Tea Industry- Final

8/8/2019 Tea Industry- Final

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TEA INDUSTRY- An Overview


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ABOUT TEA After water, tea is the most widely-consumed beverage in the world.Tea is obtained from Camellia SinesisPlantThe four types of tea most commonly foundon the market are black tea , oolong tea,green tea and white tea, all of which canbe made from the same bushes, processeddifferentlyGrows mainly in tropical and sub-tropicalclimates

Age profile of a tea bush is 80-100 yrs but they are highly production only between 20-40 yrs of age .


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INDIAN TEA INDUSTRY


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Tea Industry: Pride for India

India is the largest consumer and the secondlargest producer of tea in the world.

Turnover of the tea industry is more than Rs.7000 Bn.Tea is a significant foreign exchange earnerwith exports of around Rs. 24 billion in 2008.The listed companies account for about 40%of total tea production.


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HIGHLY REGULATED HIGHLY REGULATED I NDU STRY

Major revenue earner for the government in terms of taxes and foreign exchange.GOVERNMENT controls

minimum and maximum prices of tea in domest ic a nd exportmarketsthe maximum quantity of tea wh ich ca n be sold to a ny e ntity in one tra nsa ction.

Tea imported or exported have to u ndergo cert if icat ion for qual ity che ck.

Ma ndator y to obta in a license for commencing businessoperations .Ma ndator y to obta in NOC for expanding area u nder u nder cultivat ion.Tea imported into India for purpose of re-export has to be re-exported w ith in 6 mo nths w ith a m inimum value add ition of 50%


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A Gov ernedGov erned c o mm od ity!!Gov erne d by: T he T ea Act, 1953

Apex b od y: T ea Board of India As a food product , tea is g ov erne d by:

Essential Commodities Act, 1955Prevention of Food Adulteration Act, 1972Packaged Commodity Act, 1980

As a plantation industry , tea is governed by:

Plantation Labor act, 1951Land Reforms Act, 1950Forest Conservation Act, 1980


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SUGAR PRODUCING REGIONS23401

22358

21263 ASSAM 49 .00%14091 W EST B EN 24 .65%22107 o t r 1 .35%23605 KERELA 7%

23043 KARNATAK 0 .50%23072 TAM IL NAD 17%

246898 980818 100 .00%25%

ASSAM

49 %

TAMIL ADU17 %

WEST BENGAL25 %

o t r 1%

KERELA

7%

KARNATAKA

1%

NORTH INDIA accounts for 75% of domestic tea production !!


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Region Wise Production2002 % 2003 % 2004 % 2005 % 2006 % 2007 %

of total of total of total of total of total of total

Totalnorth India 631,748 75.3 648,277 73.8 662,184 74.2 700,975 75.5 729,619 76.3

Assam 433,327 51.7 434,759 49.5 435,649 48.8 474,137 51.1 483,649 5WestBengal 188,021 22.4 200,635 22.8 214,541 24 214,660 23.1 233,286 24.4

Others 10,400 1.2 12,883 1.5 11,994 1.3 12,178 1.3 12,684 1.3 1TotalsouthIndia 206,726 24.7 229,852 26.2 230,781 25.8 227,009 24.5 226,288 23.7 2

Tamil Nadu 143,121 17.1 166,572 19 163,015 18.3 154,598 16.7 152,267 1

Kerala 57,772 6.9 58,012 6.6 62,146 7 67,033 7.2 68,761 7.2 61

Karnataka 5,833 0.7 5,268 0.6 5,620 0.6 5,378 0.6 5,260 0.6 5,Total India 838,474 100 878,129 100 892,965 100 927,984 100 955,907 100 100

S ource: Tea Board Of India


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TEA MAP of India


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Area under cultivation

Total area under cultivation is 567999hectares (2007).

Average size of land holding is 3.96 hectaresin 2005North has 76% of area under tea cultivation.North has higher number of large size land

holdings (more than 10.12 hectares).In south, most of the area is used for coffeecultivation.


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Growing season

Requires: warm days, long hours of sunshine,high humidity, adequate rainfall.

Monthly P r oduction In 2008

0

20000

40000

60000

80000

100000

120000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct N Dec

N rth India South India

July

September gives the maximum produce in North India.


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Parties to the industry

PlantersIntegrated playersNon-integrated playersGreen leaf GrowersBLFs (bought leaf factories)


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Distribution channels

Auction salesPrivate salesDirect Exports


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Auction sales Auction centers: Single point of contact forthe buyer and the seller.7 auction centers in India: Gauwahati,Siliguri, Cochin, Calcutta, Coonoor,Coimbatoor, Amritsar.Guwahati is the largest CTC tea auctioncentre in the world.

