A decline in export volume is anticipated to lead to an 8% year-on-year degrowth in revenue for the Indian tea industry this fiscal, as stated by CRISIL Ratings on Friday, based on their study of 28 rated tea companies.
Operating profitability is set to decline for the second consecutive year, dropping by 100 basis points (bps) to 5% due to reduced realization. The previous fiscal saw a 150 bps decrease in profitability, primarily attributed to a rise in wages. Wages, accounting for 20% of the total production cost, were increased by 15% in the last fiscal year. Nevertheless, stable credit profiles will be maintained due to minimal capital expenditure (capex) and low leverage.
Nitin Kansal, Director, CRISIL Ratings, said “Domestic demand, which accounts for 82% of sales volume, should remain steady at 1,100 million kg this fiscal. However, exports, which make up 18% by volume and ~30% by value, may slide ~12% on-year to ~200 million kg. Last fiscal, the export volume had increased 14% due to lower production in Sri Lanka, a major tea exporting country.”
In the realm of tea exportation, India holds the position of the fourth-largest exporter, commanding an 11% market share, following China, Kenya, and Sri Lanka. This fiscal year, the augmented supply of Sri Lankan tea is expected to influence the demand for Indian tea.
Anticipated this fiscal year is a resurgence in Sri Lankan tea production, attributed to improved access to fertilizers and pesticides. Sri Lanka primarily focuses on producing orthodox tea, which enjoys significant global demand due to its high quality. The nation holds a substantial 50% share of the worldwide trade in orthodox tea. As a result, the revenue generated by Indian tea companies is expected to decrease due to reduced realization, despite stable domestic production projected at 1,350 million kg this fiscal. This decline in operating profitability is forecasted to lead to a 40% reduction in cash accrual for the fiscal year.
“Low capex intensity and stable working capital cycles will keep borrowings under control. So, the capital structure of tea companies in the CRISIL Ratings portfolio would remain stable, with gearing expected below 0.50 time as of March 31, 2024, in line with the historical trend. Healthy balance sheets will ensure comfortable debt protection metrics, lending stability to credit profiles,” said Argha Chanda, Associate Director, CRISIL Ratings.
Consequently, even though the operational performance is not robust, the interest coverage within the sample set is expected to remain at three times or more this fiscal year. It will be crucial to monitor the weather conditions in vital tea-growing regions and potential additional wage increases.
