Tea Industry Update - "The hot sip!"
The tea production in Kenya - the second largest tea producing country in the world, is expected to decrease by 10% yoy to 335mn kg while exports are likely to drop by 25mn kg this year, due to dry weather conditions currently being experienced in tea growing areas and interruptions in tea plucking and processing owing to skirmishes experienced in January 2008. Although, India is the largest producer of tea, it is also the largest consumer of tea and therefore only 15-20% of its produce is exported, while the rest is domestically consumed. Kenya on the other hand exports almost its entire produce and therefore a shortfall in Kenyan output would lead to tight global supplies.
The shortfall in Kenya could worsen an already tight global supply of tea and would further push up the prices. Tea industry veterans have been predicting that prices could rise by Rs5-7 per kg for the next full year and after taking Kenya into account, the rise is likely to be even higher. Firm tea prices, will be a concern for the branded tea players, since it will lead to an increase in their tea procurement cost. Although we are positive on the outlook of Tata Tea's business, it may not be the best play to capitalize on the rising tea price trend. Some of the large plantation stocks like Mcleod Russel, Duncans Industries, Goodricke, Jay Shree and Harrisons Malayalam may offer greater appreciation.