The loss of output in Sri Lanka is expected to persist for some time, keeping supplies tight on the worldwide market. According to the agency's most recent quarterly report on bulk tea, prices of ODX teas are at an all-time high due to a demand-supply mismatch in the international market caused by production disruptions in Sri Lanka, a result of the island nation's current economic crisis, which is the world's largest exporter of ODX teas.
According to the analysis, the production loss in Sri Lanka is anticipated to persist for some time, keeping supply tight on the international market and sustaining prices of Indian ODX teas.
Tea Prices
North India (NI) CTC (crush-tear-curl) tea prices in 5M FY2023 are also up 5% (Rs. 9 a kg) year on year, mostly due to a strong increase in auction prices in August 2022. The current season's lower-than-expected output, notably of grade estate teas, and rising demand for excellent quality teas are supporting the advance in NI CTC prices.
Given the restricted supply base of top quality CTC tea, the price premium is expected to persist in the future, according to Icra. However, prices of SI CTC teas remained lower in 5M FY2023, compared to the preceding two fiscals, due to maintained production levels from purchased leaves in NI, a direct rival of SI CTC teas in terms of quality.
"With ODX prices likely to remain much higher year on year, several quality producers have expanded ODX output." As a result, output of high-quality CTC is projected to stay flat, supporting the pricing of such teas. According to a research of tea prices, the price disparity of NI CTC teas made by the top 50 estates over average auction prices climbed to 137/kg in 8M CY2022 from Rs. 122/kg in CY2021, according to Kaushik Das, vice president and co-group leader, corporate sector ratings, Icra.
Salary Increases In Northern India
Until May 2022, overall all-India output was up 16% year on year to 320 Mkg. Crop losses in June and July 2022, however, caused by unfavourable weather and flooding, resulted in a 2% decline in all-India production to 614 MKg in 7M CY2022 on a YoY basis. Given that 54% of yearly output normally occurs during the last five months of any calendar year, ICRA anticipates total production in CY2022 to be steady compared to last year, however this is contingent on cropping levels until October, after which production will begin to dip.
In CY2021, all-India output increased by 7% year on year to 1,343 Mkg, recovering from the lows of the pandemic-affected CY2020 season. However, it was still 3% lower than the record crop of CY2019.
Cumulative prices for NI and SI ODX teas in 5M FY2023 have increased YoY due to a demand-supply mismatch for ODX teas in the international market caused by a production interruption in Sri Lanka. However, due to the better quality of ODX teas, the price increase in 5M FY2023 for NI (34%) was substantially more than that for SI (5%). According to the ratings agency's research, full-year cumulative prices are also predicted to be much higher than in FY2022.
Prices
Monthly prices at auction centres in Sri Lanka increased in the current year compared to the previous year, owing to lower tea output as a result of the present economic crisis. On a year-on-year basis, the total Sri Lankan auction price in 7M CY2022 increased by 16% to $3.69/kg. Sri Lankan output fell 18% year on year to 152 Mkg from January to July 2022. Going forward, output is projected to stay lower on a year-over-year basis, which would keep prices elevated.
In volume terms, exports from India increased by 12% in the first six months of fiscal year 2022. While NI export quantities climbed by 11.2 Mkg (24%) in 6M CY2022, SI export volumes decreased by 0.8 Mkg (2%). Despite an increase in export volume, realisation fell by 2% year on year to Rs. 261/kg in 6M CY2022. Given the scarcity of ODX teas on the worldwide market, export realisation is expected to increase year on year.
In FY2022, a drop in the operating margin (OPM) of participants in the ICRA sample set was caused by a softening of realisation from the highs seen in FY2021. As a result, interest coverage and total debt/OPBDITA are expected to fall to 1.5 times and 8 times, respectively, from 2.6 times and 3.9 times in FY2021. While there has been another increase in pay rates in Northern Ireland for the current calendar year, the impact is likely to be offset by good tea realisations, particularly from farmers who are focused on producing premium teas.
"Despite the impact of rising pay rates, the financial performance of quality manufacturers is anticipated to improve year on year in FY2023." Increased pricing for premium CTC and ODX teas will let producers to withstand increased production costs owing to wage rate revisions, according to Sujoy Saha, vice president and sector head, corporate sector ratings, Icra.
