Brewing a fresh flavour

Low opening stocks mean higher tea prices next year too

Tea stocks have run up a long way on the back of a near recovery after six straight years of recession.

The recovery in tea prices has been led by a dramatic fall in production of 35 million kg till July-end with a shortfall of another seven million kg expected in August owing to adverse weather.

The other factor making for high tea prices has been the rising exports. The industry hopes to end the year with incremental exports of 20 million kg.

If domestic consumption grows at the usual 2-3 per cent, then the industry is staring at a huge shortfall, which will not be met and by January-February supply would run out. So the new year would start on a clean slate and a repeat of this year's firm prices is expected.

The big hope is on exports where new opportunities are opening up after decades of stagnation. Egypt has reduced import duty from 30 per cent to 5 per cent.

Egypt consumes around 70 million kg of CTC, which is India's forte. Pakistan is also fast becoming a major importer of Indian tea. But some importers are taking a more cautious approach, with rising prices.

All India average prices during April-July were at Rs 65.86 per kg against Rs 57.44 per kg last year. North Indian tea was at Rs 75.95 per kg compared with Rs 65.58 per kg, while South Indian tea was also up at Rs 65.86 per kg against Rs 57.44 per kg last year.

Small wonder that tea companies, which were losing out on account of exposure to loss-making plantation sector, are back in favour in the markets.

Tata Motors

Tata Motors' ADRs, formed through the conversion of its GDRs, listed at a tiny premium of 2.5 per cent to its closing price in India. Most other ADRs enjoy a premium of over 20 per cent and in some cases, such as Infosys, the premium is as high as 52 per cent.

Of course, there's the fungibility issue. Tata Motors' ADRs are fungible with its ordinary shares, up to 15.1 per cent of its paid-up capital. Currently, there are 23.1 million outstanding ADRs, representing 6.4 per cent of the paid-up capital, which means there's enough "headroom" to convert local shares into ADRs. Normally, in cases where there's little or no headroom the ADRs premium is higher.

But there could be other reasons for the low ADRs premium. Indian auto shares are no longer as sought after as they used to till the early part of 2004. The Tata Motors stock, for instance, has fallen over 27 per cent since its peak in mid-February.

Similarly, even Ashok Leyland and Maruti Udyog have fallen over 30 per cent since their peaks in early 2004. In the post-election rally, the Tata Motors stock has risen just 10 per cent, compared to a gain of over 25 per cent for the entire market.

Among other reasons, the firming up of oil prices will certainly hit Tata Motors, as it hits the profitability of transport operators. Besides, higher commodity prices are also expected to impact the company's profitability.

More importantly, the lacklustre movement in the share price of Tata Motors since February this year indicates that the high double-digit growth in commercial vehicle sales may soon be a thing of the past.

Fallout of rising oil prices

In spite of international oil prices going through the roof, there's some consolation for India """" the price of Dubai crude oil (of greater relevance to the country since around 57 per cent of our crude imports are from West Asia) has risen approximately 52 per cent over the last one year vis-a-vis an approximate 75 per cent increase in oil prices on the Nymex.

Rising crude prices are expected to hit integrated oil marketing companies such as BPCL and HPCL ""- under-recoveries in case of diesel have been estimated at Rs 0.75-Rs 1 per litre.

Also losses incurred on LPG sales for integrated marketing companies have grown to an estimated Rs 125-Rs 130 per cylinder. The only consolation has been the strong refining margins, which have surged to well above $8 per barrel in August-September '04.

Nevertheless, a drop in profits of approximately 30-35 per cent year-on-year in the September quarter is anticipated for oil marketing companies. However, a surge in refining margins is expected to help players such as Reliance Industries and MRPL.

As a result, the Reliance Industries stock has gained approximately 8 per cent over the last 3 weeks. Also upstream companies such as ONGC are expected to gain with year-on-year realisations improving approximately 45 per cent. This stock has gained approximately 6 per cent over the last three weeks.

Meanwhile, manufacturing companies have had to bear an approximate 25-30 per cent increase in furnace oil costs over the last few weeks and they have been absorbing these costs, as a result their margins are being squeezed.

With contributions by Ishita Ayan Dutt, Mobis Philipose and Amriteshwar Mathur