There are reports that tea prices may move higher again. In an interview to CNBC-TV18, Kamal Baheti, chief financial officer, McLeod Russel says normally, the fourth and third quarter are little overpriced as compared to the first and second quarter because the quality of the tea at the end of the season is a bit lower. "For the rest of the season, we expect strong prices to continue," he adds.
Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy.
Q: What is happening with tea prices? Do you reckon the year-end and going into next year may see another rise in prices?
A: Yes. If you look at this year, we started with little low inventory at the beginning of the season. The prices opened with around Rs 20 gap as compared to last year opening prices. As we came into the season, there had been a little drop in crop, particularly in Assam. It had seen the higher prices throughout till October. Since we are coming to the end of the season, these shortages are being felt more and more. Last two-three weeks actually had seen further increase of around Rs 5-10. So, at times, we are higher by around Rs 25-30 per kg as compared to last year.
Lower inventories at the beginning of the season, lower production this year and actually higher consumption will actually bring in much lower inventories, maybe the lowest ever at the end of the season. That augurs very well for the opening prices for the next season which starts from March. So, yes, we believe that current price trends will continue for the end of the season and should be much higher when we open the next season as well.
Q: What is the range for the next couple of quarters? What kind of realisations do you expect to see as you head into the third and fourth quarter?
A: Normally, the fourth and third quarter are little overpriced as compared to the first and second quarter because the quality of the tea at the end of the season is a bit lower. But we have seen a trend where the current prices are higher than what was there in the second quarter. So, I think the current range for our company is around Rs 170-175. Overall average, for the year, we expect to be around Rs 172-175. That is almost Rs 23-25 higher as compared to last year.
We opened the season with around 10 percent gap with lower inventories. We expect another 5-10 percent increase in the price as we come to the beginning of the next season. Normally, end of the season, there is hardly tea left to be sold in the fourth quarter because of the seasonal nature of the business. But, yes, for the rest of the season, we expect strong prices to continue and to open much higher, when we open the next season as well.
Q: What are the exact figures in terms of the global shortage year-to-date (YTD)? Within that, how much has India lost?
A: The last figure, reported for October, was around 50 million kg lower production as compared to last year. India will be around 20 million kg odd down, particularly in Assam. They have reported stagnant production by Tea Board, but we believe Assam itself will be 15-20 million kg down. More than that, if you really look at last five six years, it has been absolutely stagnant production with no increase whatsoever bringing the prices up.
The prices had moved up every year in last five-six years. If we really look at the overall area under the tea plantation remaining the same, this stagnancy in production will continue for atleast another four-five years. That brings in lower inventories and higher consumption growth and should really keep on reflecting on the prices, not only for the coming season, but atleast four-five years to come.
Q: What will a Rs 20-30 improvement in prices translate into, for you, on the bottom-line? You went through a couple of wage changes as well. Is that all out of the way or will you be incurring some wage increments this time around?
A: This year will be a little tough year on the cost side as well. This is the year when there had been a huge wage revision starting from January 2012. But I think this is the year which has taken the maximum impact of it.
In the next two years, the wage revision will be marginal to around 5-6 percent as per the agreement which has been signed. So, taking all the cost increases into account and also the crop drop, which is there this year, we expect overall margin per kg to increase by around Rs 5-7 this year.
Going forward, in the next year, if we see another increase in prices with normal production next year, any increase in prices, the entire price increase should really reflect at the bottom-line. So, yes, the major cost increase has already been taken into account. This actually augurs well for the industry because this kind of a cost increase crop loss year, if we can take care and improve our margins in rupee terms per kg, it means that atleast for another two years where the agreement is in effect should be much better off than the current year as well.