TEA : Strong brew and good aroma

Budget provisions

The industry expected a total removal of Excise duty, but has only been halved.

Current Status of the Industry
The tea industry is going through a very difficult phase, accentuated by shrinkage of domestic demand, steep fall in exports and a virtual free fall of auction prices.

The fall in tea prices have been rather very steep as reflected by a sharp 36.2% fall in whole sale price index of tea from 153.3 in the week ended 10^th February 2001 to 97.8 in the week ended 9^th February 2002. As the base year of the whole sale price index is 1993-94, and the Index was fixed at 100 at that time, even after eight years since then, the prices have only come down. This explains the long-term vulnerability of tea prices, particularly after the collapse of USSR.

The tea production in calendar year 2001 increased marginally by 0.85% to 853.71 million kg. Tea exports fell sharply by 13.41% in the calendar year 2001 to 179.09 million kg from 206.82 million kg exported in the year 2000. The dismal performance is partially on account of steep fall in exports to Russia, UAE, Poland and UK. Exports to Iraq, Libya, Turkey, Japan and Australia have also fallen. Also certain policy matters of importing African countries impacted Indian tea exports.

Impact of the budget on the industry’s prospects
The reduction in the excise duty from Rs 2 to Re 1 per kg will benefit the industry by around Rs 85 cr. The increase in import duty on tea from 70% to 100% appears highly positive for the industry. However, considering the fact that most of the tea imported is getting exported, the real impact of this is expected to be marginal.

The changes proposed in direct taxation will benefit the leading players in the industry. The removal of surcharge on dividend will substantially improve the cash flows of companies in the industry in general, and of Hindustan Lever and Tata Tea in particular. Part of such benefits will be eroded by increase in surcharge on income tax and reduction in income tax exemption from 100% to 90% on the profit from exports. Hence, on account of changes proposed in direct taxes, the incidence of tax on tea companies will come down.

On the whole, the budget is positive for the tea industry, though for survival and growth, the industry has to concentrate on improvement in quality, appropriate branding and marketing and develop niche markets.

Company impact
Companies like HLL, Tata Tea are likely to be significantly benefited from reduction in excise duty. However, they will also be marginally affected by reduction in the exemption from Income tax on export profits from 100% to 90%. The changes proposed in direct taxes will benefit the leading players of the industry, including Tata Tea, HLL, Goodricke group and Eveready Industries. On a net basis, the budget is likely to improve the prospects of the industry a shade higher.

Companies to Watch
HLL, Tata Tea, Eveready Industries, Goodricke group.

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