Tea prices will continue to remain high next year: McLeod

Kamal Baheti, CFO, McLeod Russel, says that he expect prices will continue to high next year. He expect both the top-line and bottom-line to increase going forward.

Below is the edited transcript of his interview to CNBC-TV18. Q: There is an understanding that this year the tea production will be below one million kilograms mark and is expected to be around 970 to 975 kilograms lower than last year. Lower than last year’s output. What is your view on output and prices?   
A: In Assam, we are now near the close of the production season. Due to weather concerns our production was low by around 15-20 million kilograms. Last year the production was 988 million kilogram and it will be in the range of around 970 to 975 million. We expect similar level of production going ahead also. Q: Why there is stagnation even though your company has large plantations?
A: The suited land which is available in some parts of Southern and North Eastern India for tea plantation is very restricted and is fully planted. For individual companies to grow, M&A is the only option available. The government gives on lease contiguous land of 500-700 hectares, which is difficult to get today. With a gestation period of five years and no additional land available, production visibility looks stagnated going forward. Q: Higher yields are not a way out?
A: The only other way is to uproot a de-plant and increase the yield. It is a very slow process where you uproot only 1.5-2 percent per year. One can see impact on yields only after 10-15 years provided the weather remains good. Q: Where does tea prices currently stand at? What is the trend that we could expect in tea prices in the future?
A: We started on a very strong note with around Rs 20-25 higher prices. Prices have been low this season due to quality but this year it has been different because we had lower production. The price continue to be very strong. Prices have been high by Rs 25 throughout the year. Since we began the season with lower inventories we will continue to have further low inventories at the end of the season. We expect another 10 to 15 percent increase in prices during the beginning of this season in 2013-2014. But the tea price trend which has been higher this year should continue at least for next couple of years. Q: How syndrome of lower productivity or lower output and higher prices impact a company like yours. You largely have in house tea leaf plantations or do you also have to procure. What is the impact on margins? Does it just get passed on – higher tea prices at the auction and that getting into higher end product prices?
A: Normally, the increased price is passed on to the customers by the tea packeters. We are seeing large production from our own capacity and we as a company stand to gain. It is a fixed cost industry and any increase in prices beyond the increase in cost actually reflects in EBITDA. In last 3-4 years, our EDBITA margin has grown from 12-13 percent to 26-27 percent. Our company has grown through M&A route and our production has doubled in last 5 years and it is reflecting in both margin and volume level. Q: What has been the global tea production with respect to demand and supply?
A: Globally, the land situation is also same. Kenya and Sri Lanka are two major countries which produce tea and there also the production has been very stagnant. In last two years, Kenya has dropped production by around 30 million kilogram and the prices in Kenya in the current auction has been 57 cents higher compared to last year, very much in line with increase in prices in India.
The trend has been similar.  There has been across the globe increase in prices in the similar manner. The production has been stagnant not only in India but across the globe. The total black tea production is estimated to around 2.6 billion kilogram similar to 2007 level and that has impacted prices. Prices have actually doubled in last four-five years across the globe. Q: What about for FY13 per se? Given the fact that sales quantity is lower but it gets offset by higher sales prices what could be expect in terms of a revenue performance of fiscal year FY13? What kind of a growth we would be looking at?
A: Our production will be lower by one or two million but the price has off setted the fall. We expect around 10 percent increase in top-line and around 10-15 percent in bottom-line. From cost point of view, this has been a difficult year where wages were revised by around 16-17 percent as per the last wage agreement. But in next 2 year there will be a normal increase of around 5-6 percent. Overseas operation has contributed well to the company where the production has been stable and prices have been good.