Tea Stocks Surge On Expectation Of Higher Prices

Shares of tea producers rose up to 20 percent today on expectations that prices will rise faster than the costs first time in three years.

This would change the three-year vicious cycle of lower prices and higher costs, which resulted in much lower profitability for most tea companies, said Kamal Baheti, wholetime director at McLeod Russel India Ltd.

Overall production in India has declined 15-20 million kilograms, he said. The demand is likely to grow 3-4 percent. Also, output has fallen in Kenya and other African countries, boosting exports from India.

All these could lead to a cumulative shortfall of 40-50 million kilograms in India, Baheti said. That’s pushing up tea prices. McLeod Russel expects the prices could come off a little in the next 45 days, but there’s a possibility of the new season starting with an uptick of Rs 15-20 a kg.

Shares of McLeod Russel rose 7 percent today compared to a 0.3 percent decline in the benchmark S&P BSE Sensex. Tata Global Beverages rose 3.8 percent, Jayshree Tea & Industries jumped 14.4 percent and Harrisons Malayalam Ltd. surged 20 percent.

McLeod Russel’s revenue could grow 10-15 percent in the year to March, Baheti said. Due to its operating leverage, core Ebidta could more than triple over the previous year to Rs 180-200 crore in 2017-18. Ebidta margins could double from 6 percent if the cycle persists and could go as high at 18 percent in the future, he said.