The credit profile of tea companies will improve as the EBIDTA (earnings before interest, tax, depreciation and amortisation) margin of 44 tea companies rated by CRISIL Ratings (accounting for 12% of the industry’s revenue) is expected to increase 300 basis points to 11% in FY21. This has happened as auction prices of tea have risen 30% on-year this fiscal because of production disruption following the Covid-19 lockdowns and steady domestic demand.
Crisil in a release issued on Friday observed “That, and better capital structure will lead to an improvement in their credit profiles.”
Domestic demand for tea is expected to remain steady at 1,100 million kg this fiscal. A decline in ‘out-of-home’ consumption (through the hotel / restaurant /café, or HORECA, segment), which accounted for 10% of domestic demand, has been largely offset by a rise in ‘at-home’ consumption. On the other hand, exports, which contributed to 18% of overall volume in fiscal 2020, de-grew by 20% as production of high-quality tea leaves, or first flush, was wasted due to pandemic-led disruption in the first quarter.
Nevertheless, all-India tea auction prices are expected to average Rs 170-175/kg this fiscal, or 30% higher on-year, as production is estimated to be 8-10% lower at 1,200-1,250 million kg. Production in key tea producing states was impacted by both, lockdowns that delayed plucking of leaves in the first quarter, and floods in Assam. These states contribute to 84% of India’s total tea production. Given the surge in tea auction prices and stable domestic demand, overall industry revenue will grow at 18-20% in this fiscal despite lower export volumes.
Jaya Mirpuri, director, and
Ratings said, “Higher realisation on account of lower production and sustained domestic demand will translate into expansion of operating margins by 300 bps to 11% this fiscal, on-year”. The surge in profitability is expected to swell cash accrual by 50%. Further, low capex intensity will ensure most of the accrual will be deployed towards working capital. Therefore, the capital structure of the 44 companies should improve, with total outside liabilities to tangible net worth at 0.6 time from 1.03 times in fiscal 2020.
Argha Chanda, associate director, CRISIL Ratings said, “Significantly higher accrual and lower external borrowings augur well for the overall credit profile of the tea industry. This will lead to an improvement in interest coverage to 3.7 times this fiscal from 2.7 times last fiscal.”
As production recovers next fiscal to pre-pandemic levels of 1350 million tonnes, auction prices will correct, albeit still remain elevated to the levels of fiscal 2020. This will lead to revenues to grow at 15% over fiscal 2020, further supported by export demand recovery. That said, operating margins will hold at 9-10%. Improved profitability levels will continue to support credit risk profile with interest coverage at 3.3 times and total outside liabilities to tangible net worth at 0.7 time in fiscal 2022. Climatic conditions in tea-producing geographies disrupting the next plucking season or any increase in labour wage rate by state governments will be the monitorables in the road ahead.