Tea Marketing Control Order: requires teaproducers to sell a specific % of their output through auction. The order excludespackaged tea,value-added tea and exports

from its purview


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PRODUCT INTRODUCTION


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PRODUCT CLASSIFICATION


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Black tea constitutes 75% of

global consumptionC TC m e thod op odu ct on

thodo m e thod op odu ct on

Flavour rong De lica e

Cuppage H igh: 550 cups per kg of ea

Low : 250 cups per kg of ea

Pr ic ing Low er. Ma inly pos itioned inthe med ium and popu lar teasegmen ts

Higher. Ma inly pos itioned in thesuper prem ium and prem ium teasegmen ts

Grades produced Ma inly fann ings and dus t All grades - w ho le leaf, brokenleaf, fann ings and dus t

Major consum ing coun tr ies Pak is tan R uss ia

S ou c e: I ndu tr , C R IS IL R esea rc h


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A SHIFT to CTC productionfrom OrthodoxDomestic demand high for CTC typeCTC method leaves higher cuppage

Cost of production lower by Rs. 8-10 per kg. After the disintegration of USSR in 1991 demandwas more for cheaper CTC variety.

Currently, orthodox production accounts forabout 9% of the total domestic production.

North: 7:93South: 16:74


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But, opportunities bright withORTHODOX

Russia, India s biggest export destination is reverting to Orthodox

variety after an economic recovery.60% of global consumption is of orthodox varietyIndia s exports stagnated; Govt providing boost to production andexport of orthodox tea.


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D OME S TICCON SU MPTION (80%)

Loose Tea 55% Packaged Tea 45%

Government is the largest purchaser of packaged tea (to sellthrough defense canteens, railways, aviation etc.)

Packaged tea consumption registered a growth of CAGR 5.7%from 1986 to 2007.

Packaged tea demand is price sensitive at lower end tea consumers.


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Packaged TeaPrices of loose tea are influenced by demand-supply dynamics as there is low valueaddition and product differentiationPackaged tea prices are stable and relativelyhigher due to better quality, value additionand strong brand image.TMCO excludes packaged tea from itsprovision of selling 75% of the produce

through auction sales.300 recognized brands in packaged teamarket HUL and T ata T ea are the market leadersaccounting for 40% of market share .


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Domestic Branded Tea Market

PlayersHUL

T AT A TE A

WAGH BAKRIDUNCANSGOOGRICKEEVERREADY

JAY SHREEDHUNSERIOTHERS (local and regional players)Source: Crisil research


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What determines TEASUPPLY?

1. Average age of bushes : Tea plant is most productive between20-40 years .

Around 40% of tea bushes in India are over this productive age.

In Assam and Tamil Nadu 40% of bushes above this age.In kerela and karnataka, more than 75% of bushes are abovethis age.

2. Yield3. Weather conditions4. Area under cultivation: India has the second largest area under

cultivation after China.


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Acreage not Expanding due

to restrictions by Govt. Area (Hectares)

460000

480000

500000

520000

540000

560000

580000

a r e a

( h

e c

t a

t r e

Area (Hectares)504366 509806515832 519598521403 555611567020 567999

2000 2001 2002 2003 2004 2005 2006 2007


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Yield is deteriorating due to

growing age of bushes. YIELD IN Kg/Hectare

0

500

1000

1500

2000

2500

k g

North India 1601 1630 1649 1684 1616

South India 2004 2003 1899 1910 1839

India 1690 1713 1703 1732 1663

2003 2004 2005 2006 2007

Yi eld ha s d e clin e d f ro m 1844 kg in 1998 to 1663 kg pe r h e c tar e in 2007du e to inad eq uat e in ves tme nt s, in eff ic ie nt p rodu c tion p ra c ti ces andg ro win g a ge o f bu s h es


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Special Purpose Tea Fund- A

GOVERNMENT INITIATIVEPurpose: to solve the problem of deteriorating age profile of tea bushes.

STPF targets area of 2.12 lakh hectares OFOLD TEA AREA (above 50 years of age) to bere-planted/rejuvenated over a 15 year periodcommencing 2007.

Replantation : 1.7 lakh hectares

Rejuvenation: .42 lakh hectaresFinancing : 25% as govt. subsidy

: 50% as term loan: 25% by Tea Gardens


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Implications of SPTF

Corpus of SPTF: 4500 croreTill the end of 11 th 5-year plan (i.e 2012) .68 lakh

hectares will be replanted and .16 lakh hectaresrejuvenated.Gestation period for replantation: 5 yrs

Rejuvenation: 9-12 months

As a result, effective area under tea cultivation willdecline leading to a fall in production with asubsequent rise in tea prices


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What determines the DEMANDfor Tea??

