2023/24 – A Bitter Year in Retrospect
The Indian tea industry faced considerable challenges in 2023, with low tea prices and rising costs. According to the Tea Board of India, average auction prices fell to around ₹180 per kilogram, while wage inflation and higher input costs drove production expenses up by low double digits. Increased competition from low-cost Kenyan and Sri Lankan tea producers only intensified the pressure on Indian exports, impacting both revenues and profit margins for domestic tea companies.
A New Dawn in 2024?
This year, however, the market is on an firmer trend, especially from mid Q1 2024. In the below image, it can be seen that prices for the commodity across the country have seen a ~20% recovery, with auction prices even reaching ~₹250 per kg versus ~₹195 per kg in Q2 in North India. While tea production volumes in India are expected to be slightly lower due to weather-related disruptions and strategic production cuts, this reduced output is expected to benefit the industry’s bottom line due to the high operating leverage nature of the tea producers. We anticipate that operating margins that struggled in the mid-single digits last year could now potentially reach the high single or low double digits.
Our Choice of Brew in the Financial Markets
In an industry where dynamics are not usually favourable for very long, our preferences leaned towards producers with good parentage and better balance sheets. Looking to capitalize on this sector’s revival, we chose Goodricke Tea as our investment in the sector.
- Goodricke Tea:
- Background & Management: Established in 1977 and a subsidiary of the UK-based Camellia Plc, Goodricke Group Ltd. combines multinational expertise with local market knowledge. Goodricke operates several premium tea estates, particularly in Assam, Darjeeling, and Dooars. The company specializes in high-grade, orthodox teas and has a growing portfolio of premium consumer brands, including “Goodricke Castleton” and “Goodricke Roasted Darjeeling.” Its emphasis on premium quality enables Goodricke to command higher prices and cater to a discerning customer base, both in India and overseas.
- Competitive Advantage: Goodricke’s multinational backing from Camellia Plc provides not only financial strength but also extensive expertise in efficient operations, sustainability, and global market positioning.
- Valuations and Profit Potential: The company is well-situated to capture value from the current price increases, with projected operating margins expected to rise into high single digits this year from the -6% from last year. A path back to profitability is envisioned, with high single digit OPMs. Further, considering YOY growth, balance sheet improvement we also envision improvement in valuations from current 0.7x TTM Sales
