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Tea stocks rally as prices surge amid supply disruption; should you buy?

Topics Tea prices | Markets | Tea firms

Analysts at Sharekhan opine that while tea prices in the India business are expected to move upwards in the near term, this will put some pressure on gross margins in near term
Tea prices across the country have continued to surge as massive flood in the north-eastern and southern India and the subsequent supply disruption hit tea inventory. As on August 8, the weekly tea prices for CTC leaf tea -- or Crush, Tear, Curl tea-- at All India level stood at Rs 253.42 per kilogram, up from Rs 243.41 per kg as on August 1, and Rs 212.48 per kg as on July 25. Of this, tea prices in North India saw sharp uptick from Rs 240.42 per kg as on July 11 to Rs 282.38 per kg as on August 8, data by Tea Board of India show. 

“Prices of tea in auctions have gone up significantly this year due to a shortage of supply. But we are not being able to pass on the price to our customers because the economic situation in the country is not conducive for increasing prices. The pandemic has created economic uncertainty everywhere,” says Viren Shah, chairman of Federation of All India Tea Traders Association (FAITTA).

Amid this, stock prices of tea companies have witnessed sharp upmove. Since their March 2020 lows, shares of McLeod Russel have leaped 769 per cent, Jay Shree and Tea Industries (147 per cent), Tata Consumer Products (137 per cent), Rossell India (130 per ceny), and Tata Coffee (104 per cent). In comparison, the benchmark S&P BSE Sensex has surged 46 per cent.   

During Monday's trading session, McLeod Russel was locked in the 5 per cent upper circuit band at Rs 17.78 per share, which was also its fresh 52-week high. Huge volume of 2.53 million shares was seen on the counter on the NSE and BSE till the time of writing of this report. Tata Consumer Product, meanwhile, hit fresh record high of Rs 547.9, up 2 per cent on the BSE today, surpassing its previous high of Rs 542.90 apiece hit on August 13. 

That apart, shares of Dhunseri Tea Industries surged 7 per cent, Diana Tea gained 5.5 per cent, Goodricke Group (5.1 per cent), James Warren Tea (5 per cent), Rossell India (4.6 per cent), and Bombay Burmah (1.7 per cent). Besides, Harrisons Malayalam, Jay Shree Tea, Kanco Tea Industries, Asian Tea Exports, and Warren Tea were up in the range of 1.5 and 3 per cent at 12:06 am. In comparison, the S&P BSE Sensex was up 53 points, or 0.14 per cent, at 37,390 level.

Investment Strategy

As pointed out by Shah of FAITTA, tea producing companies command slight power over increasing retail prices, thus putting pressure on their profit margins. 

"Whatever has been the price hike, it has been offset by loss in production, thereby bringing down the overall revenue. For instance, if someone is making 100 kg of tea and selling it at a certain price, he is now selling it at a slightly higher price, but a lower quantity. Overall, there has been a 40 per cent fall in production till June due to the lockdown. Once July figures come in, one can ascertain the impact of recent floods on production as well," says Arijit Raha, secretary general and chief executive officer of Indian Tea Association (ITA).

In-line with the view, analysts remain cautious on tea-stocks as they believe the companies may witness lower growth in revenues due to loss in production.

"Tea production takes place during March-June which was impacted firstly by Covid-19 led lockdown and then erratic climate as well as floods. At the same time, healthy demand also led to an increase in prices for tea. Consequently, we saw stocks rallying during the same period due to higher demand by consumers. However, the rise in price has not translated into revenue for the tea manufacturing companies and thus in the coming quarter, they could witness lower growth in revenues due to loss in production. Going forward, we would expect some consolidation/correction in the price of tea stocks. Thus investors may consider booking profit and waiting for a healthy correction to re-enter," says Ajit Mishra, VP- Research at Religare Broking.  

Analysts at Sharekhan opine that while tea prices in the India business are expected to move upwards, this will put some pressure on gross margins in near term. "However, these margins may take comformt certain price hikes at domestic level coupled with decline in international tea prices and Robusta coffee prices," they said in a report dated August 5.

Company Name Price on BSE as on Aug 14 Price on BSE as on March 23 % change
Mcleod Russel India Ltd. 16.94 1.95 768.7
Jay Shree Tea & Industries Ltd. 59.25 23.95 147.4
Tata Consumer Products Ltd. 537.35 226.6 137.1
Rossell India Ltd. 93.6 40.6 130.5
Tata Coffee Ltd. 105.35 51.75 103.6
B&A Ltd. 181.1 99.25 82.5
STEL Holdings Ltd. 59.5 34.3 73.5
CCL Products (India) Ltd. 254.35 151.75 67.6
Warren Tea Ltd. 46.85 28 67.3
S&P Bse Sensex 37877.34 25981.24 45.8
Source: ACE Equity

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