Tea price hike to help margins rise to 13-14% in FY17: McLeod

Assam tea prices have hit a record price of Rs 501 per KG. This trend, says Kamal Baheti, Chief Financial Officer (CFO), McLeod Russel, will continue into the peak productions months (between July and October). This will lead to a rise in margins to 13-14 percent in FY17 as against 8.6 percent in the previous year.The tea companies have seen their costs rise over the last two years. This increase in costs is led by hikes in wages, says Baheti.CS Bedi, Managing Director, Rossell India, agrees with Baheti, but also adds that increasing tea prices will give some relief to tea companies. He expects tea prices to go up by 10 percent in FY17.  Below is the transcript of CS Bedi and Kamal Baheti’s interview with Nigel D’souza on CNBC-TV18.Q: We have seen that Assam tea prices have hit a record high of more than Rs 500 per kg. Could you tell us, you expect this trend to continue? What kind of impact can it have on your revenues for FY17 itself?Baheti: Before we really move forward, let me clarify these are one off cases where the Rs 500 per kg price has come. These are not the average prices. These are the second plus the best quality teas, normally fetch much higher prices than what they fetch in the month of April and May. These are the normal trends. The real question is that in the last 2-3 years. The tea prices have not moved at all. In fact, they remain more or less flat. The beginning had been good and we believe that going forward the prices will keep on moving higher. July to October are our peak production months and if the tea prices trend continues to be there, then we believe will be more traction on the profitability impact on the tea companies.Q: You were telling us that you are expecting, the crucial part is in July to that October period. So, in the best case scenario, where do you see prices headed? That is question number one. Also, you said that prices did not move in the recent past. So, for FY17, what kind of an impact can we see on your revenues? It is up more than around 16-17 percent in the last fiscal year this year, if things improve and in a blue case scenario, what kind of an increase can we see?Baheti: If we have to really put in the perspective, last two years it was not only that the prices did not go up, we lost a lot of crop. And the cost is gone up mainly on the wages side. This year the wage increase is going to be nominal and the weather condition looks fairly good, so we should be able to recover the crop itself. That will take care of the cost increases. So, any increase in prices will reflect in the earnings before interest, taxes, depreciation and amortisation (EBITDA) margins. We did drop it from 19 odd percent to around 9 percent. Our expectation is that around 10 percent increase in the tea price will take it to around 13-14 percent this year.Q: So you are expecting margins to go to 13-14 percent?Baheti: Yes, from 8-9 percent of the last year.Q: Yesterday, we did see Rossel India, the stock really flared up in trade. Now in the last fiscal, if I just take a look at your numbers, from your tea business, manufacturing of tea, you did roughly around Rs 121 crore or thereabouts. Now with these tea prices moving higher, what kind of an impact can it have on your tea revenues in FY17? And also, could you tell us in terms of margins, what kind of an impact can it have? As you were telling us the last time around, you produced fairly high quality tea as well.Bedi: I think the market has clearly always rewarded quality. And as far as we see it, we see a sustained improvement, but I would agree with Mr Baheti too, that at the end of the day, the costs are also going up and naturally, the eventual financials depend also on what kind of cropping we have. But we are quite confident that we would like to see the prices up by about 10 percent at least. It is a question of how we manage our cost. And as you know, a lot of costing and tea really is not out of wages but with everything else that we work out for our workers in kind. So, we still are quite positive over how things will pan out this year. Though for a start it has been a little weak start due to very wet conditions.Q: But Mr Baheti also said that he is expecting margins to improve by a goodish bit. For Rossel India, can we see margins improve may be around 200 basis points, 300 basis points. Mr Baheti said that any kind of price increases really will flow directly into the margins as well, because this time around beej prices are not going to go up as much. For Rossel India, can we prices move higher?Bedi: I think definitely, we should be looking at a better year, definitely. No doubt about that.Q: Can you give us some numbers?Bedi: I will not venture as much as Mr Baheti would, because we have actually, we have sold a lot more than 3 percent of our crop. So, there is a long road ahead. But, I am confident because I think one has confidence on his own ability rather than what else may be thrown at you from other sources.Q: Could you tell us what is the crop acreage status in India and also give us what is the difference between domestic tea prices as well as global tea prices.Baheti: Normally, the global tea prices do move in tandem with India. But in the last couple of years, we had seen that it did not move in line. Last year, there was a crop loss in Kenya and the Kenyan prices went up by 25 percent. We did not see much increase in prices in India. But this year again, we had seen a very good production coming from Kenya, the prices dropping, but Indian prices actually gradually going up. So, there is some connectivity, but not every year-on-year basis. But the best past which we are seeing in last couple of weeks that the tea prices, both in India, in Kenya despite very high crop in Kenya, has started moving up. Last year we have seen around 25-30 cents increase in Kenyan auctions. We had also seen tea prices going up in the Indian auctions. As we go into the peak season and if overall monsoon in the country really picks up and the demand comes up, I see no reason why we will see higher prices going into the peak season from July to October. I agree there is a long road ahead of us, but the going looks better than what it has been there in the last couple of years.