Operating margin to shrink, too, but low leverage, nominal capex to support credit profiles
The tea industry in India will report ~8% on-year degrowth in revenue this fiscal, led by decline in export volume.
Operating profitability will fall for the second year in a row, shedding 100 basis points (bps) to 5%, due to lower realisation. Profitability had fallen 150 bps last fiscal, primarily because of increase in wages.
Wages, which constitute ~ 20% of total cost of production, was hiked ~15% last fiscal.
However, low leverage and negligible capital expenditure (capex) will keep credit profiles stable.
A CRISIL Ratings study of 28 rated tea companies, which account for 12% of the Rs 22,000 crore industry revenue, indicates as much.
Says Nitin Kansal, Director, CRISIL Ratings, "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."
India, with a share of 11%, is the fourth-largest tea exporter after China, Kenya, and Sri Lanka.
This fiscal, increased supply of Sri Lankan tea will impact demand for Indian produce. Sri Lankan tea production is expected to rebound this fiscal given better availability of fertilisers and pesticides. Sri Lanka predominantly produces orthodox tea, which sees good demand globally because of quality. The country accounts for 50% of the global trade in orthodox tea.
This will lower realisation of Indian tea companies with domestic production seen stable at 1,350 million kg this fiscal.
The consequent decline in operating profitability will reduce cash accrual by ~40% this fiscal.
Says Argha Chanda, Associate Director, CRISIL Ratings, "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 on March 31, 2024, in line with the historical trend. Healthy balance sheets will ensure comfortable debt protection metrics, lending stability to credit profiles."