Changes in tea drinking populationTo grow at CAGR of 1.91% for 2007-2011

Growth in per capita consumptionHas been growing at CAGR of 1%


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SO .. do we IMPORT?

Imports remain negligible and are donechiefly for the purpose of re-export afterblending.100% duty on tea imported.Majorly, black tea is imported, with nominalquantities of green tea.

Under the free trade agreement,Sri Lanka exports to India at a special duty rate of 7.5%upto an annual quota of 15 Mn. kg.However, the imports through Sri Lanka have also beenminimal


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BUT, we do EXPORT !!

India is the fourth largest tea exporterin the world

share in world exports

Sri Lan a20%

Kenya20%

China18%

India14%

Others

28%


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Destination wise exports

(MN Kg) 1990 1995 2000 2001 2002 2003 2004 20CIS 128.6 81.6 95 82.2 62.1 56.7 53.4 48.1 49 53

UAE 4.8 13.7 22.1 23.3 26.4 23.7 25.6 26.5 21.9 24

UK 21.7 21.1 20.9 16.1 20.9 19.9 19.8 21.4 23.2 1

IRAN 10.9 1.7 3.4 2.8 1.2 1.5 5.3 6.6 8.7 13.1

USA 1.7 2.7 7.5 6.2 7.4 8.7 7.8 9.1 8.5 9.6

PAKISTA 0 0.2 3.3 3.3 0 3.7 5.8 11 14.7 5.5

POLAND 7 15.8 12.5 8.3 7.2 5.8 5.2 4.1 3.IRAQ 0 0.1 10.9 16.9 44.2 13.4 25.8 35.8 52OTHERS 34.4 30.3 31.1 23.5 31.6 50.3 49.1 36.4 Total 209.1 167.2 206.7 182.6 201 183.7 197.8 199


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Key export marketsCountry Analysis Major competitor

R U SSIA ORTHODOX market SRI LANKA (better quality,low rates)

UKCTC market KENYA (cheaper rates)

PA K IS T AN 100% CTC market. Ideal market for India in terms of proximity and category of consumption

KENYA (political relationsinfluence Indian exports).

EG YP T CTC market. KENYA

I R AQ ORTHODOX market.Payment issues in IRAQ

SRI LANKA, VIETNAM

JAPAN GREEN TEA MARKET CHINA

U SA ICED TEA ARGENTINA


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Categories of exportsEXPORT S

BU LK TEA (87%)PACKAGE D TEA

(13%)

Packet Tea44%

Tea Bags41%

InstantTea 15%

S ource: Tea Board of IndiaAs per 2007 data

Bulk tea is increasingly used for blending abroad and not for direct consumption.

Instant tea is not widely consumed in India due to its high price and therefore major produce is exported

Orthodox tea accounts for 30-45% of total export volumes .


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Export trends

Exports have been on a decliningtrend due to:

Disintegration of USSRCompetition from Sri Lanka, Kenya and ChinaUncompetitive pricing of Indian TeaGovt Policies (export duty, ban on exports fromtime to time etc.)

The ratio of exports-to-domestic consumptionhas changed from 25:75 in 1997 to 20:80 in 2007


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India: DEMAND-SUPPLY scenario


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INDIA S PRODUCTION DECLININGTea Production increasing @ CAGR 1.35%

840000

860000

880000

900000

920000

940000

960000

980000

1000000

t o n n e

Tea Production 892965 945974 981805 944678 980818 968050

2004 2005 2006 2007 2008 2009P

Production had fallen in 2007 due to poor weather conditions and is expected to fall in 2009 also due to

the same


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Production fell by 10 % inJan- May 09 Y-o-Y

Monthwise Te a Production In India

0

1020

30

40

50

60

70

80

90

Jan Feb Mar Apr May

M n

K

2008 2009


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Domestic consumptionincreasing

Domestic Consumption Increasing @ CAGR 2.5%

650

700

750

800

850

900

M n

k

665670675680685690695700705710

G r a m m e

DomesticConsumption (Mn.Kg)

735 757 771 786 802 850

Per Capita (Gms) 681 691 693 696 701 705

2004 2005 2006 2007 2008 2009


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Result: Decline in Export Surplus

Export Surplus

0

50

100

150

200

250

2005 2006 2007 2008 2009 P

(million kg) 2005 2006 2007 2008 2009 P

Production 928 956 945 981 96

Imports 16.376 23.81 16 20 1

Total Availability 944.376 979.81 961 1001 986Domesticconsumption 757 771 786 802 850.

