broader indices with returns at around 240-460 per cent. The best returns came from McLeod Russel, which has gained 455 per cent and Jay Shree Tea, up 280 per cent. However, Tata Tea rallied only 75 per cent, which is largely in line with the gain in the Sensex. With fundamentals of the tea plantation sector still looking strong on no signs of easing of production shortfall, analysts remain bullish on this space.
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