High domestic demand to pressurise tea export:Mcleod Russel

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High domestic demand to pressurise tea export:Mcleod Russel

In an interview with CNBC-TV18, Aditya Khaitan, Managing Director of Mcleod Russel, spoke about the tea sector.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Mcleod Russel has target of Rs 300: Rajen Shah ALSO READ See latest News about Mcleod Rus See previous management interviews See what other Experts & Brokerages are saying about Mcleod Rus Mcleod BSE | NSE 31/05/12 Are Mutual Funds betting on Mcleod?

In an interview with CNBC-TV18, Aditya Khaitan, Managing Director of Mcleod Russel , spoke about the tea sector.

Here is a verbatim transcript of an exclusive interview with Aditya Khaitan on CNBC-TV18. Also watch the accompanying video.

Q: The crop production numbers from India look very good. This year's output could exceed last year's 980.8 million kilograms. Is there a softness in prices or will the global scarcity still continue to put an upward pressure?

A: We have been having a very volatile production cycle. We have months which are running low and then our subsequent month is running high. October was a big month for us where we made up some of the losses during the year. November had been a bad month. I would be very surprised if we are able to exceed last year's production of 980 million kilograms because the weather is also turning quite cold up in a time.

We will shut our production much earlier than the last year. To counter that, the consumption growth is also growing at around 3-3.5%, which is around 35 million kilograms extra tea. If you look at it from the consumption and supply point of view, we end up with the same quantity as last year. India will be short by close to 35 million in the pipeline stock.

As we enter the winter months, we would be running short. So people will look at buying new season tea's in the month of April with very low inventory levels. So we are looking at India opening next year on the pipeline stock of close to 16 million shortage compared to this year.

Q: Can you extrapolate the impact on the price?

A: There has been talk about the tea sector prices flying high. We have had a huge recession for the last seven years, where the price of tea has actually fallen from the highs of 1999-2000. We came down to the cost of production upto 2005-2006. We are now just playing a catch up. If you take inflation into account from 1999 to 2009-2010, the price of tea should have been selling at a much higher level than what it is. So it has been taken in a different comparison.

Q: What margins are you operating at? What is the historical all time high for the margins that you have earned? Since you are also doing tea out of Vietnam, can you tell me how serious threat is Vietnam to tea because in robust of coffee they did become one of the largest producers? They dislodged the market for coffee. Do you think there is a serious Vietnam's threat in terms of where tea is really grown at the end of the day?

A: To give you a fair comparison on our all time high margins is a little difficult because we had been acquiring gardens in companies from 2005. We were at around 40 million kilograms in 2004 and today we are at around 81 million kilograms. So we have grown in the last four-five years. We have just started making money in terms of margins. Our margins are on all time high. Level in the year 199 was around Rs 40. We have come to those levels now because our cost of production from 1999 to 2009 had got up by close to Rs 35-40.

Therefore, in 2009 we have been able to start moving ahead from the margin high of 1999. Regarding Vietnam, it is a small country. We have a 100% import duty in tea. Vietnam is seen to be growing in production. It is an agriculture based country. We made a foray there because in the long run, with the consumption growth that has taken place in India, exports from India to the overseas market might come under pressure if our own consumption level keeps growing. The world market will then have a vacuum in terms of tea.

There are only three big countries that produce black tea which is Africa, India and Sri Lanka. Sri Lanka is basically an orthodox producer. So we are looking at other countries that make CTCs to fill the markets in Middle East and Pakistan.