Exports Surplus 187.376 208.81 175 199 136


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RESULT: PRICES RISE

P R CE R E AS STOC K D EC N ES

0

50

100

150

200

250

300

350

M n

. K g

0

20

40

60

80

100

120

P r

i c e

R s

. / K g

C lo ing oc 299.9 30 6 .9 285.9 281.9 220.7

Pr ice Rs ./k g 58.1 66 .01 67.27 8 6 .99 95.31

2005 200 6 2007 2008 2009P


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THE CURRENT SCENARIO(million kg) 2005 2006 2007 2008 2009 P

Production 928 956 945 981 968.0

Imports 16.376 23.81 16 20 18.0

Domesticconsumption 757 771 786 802 850.0

% increase

Exports 199 219 179 203 180.0Closing stock

299.9 306.9 285.9 281.9 220.7Closing stock(months of consumption) 4.6 4.6 4.2 3.9 3.0

Price Rs./kg 58.1 66.01 67.27 86.99 95.31


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EX PO R T S T O S UFFE R DUE TO FALL INPRODUCTION AND INCREASE IN DOMESTIC

CONSUMPTION

16 24 16 20 18

199219

179

203

180

0

50

100

150

200

250

2005 2006 2007 2008 2009P

M n

k

Imports Exports


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Exports fell by 22% in Jan-May 09 YoY

Monthwise Exports from India

1716.1

18

1213

12 12

14.2

11.39.8

02

468

10121416

1820

Jan Feb Mar Apr May

M n

K g

2008 2009


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AUCTION PRICES

0

20

40

60

80

100

120

price Rs ./kg

Price Rs./kg

Price Rs./kg 58.1 66.01 67.27 86.99 95.31

2005 2006 2007 2008 2009 P

And with growing demand and fallingsupplies, prices of tea at auction arebeing pushed up..


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COMPANY: COSTS ANDPROFITABILITY


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THE COST STRUCTURE

F or Integrated Players

HI HLY L B OR INTENS IV E : Wages & Salar y a cc ou nts for about 4 0% of gross sales

HI H ENERG Y COSTS: A ffected b y inc reas ing pr ices of fuel o il a nd coal . A t the level of Rs . 5-7 per kg .

L OW DEPR IC I TION: A s it is a labor inte ns ive se ctor, capex is l imited to putt ing up a fa ctor y,initial investme nt in pla ntat ion, per iod ic expe nditure o n repla ntat ion/ rejuve nat ion.

L OW INTERSET COSTS

S ource: Crisil Research


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MANPOWER: A Big Cost

Productivity declining , currently at only 20-22 kgper worker per day.H igh social costs :

The Plantation Labor Act,1951 has mandated teaestate management to provide a wide range of welfare activities for the employees.Labor welfare costs in NORTH: Rs 7.17 per kg

Only a small portion of wages actually linked to laborproductivityHuge level of excess employment ( cannot be cut due to several labor laws)


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HIGHLY TAXED INDUSTRY 40% of the income is subject to corporate income taxRemaining 60% is subject to agricultural income tax at a ratedetermined by respective state governments and are much higherIndian taxation structure is very high in India at around 45% ascompared to around 23% in Sri LankaTaxes in Assam are highest in the country

State Rate (%) Other de tails

Assam 30 Levied on 60 per cent of the total incomeW es tBengal NIL

Exem pt for a period of 3 years w .e .f.Apr il 1, 2006

Kerala(companiesonly) 35 On income up to Rs 25,000

40 On income above Rs 25,000 to Rs 100,000

45 On income above Rs 100,000 to Rs 300,000

50 On income above Rs 300,000Tamil

Nadu Nil Abolished w .e.f. April 1, 2004Sourc e: J Thomas Tea Statistics , CRISIL Research

Agriculture Income Tax Rates


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INDIRECT TAXES

Import duty is highest in India @ 103%Excise duty : Redu ction in ex cise dut y from

1 6% to nil on tea in udget 200 9 -1 0Customs dut y redu ced from 7 .5% to 5% o n spe cif ied ma chiner y for tea in udget 0 9 -1 0Cess: @ 30 paise per kg

: for Darjeeling tea @ 12 Paise per kg

VAT : @ 4 % or 12.5 %


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REALISATIONB randed Segment Players get the h ighest real izat ions followed b y those who are prese nt in both bulk a nd bra nded segme nts .

