We expect another year of very firm tea prices: McLeod Russel

Aditya Khaitan, MD, McLeod Russel, in an interview with ET Now predicts another year of very firm tea prices.

The tea deficit widened to 130 million kgs compared to 110 million kgs that was estimated earlier. What’s your own estimate of the shortfall in production globally and particularly in India?

Globally the world market has reacted in terms of shortage because of the draught that hit Kenya as well as Sri Lanka and India is because of the consumption story. So if you look at the three countries in totality, we are looking at around about 130 million shortage in the inventory pipeline.

I do not see any of these three countries in the near future being able to produce this shortage and meet the consumption growth at the same time.

In India, we are growing at around 3.5% in the consumption pattern, so India needs approximately 35 million kgs every year to feed its consumption growth. You have other countries like Pakistan, Egypt, Middle East and the other countries also growing at a much more slower rate but it is adding to the consumption growth pattern.

So going forward, I see that demand-supply mismatch will remain for the next few years and prices will remain strong for the next few years to come.

Particularly in India, the major tea producing states like Assam and West Bengal are clearly not likely to produce tea until early April. Keeping that in mind, what is your estimate of the shortage that India is likely to face?

We started last year with a shortage of around 20 million. This year, I do not see the production meeting last year’s target, so we will end up with at least a shortage of 10 million. Add to that the 35 million requirement for the consumption growth, you are looking at close to 45 million shortage in the pipeline.

So we will start this year in the month of March-April with about 65 million shortage. Obviously this will work out to the pipeline inventory levels of all the major packers in a very, very low level and they will be hand-to-mouth .

Also, new season tea buyers tend to buy because it is fresher, it is better quality and hence the price reaction will be much, much stronger than what we saw roundabout March-April of last year.

What’s your estimate on tea prices in the coming months?

I would like to clarify that when you talk of prices being all-time high, you must also see from the base from which the prices have started rising. In India, we were running at around Rs. 99-100 for the top level teas in 1999-2000.

From there, the price of tea dropped to Rs 72, in fact lower, and we came down to levels which are below cost of production. So we are now only playing catch-up to meeting the requirement of what is the inflationary levels of tea that should be.

If you just take inflation as a barometer from 1999 to 2010, then we are well below the inflation level also. So you can say the prices are moving up but according to me, we are only playing catch-up. We are still Rs 25-40 lower than what it should have been at this time of the year.

Any estimate for the year 2010 in terms of an outlook
for price?

It is a very, very difficult question to answer because it is basically related to weather also, so going forward, it all depends upon how the season starts in the month of March and April. If we get the rains that we want roundabout February-March to start the season going.

If the weather comes in, I feel the market will still open much stronger and then may be by July, it might start tapering off when the main bulk of tea start coming in. But if we open the year with a drought, then being a commodity, prices can go to any levels.

What are your current realisations per bag then and what does a Rs 10 hike per bag mean in terms of margins for you?

We have been able to increase our volumes over the last few years. For us, we are presently in McLeod Russell producing close to 80 million and a Rs 10 rise will obviously transform to 80 crores to the bottom line.

We have also made two acquisitions overseas with Vietnam last year and recently we have acquired 15 million kgs in Uganda. So obviously the price increase that will take place will substantially add to the growth in the bottom-line.

Our equity is strong. Our debt is coming down every year, so basically going forward, a Rs 10 increase would tantamount to close to 80 to 90 crores to the bottom-line of McLeod Russell.

Do believe that even if the crop is normal next year, we could continue to face supply shortage?

As I said to you that even if India produces 20 million extra this year in its production, it will still be falling behind the demand of 35 million. So therefore, going forward we have come to a situation where according to me the market, the whole that has been created of close to 130 million, will take a long time for any of the three countries to be able to match up.

So do you believe then that you actually expect to see a full year of firming tea prices ahead of us?

Well, we hope so. As per what I can see on paper, yes, we expect another year of very firm tea prices.

You recently acquired Uganda Tea Company for about 118 crores. What’s happening there and are you also looking at raising any funds, any other acquisitions in the non-organic space?

We do not need to raise any funds. We have managed to make the acquisitions out of internal accruals. As I mentioned, our debt equity is quite strong. We have enough cash accruals to meet the requirement and yes, acquisitions are an ongoing process. We will certainly keep on looking at strategic opportunities and if they make sense, we will certainly look at it much more seriously.

So what about acquisitions in Africa. Is that a space you are looking at?

We have a team that is looking around keeping an eye on what’s happening in the various countries in Africa and if any opportunities are around and if they are willing to be sold, yes, we would certainly show interest.