Let The Tea Party Begin

The long and painful bearish phase is over for the domestic tea sector, which has so far been a laggard in the commodity bull run

KI R AN K ABT TA ET INTELLIGENCE GROU P

THE DOMESTIC tea industry has finally recovered from a seven-year long bearish phase, spanning 1999 to '06, and now looks set to participate in the current bull run in commodities. Tea prices have been firming up since CY07 and future prospects appear to be bullish, too.
    If financial indicators are anything to go by, the industry has already started showing signs of recovery. Its operating profit margins, which had dipped to around 4% during the middle of '06, have now risen above 9%. And there are indications that this rise is likely to continue.
    With tea being a staple drink of Indians, it is no wonder that the country is the largest producer and fourthlargest exporter of tea in the world. The labourintensive industry directly employs over 1.1 million workers.
    The bulk of tea trading in the domestic market is done through auctions. Companies generally strike private deals to export the commodity. Kolkata, Guwahati, Siliguri, Kochi, Coonoor and Coimbatore are the major auction centres.
    However, the Rs 10,000-crore domestic tea industry is a fragmented one. So, while the Rs 600-crore Mcleod Russell is the largest tea producing company in India, it has only an 8.3% share of the domestic tea market.
    On the other hand, Tata Tea is India's largest independent tea marketer and has emerged as the world's second-largest tea manufacturer after a spate of international and domestic acquisitions.
    The industry has a wide spectrum of companies, ranging from pure plantation companies like Mcleod Russell, Apeejay Group, Harrisons Malayalam and Assam Company to companies like Hindustan Unilever (HUL) and Tata Tea, which are focussed on marketing branded teas.
    Around 80% of the costs of plantation companies go towards fixed expenses like fuel, power and labour. Inflationary pressures are now pushing up these fixed costs. Labour unrest is another major problem faced by such companies.
    All these reasons are forcing companies like HUL and Tata Tea to sell off their plantations and concentrate on brand building. Branding helps marketing companies to ride over crop cycles by passing on the increase in costs to consumers. However, marketing companies face an increase in raw material costs (in
the absence of plantations) as well as competition from regional brands.
    Last year, India produced 940 million kg, of which, more than 800 million kg was consumed domestically. Indian tea consumption is growing at a rate of 3.3% annually. The production trend in India has been weak since the beginning of this year.
    This, coupled with lower production in Kenya (the world's second-largest producer of tea) and Sri Lanka, make for a bullish case for tea prices, going forward. The prices in CY07 were up 15-20% year-on-year.
    During times of rising prices, tea marketing companies face margin pressures if they are not able to pass on the increase in prices to customers. For instance, a rise in tea prices may not augur well for Tata Tea, which gets only 10% of its revenues from plantation tea. However, many tea companies today have diversified into other related products to hedge themselves from the acute cycle in the tea industry.
    Among the existing companies, Tata Tea seems to be the most promising one, as it has diversified into tea, coffee, bottled water and other valueadded beverages. HUL, despite having the largest selling branded teas, earns only around 10% of its revenues from the tea business. Harrisons Malayalam also produces rubber and pepper on a large scale in South India.
    So, which companies are likely to benefit from the rally in tea prices? Companies with plantations in North India, where the quality of tea is better than that in South India, will benefit from the rise in tea prices on the back of strong domestic demand.
    Among the existing plantation companies, Mcleod Russell stands to gain the most. After acquiring plantations of Williamson Tea and Doom Dooma Tea from HUL, Mcleod Russell has now become the largest tea plantation company in India.
    Other companies which have North Indian plantations are Jayshree Tea, Goodricke Tea and Duncans Industries. Harrisons Malayalam, South India's largest tea company, also has good growth prospects.
    kiran.kabtta@timesgroup.com