KOLKATA: DP Maheshwari, managing director, Jayshree Tea & Industries, says the company expects a shortage of 100 million kg in global tea production. He said tea prices may remain strong for the next five years.

Where do you see tea prices going ahead from here?

Maheshwari: Prices will continue to go up due to shortage of  production... internationally, I think, we are running short by almost 18 million kg at the end of July...the next five months is also not very bright...so, by the end of the year, we might end up with a shortage of 100-125 million kg...added to that, we started the year with a deficit...so the tea market is definitely going to remain firm...

I personally feel that for the next five years, definitely, there should be strength in the market...consumption is growing because everybody has started accepting the goodness of tea...I feel the market will remain firm for the next 4-5 years...

How much of profit increase would you then see translating into your own balance sheet because most of your cost is fixed?

Maheshwari: Apart from the fixed cost is wages, which continue to go up every year... plus the cost of inputs like fertiliser, pesticide etc... I personally feel that the cost will go up by around Rs 10-15 per kg... but then let us not forget that if you have to factor in inflation, they are still way behind the prices we got in 1999...

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About the company
Part of the BK Birla group
Owns 21 tea estates in north and south India
Has a total of 9168 hectares under cultivation
Produced 21.8 million kg of tea in 2009
Has diversified into chemical and real estate businesses

Tea plantations : Operating leverage kicks in
Prices are on an upward run, up 25% TYD
Plantation companies to benefit from higher operating leverage
Higher tea prices will benefit company as most costs are fixed
Better realisation from higher tea prices will add directly to profit growth
Tea prices have remained stagnant for almost 10 years
On inflation-adjusted basis, analysts see tea prices at Rs 140/ kg

Analyst estimates
For every Re 1 increase in tea price, increase in EPS
Company                                                        EPS rise
Jayshree   Tea                                                  9%
McLeod                                                           7%                             
Warren Tea                                                      6%

Industry dynamics
Drought in Kenya, Sri Lanka and India damage crops
India, Kenya and Sri Lanka account for over 50% of global tea exports
Sri Lankan production down 32% in the 6 months to June to 130.5 million kg
Kenya’s crop at 161 million kg, 21% down YoY
India’s tea output may drop 20 million kg from last year’s 980.8 mn kg
India’s tea production in the 7 months to July down 3.3% to 461 mn kg

Tea prices
Indian prices have gained an average 25% this year
Tea prices in Kenya and India may gain by another 15% in the next year
Stagnant prices for almost a decade forced plantation companies to cut investment in replanting old bushes