According to a report released on Friday, the tea industry is likely to experience an 8% year-over-year decline this fiscal due to declining export volume as a result of an increase in supply from Sri Lanka. According to a report by Crisil Ratings, the operating profitability of the sector will decline for the second year in a row, losing 100 basis points (bps) to 5% as a result of lower realisation.

According to the report, a rise in wages was the main reason for a 150 bps decline in profitability in the previous fiscal year. Additionally, in FY23, wages, which account for 20% of total input costs, were increased by 15%. However, the report noted that minimal capital expenditure (capex) and low leverage will maintain stable credit profiles. According to the agency, the tea industry will experience an 8% year-over-year decline in revenue this fiscal, driven primarily by a decrease in export volume.

“Domestic demand, which accounts for 82% of sales volume, should remain steady at 1,100 million kg this fiscal. However, exports, which make up 18% by volume and 30% by value, may slide 12% year-on-year to 200 million kg. Last fiscal, the export volume had increased 14% due to lower production in Sri Lanka, a major tea exporting country,” Crisil Ratings Director Nitin Kansal said.

After China, Kenya, and Sri Lanka, India ranks fourth in terms of tea exports with an 11% share. According to the report, this fiscal, as Indian produce production is anticipated to rebound as a result of better availability of fertilisers and pesticides, there will be an impact on demand for Sri Lankan tea. Sri Lanka primarily produces orthodox tea, which enjoys strong demand worldwide due to its high quality and makes up 50% of global trade.

This will lower the realisation of Indian tea companies, with domestic production seen stable at 1,350 million kg this fiscal. The consequent decline in operating profitability will reduce cash accrual by 40% this fiscal, the Crisil Ratings report noted.

“Low capex intensity and stable working capital cycles will keep borrowings under control. So, the capital structure of tea companies would remain stable, with gearing expected below 0.50 times as of March 31, 2024, in line with the historical trend. Healthy balance sheets will ensure comfortable debt protection metrics, lending stability to credit profiles,” Crisil Ratings Associate Director Argha Chanda said. Hence, despite weak operating performance, interest coverage will remain over 3 times this fiscal, it added.

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