Tea companies likely to see 8% revenue degrowth this fiscal: Crisil

The tea industry in India is expected to register a 8 per cent degrowth in revenue this financial year, led by a decline in exports, according to Crisil Ratings.

Operating profitability is also expected to fall for the second year in a row, shedding 100 basis points (1 per cent is equal to 100 basis points) to 5 per cent, due to lower tea prices, it said.

Profitability had fallen 150 basis points last financial year, primarily because of an increase in wages.

“Wages, which constitute 20 per cent of total cost of production, was hiked 15 per cent last fiscal,” Crisil said in a report.

Domestic demand, which accounts for 82 per cent of sales volume, should remain steady at 1,100 million kg this fiscal, said CRISIL Ratings Director Nitin Kansal.

“However, exports, which make up 18 per cent by volume and 30 per cent by value, may slide 12 per cent on-year to 200 million kg. Last fiscal, the export volume had increased 14 per cent due to lower production in Sri Lanka, a major tea exporting country." Kansal said.

India, with a share of 11 per cent, is the fourth-largest tea exporter after China, Kenya, and Sri Lanka.

This fiscal, increased supply of Sri Lankan tea will impact demand for Indian produce. Sri Lankan tea production is expected to rebound this fiscal given the better availability of fertilisers and pesticides.

Sri Lanka predominantly produces orthodox tea, which sees good demand globally because of its quality. The country accounts for 50 per cent of the global trade in orthodox tea.

This will lower the realisation of Indian tea companies with domestic production seen stable at 1,350 million kg this fiscal, Crisil said.

India as a whole contributes 23 per cent to the global tea output and employs around 1.2 million workers in the tea plantation sector. Just Assam produces nearly 700 million kg of tea annually and accounts for around half of India's overall tea production.

For several years now, India's tea industry has been struggling with issues such as rising production costs, relatively stagnant consumption, subdued prices and crop losses due to climate change. It also faces the challenge of finding a footing and holding its ground in a competitive global market.

The tea business is cost-intensive, with a sizable portion of the total investment being fixed cost.