Even as the domestic tea industry is facing challenges in short-term, ICRA today said the demand outlook for the sector remains favourable in long-term.
The rating agency also sad there would be a rise in demand due to positive impact of monsoon on disposable incomes in rural India.
"While the long-term domestic demand outlook remains favourable, challenges persist in the short term. A normal monsoon in this year is expected to have positive impact on disposable incomes in rural areas, which would support domestic demand," said Kaushik Das, Vice President, ICRA Corporate Sector Ratings.
"Thus, prices are expected to remain firm with some upward bias during the year," he said adding that "nonetheless, cost pressures would limit any appreciable improvement in operating profitability of the industry as a whole."
The domestic tea industry lately has had to cope with a increase in employee costs - largely driven by a sharp increase in wage rates - over the past two years, ICRA said.
This year too, labour wage rates are expected to rise further, as per wage agreements, keeping profitability and debt coverage indicators under pressure, it added.
Over the long-term, however, increasing domestic demand and limited increase in production are likely to support a positive price trajectory, he added.
The performance of the industry in terms of exports would be a crucial factor determining the overall supply-demand balance and price levels going forward.
India is the largest producer as well as the consumer of black tea in the world.
However, the per capita consumption of tea in India, at around 730 grams, is lower than that of almost all other major black tea consuming countries globally, and has the potential to witness further growth going forward.
Domestic tea production has remained largely range-bound
for the past three years with the total production witnessing only a nominal increase over the period, primarily on account of the limited availability of land for incremental tea plantation, ICRA said.
In the current year, till June production is likely to be up by 2 per cent, it said.
India exports only around 20 per cent of the black tea produced domestically.
During 2015, while total exports of tea in volume terms saw a year-on-year increase of around 10 per cent, the average realisation of Indian exports recorded a decline.
In the current year, till June, exports are up by around 6 per cent in volume terms.
However, the ability to maintain the trend at remunerative prices, given the increase in global tea availability on the back of higher production in Kenya, would be critical to the overall financial performance of the tea industry in the current year, ICRA said.
"Most of the large bulk tea players have utilised the healthy cash accruals during the period FY08-FY14 to fund their capital expenditure programme as well as repay their debt. As a result, financial leverage of such players is at comfortable levels at present," Das said.
