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Tata Tea: Retaining the flavour

Reshma Krishnan

THE market has been trading within a 400-point range and seems unable to sustain any major trend. There has been a lot of activity in the infotech sector mainly due to FII inflows. Among the losers in the last fortnight were a few stocks from the tea ind ustry. The likes of Tata Tea, Eveready Industries, and Jayshree Tea were the major losers from the sector.

One of the many reasons for the decline in the share prices of tea companies is the poor first quarter performance. Most of the major tea companies have been hit by tough industry condition in the current year. This can be attributed to a severe price re cession that began towards the end of 1999 and which touched a peak in April 2000.

April 2000 saw a low of Rs. 47.82 per kg, a fall of 19.25 per cent over the same period the previous year. This was also in sharp contrast with the record prices that prevailed in 1998 when growers realised Rs. 68.80 per kg in the South and as high as Rs . 80 in the North.

In April this year, southern growers had to sell their produce far below the cost of production as prices fell to Rs. 37.82 for some teas.

Possible reasons for this fall could be the fragmented export demand from main export markets, an increase in production and the threat of imports.

Tata Tea, the largest integrated tea manufacturer in the world has seen almost a 10 per cent decline in sales turnover.

This sharp fall in sales has, however, not affected its margins since it is an integrated manufacturer and its large presence in the packet segment acts as a buffer. Its operating profit margins have bucked the general trend in the industry and increased to 28.6 per cent from 22.69 per cent in the first quarter of 2000-01.

The fact that the company's margins have strengthened in the backdrop of a falling turnover indicates that it has its costs under control. This is impressive as costs have been rising significantly in the industry on account of an increasing wage bill an d fuel.

The scrip had fallen to Rs. 225 and lost over 35 per cent of its value in the last month; it now shows signs of bottoming out.

There are signs of recovery in prices in the industry, which should prove beneficial to the company. International tea prices are on the uptrend mainly due to a drought in Kenya and further worsening of the situation will have a positive effect on the in dustry as demand for Indian tea will increase.

The erosion in the value of the rupee would also increase the industry's competitiveness.

In any case, at current prices, the Tata Tea stock is attractive and on further decline, exposures could be contemplated.