The India Advantage: Chai Piyo Mast Jiyo!!!

Tea prices in India have been strengthening over the years and the change has been visible in the past couple of years more glaringly. In 2012, the average auction tea  prices moved higher by 18% to touch an all time high of Rs 122/kg with prices touching Rs 144.54/kg in the first week of January 2013.


Major Factors: Lower production in both regions (North & South) + 2% lower production in Kenya (one of the 5 leading producers in the world and accounts for around 9% (as per 2010 data) of World's total tea production.) 
The other large producers of tea in the world are China(32.48%), India(21.94%), Sri Lanka (6.25%) and Turkey(5.2%).


In 2013, tea prices are expected to move higher by around 8-10% (i.e. Rs 10/kg to Rs 12/kg) - Higher production in Kenya will not be sufficient to compensate for the drop in exports from India and increasing world consumption. India consumes about 90% of what it produces and the number is increasing. One of the important parameters of accessing this trend is the months of inventory (in terms of consumption) with the tea producers. This has declined from 5 months in 2008 to 3.7 in 2011 to 3 months in 2012. It is expected to decline further due to increasing demand. This will push the prices of the commodity higher in the coming years. Crisil expects the prices to reach about Rs 150/kg by 2014. However, the prices touched a high of Rs 144/kg in January'2013 itself.





Picture Courtesy: CRISIL Research


Tea prices in South India are relatively more affected by their global counterparts mainly due to two factors:
1. It exports around 30-40% of tea produced
2. Major variety is of CTC (Cut-Tear-Curl) type which faces stiff challenges from Kenya, the largest exporter of CTC variety.


Tea production over the years has increased from 980.8 million Kgs in 2008 to 1111.8 million Kgs in 2012 as per Tea Board of India, which is a CAGR increase of 3.18%. Assam(37.7%), West Bengal(25.8%) and Tamil Nadu(24.9%) are the leading producers of tea in the country as of Dec 2012.












The tea production sees a jump during the May to October period. This period also sees strengthening of prices as is visible from the previous years data. The first three months of the year generally have lower tea prices inspite of low production. However, the trend is visibly changing as the prices are refusing to come down this year.


Now, even after the tea prices have seen an increase, only few companies have reaped its benefit properly.









Now with a clear demand supply gap arising in the tea industry and after the substantial correction in the share prices of tea companies, are the outperforming stocks such as Mcleod Russel, Tata Tea, Warren Tea and Jayshree Tea ready for a rerating?
Before jumping on to any conclusion, its important to understand how the industry works and what is expected in the coming quarters.
I shall be covering the same and try and generate some investment ideas in the next article.


Till then, Chai Piyo Mast Jiyo!!! :)