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Gross margin pressure likely to ease in coming quarters

Tea prices in North India increased (45% YoY) to INR229/kg over Apr-Dec’20 (v/s INR158/kg during the same period last year). However, prices have cooled off by 40% from the peak of INR284/kg in Aug’20 to INR171/kg in Jan’21. In this note, we have analyzed the impact of the fall in tea prices on Tata Consumer Products (TCP) in the near term. Here are the key insights:

Tea production has started to normalize…

* Production of North India tea (Assam and West Bengal), which accounts for 84% of the country’s tea production, was impacted due to the COVID-led lockdown and floods.

* Indian Assam tea is usually harvested in three flushes:

* The first flush is from mid-March to late-June (forms 32% of the whole tea cycle volumes and is of the best quality),

* The second flush is from July to September (forms 38% of volumes and is the second best in terms of quality), and

* The third flush is from October to December (forms 28% of volumes and is of inferior quality v/s the first and second flush) (as per 2019 production data).

* All India tea production (from Mar-Aug’20) is lower by 154m kg v/s last year due to: a) first flush of the crop being lost as plucking activity came to a standstill due to COVID-induced lockdown, and b) unfavorable weather conditions. In CY20, tea production in India declined 10% (to 1,256m kg), which created a supply crunch, leading to an increase in prices.

* However, production has started to normalize from Sept’20. In Sept’20, tea production grew 1% YoY, but declined by 1% in Oct’20. In Nov/Dec’20, tea production increased by 7%/11% YoY. All of which led to a decline in tea prices from its peak in Aug’20.

… and so have prices

* Shortage in supply led to an increase in North India tea prices by 61% YoY over Apr-Sep’20 to INR261/kg. According to the Tea Board of India, all India tea prices have increased by 50% YoY over Apr-Sep’20 to INR224/kg.

* With an increase in production, North India tea prices have declined 40% from the peak of INR284/kg in Aug’20 (Sept’20 price of INR268/kg) to INR171/kg in Jan’21. Tea prices over Apr-Dec’20 in North India has risen 45% YoY to INR229/kg.

* Our channel checks suggest that packaged tea prices of Tata Consumer (for select brands) as compared to pre-COVID levels were above 25% in OctNov’20, but declined 4% in Jan’21 from Oct-Nov’20 levels.

Gross margin pressure to decline in coming quarters

* Standalone gross margin fell 840bp to 30% in 3QFY21, leading to a 410bp contraction in EBITDA margin to 10% due to high tea prices.

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