Mumbai, Jan 22 (PTI) The tea industry may continue to face challenges in the next financial year with hike in wages and its impact on prices, as production returns to normal, according to a report.

Rating agency Icra in the report also expects the challenges for the tea industry to remain in 2021-22, after considerable improvement in performance during 2020-21.

The impact on bulk tea prices once the production returns to normal in the new season would be a critical factor determining the profitability in the next financial year, the rating agency said.

West Bengal has recently announced a 15 per cent increase in wage rates, on an interim basis, which would increase the cost of production for bulk tea companies, it added.

Domestic tea prices have witnessed a significant increase in the current financial year, with the North India (NI) auction average increasing by 46 per cent y-o-y during April-December 2020 and the South India (SI) auction average up by 41 per cent during the same period, the report stated.

Tea prices witnessed a sharp increase on the back of a 10 per cent fall in domestic production, while consumption remained firm, it said.

While tea prices moderated during November-mid December 2020, following a seasonal quality decline amid normal production levels in September and October 2020, the prices rebounded in the recent auctions in the domestic market in the calender year 2020.

Thus, the profitability of NI-based bulk tea players is expected to witness a significant improvement in 2020-21, on the back of a sharp improvement already witnessed in the first half of 2020-21 and significantly lower losses expected in the second half of 2020-21.

However, the sustainability of the same in 2021-22 will depend on the price and input costs, the rating agency stated.

ICRA Vice-President and Sector Head (Corporate Sector Ratings) Kaushik Das said, "While it would be premature to comment on the exact level of tea prices, nonetheless, overall prices are likely to witness a negative bias, once the production returns to normal in the new season."

He added that trend in prices apart, another challenge facing the industry is the increase in wage rates. "West Bengal has already announced an interim wage increase, Assam is also likely to follow along similar lines."

Das also said the sustenance of the healthy profitability would be critical to ensure the long-term financial health of the bulk tea industry.

Meanwhile, on the global front, the report said the decline in production from India and Sri Lanka (a contraction of 11 per cent for both in 11 months of 2020) is estimated to result in an overall decline in global production in 2020.

This is despite a significant increase in the Kenyan crop by 32 per cent during the nine months of 2020, it added.

The report said the global supply of crush tear curl (CTC) teas largely remains the same, with the increase in Kenyan CTC crop compensating for the decline in Indian CTC production. Global orthodox (ODX) production was hit following the decline in both India and Sri Lanka, it added.

The sharp jump in production from Kenya led to softening of the CTC prices in the international market, while lower availability of ODX teas provided support to its prices in 2020, the report said.

Export from India during 2020 is estimated to be down by 17 per cent in volume terms on a y-o-y basis, it said. Almost two-thirds of the decline is because of lower ODX exports, given the sharp decline in production of such teas, the report added.

With CTC prices increasing dramatically, most producers reduced the share of ODX production (estimated to be 30 per cent lower on a y-o-y basis). HRS hrs

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