Pure bulk players get the lowest real izat ions

Operating margins of I ntegrated b ulk tea players


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SALES MIX OF LEADINGPLAYERS

Branded

tea Loose tea

HUL Not integrated 100 0

Tata Tea Ltd Partially integrated * 90 10

Dhunseri Integrated 37.6 62.4

Goodricke Group Integrated 25.2 74.8

Mcleod Russel Integrated 0 100

Parry Agro Integrated 0 100

Warren Tea Integrated 0 100

AFT Industries Integrated 0 Rossell Tea Integrated 0 100


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Effect of rising auction prices

Integrated non-branded players enjoybetter margins with rising auction prices

Non-integrated branded players facemargins pressure as hike in auctionprices means hike in their cost


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WORLD TEA MARKET


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WORLD TEA PRODUCTION

YEAR WORLDSUPPLY

WORLDDEMAND

+/-

2004 3334.53 3192.93 141.62005 3457.59 3348.52 109.072006 3572.66 3466.99 105.67

2007 3802.94 3710.84 92.12008 3749.78 3603.25 146.53

World tea production is growing at CAGR of 2.4% from 2004-2008

World Tea Consumption is growing at CAGR of 2.5 % from 2004-2008


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THE BIG TEA PRODUCERSCONTRIBUTION TO GLOBAL PRODUCTION

India25%

China29%

Others30%

Kenya8%

Sri Lanka8%

China is the biggest tea producer, India ranks second.

India is the biggest black tea producer and China is the biggest Green Tea producer.

India, Kenya and S ri-Lanka together accounts for 80% of black tea production.

Black tea accounts for 75% of global tea consumption


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China accounts for 46.6% of the total area under teacultivation in the World

ACREAGE

14.3

1.41.9

5.6

7.47

0

2

4

6

8

10

12

14

16

CHINA INDIA SRI LANKA KENYA OTHERS

l a k h

h e c

t a r e


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MAJOR TEA CONSUMINGNATIONS

RANK COUNTRY

1. INDIA2. CHINA3. CIS

4. UK 5 JAPAN

6. PAKISTAN

O O S O


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THE MAJOR IMPORTERS OFTEA

Imports have expanded at the CAGR of 2.85%.

%


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THE BIGGEST EXPORTERSShare Of World Exports

K enya

23%

China18%

India12%

Others29%

Sri Lanka18%

Growing at CAGR of 3.4% from 1996-2006


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EXPORTS BY THE MAJOR TEA PRODUCERS 2008

1160

980.82

345.82 111%

21%25.60% 317.7

94%

0

200400

600

800

1000

12001400

P R O D U C T I O N

E

X P O R T

P R O D U C T I O N

E

X P O R T

P R O D U C T I O N

E

X P O R T

P R O D U C T I O N

E

X P O R T

CHINA INDIA KENYA Sri Lanka

M n

K g

WHO IS INDIA EXPORTING


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WHO IS INDIA EXPORTINGTO ?

CIS26%

U.A.E.

12%

UK

10%IRAN

8%

OTHERS

30%

AFGHANISTAN

5%

U.S.A.

5%

PAKISTAN

4%

CIS

U.A.E.

UK

IRAN

AFGHANISTAN

U.S.A.

PAKISTAN

OTHERS

WHERE IS INDIA IMPORTING


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WHERE IS INDIA IMPORTINGFROM ?

MAJOR IMPORTERS TO INDIA (2008)

NEPAL39%

INDONESIA17%

CHINA7%

KENYA16%

OTHERS12%

VIETNAM9%

Imports are made only for the purpose of blending and re-exporting and not for consumption.


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CURRENT GLOBAL SCENARIO

Gl b l TEA DEFICIT i 2009


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Global TEA DEFICIT in 2009and 2010

GLOBAL SURPLUS/ DEFECIT

141.6109.07 105.67

92.1

146.53

-100 -110-150

-100

-50

0

50

100

150

200

2004 2005 2006 2007 2008 2009 (P) 2010 (P)

M n

K g

H ENCE WORL D AU CTION PRICE S


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WORLD AUCTION PRICESGuwahati 101.83 80.48 21.35

Coc hin 87.13 60.86 26.27

C hittag o ng (BANGLADESH) 85.76 66.11 19.66Jakarta (INDONESIA) 79.6 59.68 19.92M omb asa ( KENYA) 119.53 95.69 23.84

Li mbe (MALAWI) 72.97 54.11 18.86139.94 107.94 32

H ENCE, WORL D AU CTION PRICE S

ARE RI S ING.


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Tea Industry- Final

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