Profit margins for bulk tea producers, particularly in north India, is likely to improve in the just-concluded financial year on firm price trends from August 2017 to January 2018, a report said today.
However, going forward, the new wage agreement that would be applicable for tea plantation workers in the states of Assam and West Bengal, according to rating agency Icra, would be the single most crucial factor determining the performance of organised north Indian bulk tea players.
"Based on discussions with industry players, we understand that there is a possibility of a steep increase of around 25 per cent in wage rates over the next couple of years," its vice-president and sector head, corporate sector ratings, Kaushik Das said.
If such an increase is implemented, he said, organised bulk tea players based in north India would witness a considerable deterioration in operating margins, unless there is a commensurate rise in prices on a sustainable basis.
"A minimum price increase of around 15 per cent would be required to cushion the impact of higher wages," he added.
Meanwhile, on the production front, this year has started on a positive note, with tea production across major tea-producing nations increasing by 12 per cent in January, primarily driven by the 24 per cent increase in Kenyan production and 14 per cent in Sri Lankan production.
Although India recorded a 10.5 per cent decline in production during January, Icra said domestic cropping trends during the month are not indicative of the full-year pattern, since the full-year trend will primarily be determined by cropping levels in north India during the peak tea producing months of June to October.
Over the long term, domestic tea production growth is estimated to remain range bound, given the limited availability of land for incremental tea plantation, it said.
This, combined with a favourable long-term domestic demand outlook for tea, is likely to support prices to some extent over the long term, it added.
"However, the actual movement in price levels, relative to the trend in cost pressures going forward, will remain the key determinant of the financial health of domestic bulk tea players," said Das.