Increase in tea prices to offset impact of wage rate hike in Assam and West Bengal: ICRA

An increase in tea prices following global supply issues is likely to offset the impact of increased wage rates in West Bengal and Assam, said a report by ICRA.

The report said the increase in wage rates in the current calendar year in North India (NI), Assam, and West Bengal, in the current financial year, is expected to be nullified by healthy realizations of teas, particularly producers who are focused on producing quality teas. 

Notably, with this in Assam, the minimum impact on the cost of production will be between Rs 15-20 per kg in respective tea gardens, said Ramesh Mundhra of the Mundhra Tea Company.

In FY22, softening of realization and increase in wage rates led to a decline in the operating margin (OPM) of players, it noted. 

"Notwithstanding the impact of higher wage rates, the financial performance of quality producers is likely to witness an improvement in FY23 on a year-on-year basis. An increase in prices of quality crush-tear-curl (CTC) and Orthodox (ODX) teas would enable the producers to absorb the higher cost of production due to the wage rate revision,” Icra Vice President and Sector Head, Corporate Sector Ratings, Sujoy Saha said. 

The report stated that the ODX tea prices are ruling at an all-time high level on the back of a demand-supply mismatch in the international market due to production disruptions in Sri Lanka. Sri Lanka, the largest exporter of ODX teas globally, witnessed disruptions in production due to the current economic crisis. The production loss in Sri Lanka is likely to continue for some more time, which would keep supply tight in the international market, thus supporting prices of Indian ODX teas, said the report. 

“With ODX prices expected to sustain at a significantly higher level on a y-on-y basis, some quality producers have increased ODX production. Consequently, the production of quality CTC is likely to remain flattish, which will continue to support the prices of such teas as well. 

An analysis of tea prices indicates that the price differential of NI CTC teas, manufactured by the top 50 estates over average auction prices, increased to 137 per kg in the first 8 months CY2022 from Rs 122 per kg in CY2021,” ICRA Vice President and Co-Group Head, Corporate Sector Ratings, Kaushik Das said. 

Till May 2022, cumulative all-India production was up 16 per cent to 320 million kg on a y-on-y basis. However, crop loss in June and July 2022, due to unfavourable weather conditions and floods, led to a 2 per cent drop in the all-India production to 614 million kg in the first seven months of CY2022 on a y-on-y basis. 

Given that 54 per cent of the annual production typically takes place during the last five months of any calendar year, ICRA expects the overall production in CY2022 to remain flat compared to last year, although the same would remain dependent on the cropping levels till October, after which production will start to fall. 

In CY2021, all-India production was up by 7 per cent to 1,343 million kg on a y-on-y basis, recovering from the lows of the pandemic-impacted CY2020 season. 

However, it still remained 3 per cent lower compared to the record crop of CY2019, the ICRA report stated.