Firm prices add flavour to tea sector (updated - 13 Aug 2010)
Decline in output results in higher prices, driving profits of tea producers.
Tea prices have risen by about 15 per cent in the last one month and are expected to remain firm in the near term as production in India (among top tea producers globally) is estimated to decline in the current year.
Sector Specific - Tea
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Higher tea prices also means good news for tea producing companies - not surprisingly, many of them have seen their stocks outperform the broader market in the last two-three months. “There is still steam left in tea stocks. We believe the current lower production-rising prices scenario would play out till the end of the second quarter of 2010-11 and we recommend buy on tea stocks,” says Anup Ranadive, who tracks tea stocks at Tower Capital & Securities. Among stocks that analysts prefer are Tata Tea, McLeod Russel and Jay Shree Tea & Industries.
Tata Tea: Tata Tea, which is now known as Tata Global Beverages, is well diversified in terms of products and regions. It generates 70 per cent of its revenue from overseas markets and leads in the domestic tea market with a market share (volume) of over 20 per cent. The company is further expanding into new markets and plans to diversify its portfolio with a focus on non-tea products. As a result of this, the company is expected to report about 10 per cent growth in revenue and 25 per cent in net profits annually, over the next two years. In the near-term, analysts believe higher tea prices could put pressure on its margins and, thus, on its share prices, which could be used as an opportunity to buy the stock.
Assam, which accounts for more than half of India’s tea output, could produce less this year, thanks to the excessive rains in the month of June, which led to a pest attack on the tea crop. Basudeb Banerjee, chairman of the Indian Tea board, told Bloomberg production in the region is expected to be hit by 30-40 per cent as a result of the pest attack. According to industry data, while Assam and West Bengal witnessed a three-million-kg decline in output in the month of May, the crop has further dropped by 13 million kg in Assam and two million kg in West Bengal in June. While this decline in output will be partly offset by production in South India, analysts expect India’s overall tea output to decline from last year’s level of 978.9 million kg.
Concerns over production have led to a rise in tea prices - average Kolkata auction price at Rs 136.37 a kg is higher by Rs 20-25 a kg on a year-on-year basis. “Stagnant production in India, shortfall in production in the quality belt of Assam and carry forward shortage should lead to firmer prices in India,” says leading tea producing company McLeod Russel India in its outlook for 2010.
McLeod Russel: McLeod Russel, which manages 47 tea estates in Assam, is one of the largest tea cultivators and exporter in the country. It produces about 100 million kg of black tea, which is sold in the domestic and international markets. Due to excessive rainfall, its tea crop production, too, was hit by 2.5 million kg and came to 17.7 million during the quarter ended June. However, analysts feel this years’ decline in production would be absorbed by the rise in tea prices. They expect the company to report 20 per cent growth in consolidated revenues and 15 per cent in earnings annually over the next two years. Analysts have a buy rating on the stock, which is currently trading at nine times its 2010-11 estimated.
Jay Shree Tea: A B K Birla Group company, Jay Shree Tea & Industry has a presence in both domestic and international tea market. Last year, the company produced 29.9 million kg of tea, which analysts expect to go up to 32.5 million kg this year. While its domestic production, too, could get hit due to the pest attack, its international acquisitions (made last year) would offset the shortfall, leading to a higher overall output in 2010-11. This, along with the rise in tea prices, should boost the company’s earnings in the current year. Analysts have a buy rating on the stock, which trades at seven times its 2010-11 estimated earnings.
