Auction prices of tea have risen ~30% on-year this fiscal because of production disruption following the Covid-19 lockdowns and steady domestic demand.

As a result, the Ebidta (earnings before interest, tax, depreciation and amortisation) margin of 44 tea companies¹ rated by Crisil Ratings (accounting for ~12% of the industry’s revenue) is expected to increase 300 basis points to 11% on-year. That, and better capital structure will lead to an improvement in their credit profiles.

Domestic demand for tea is expected to remain steady at ~1,100 million kg this fiscal. A decline in ‘out-of-home’ consumption (through the hotel / restaurant /café, or HORECA, segment), which accounted for ~10% of domestic demand, has been largely offset by a rise in ‘at-home’ consumption.

On the other hand, exports, which contributed to ~18% of overall volume in fiscal 2020, de-grew by 20% as production of high-quality tea leaves, or first flush, was wasted due to pandemic-led disruption in the first quarter.

Nevertheless, all-India tea auction prices are expected to average Rs 170-175/kg this fiscal, or 30% higher on-year, as production is estimated to be 8-10% lower at 1,200-1,250 million kg. Production in key tea producing states² was impacted by both, lockdowns that delayed plucking of leaves in the first quarter, and floods in Assam. These states contribute to ~84% of India’s total tea production.

Given the surge in tea auction prices and stable domestic demand, overall industry revenue will grow at 18-20% in this fiscal despite lower export volumes.

Says Jaya Mirpuri, Director, and Crisil Ratings, “Higher realisation on account of lower production and sustained domestic demand will translate into expansion of operating margins by ~ 300 bps to 11% this fiscal, on-year”.

The surge in profitability (refer chart 1) is expected to swell cash accrual by ~50%. Further, low capex intensity will ensure most of the accrual will be deployed towards working capital. Therefore, the capital structure of the 44 companies should improve, with total outside liabilities to tangible net worth at ~0.6 time from ~1.03 times in fiscal 2020 (refer chart 2).

Says Argha Chanda, Associate Director, Crisil Ratings, “Significantly higher accrual and lower external borrowings augur well for the overall credit profile of the tea industry. This will lead to an improvement in interest coverage to ~3.7 times this fiscal from ~2.7 times last fiscal.”

As production recovers next fiscal to pre-pandemic levels of ~1350 million tonnes, auction prices will correct, albeit still remain elevated to the levels of fiscal 2020. This will lead to revenues to grow at ~15% over fiscal 2020, further supported by export demand recovery. That said, operating margins will hold at 9-10%. Improved profitability levels will continue to support credit risk profile with interest coverage at ~3.3 times and total outside liabilities to tangible net worth at ~0.7 time in fiscal 2022.

Climatic conditions in tea-producing geographies disrupting the next plucking season or any increase in labour wage rate by state governments will be the monitorables in the road ahead.

¹ Includes integrated players having own tea gardens and processing capacity; and tea processors.
² Refers to tea production in West Bengal and North-East India