The performance of Indian orthodox tea players is likely to be boosted by the strong tea prices and increase in export opportunities owing to the production disruptions in Sri Lanka, the largest exporter of the orthodox tea variety, according to a report by India Ratings and Research (Ind-Ra).

Tea companies had witnessed a strong improvement in EBITDA margins in FY21 as the pandemic affected production, leading to a rise in tea prices, the report says.

However, with an increase in production in FY22, prices started to fall, which coupled with an increase in wage rates in early 2021, affected profitability.

“Orthodox players are likely to see a margin expansion in FY23 while crush-tear-curl (CTC) variety margins are likely to remain range-bound, with cost pressure emanating from the wage hikes announced by the governments of key tea producing states,” the credit ratings agency says.

Tea production in Sri Lanka fell nearly 20% year-on-year to 171.4 million kg in the first eight months of 2022, lowest since 1996 when the country produced 169.7 million kg. In recent years, the production in Sri Lanka has been affected by the restrictions on the use of fertilisers, pesticides and herbicides, but the decline has been exacerbated in 2022 with the shortage of fuel and fertilisers affecting the output resulting in a decline in production at all elevations.

Orthodox tea accounts for around 90% of the country’s tea production, most of which is exported. This results in the country accounting for around half of the global orthodox tea trade. Iraq, Russia, the UAE and Turkey have been among the key countries importing Sri Lankan tea. Production in Kenya was down marginally to 270 million kg in the first six months of 2022.

Tea exports from India were up 16% year-on-year in the first eight months of 2022, with the orthodox variety accounting for bulk of the increase, says Ind-Ra. Trends during June-August 2022 indicate a sharper rise of 27% year-on-year as exports to the UAE doubled while exports to Russia and Iraq also increased, the ratings agency adds.

The disruption in Sri Lankan production has resulted in a significant increase in orthodox tea prices with average India auction prices at around ₹320 per kg in August 2022 surpassing the 2020 high of ₹280 per kg, the report says.

Notwithstanding some softening in the last couple of weeks, prices averaged 22% year-on-year higher in September 2022 and are likely to remain higher in FY23, the report says.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.