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ANALYSIS OF INDIAN TEA INDUSTRY

WITH RESPECT TO

MICROECONOMICS : FIRMS, MARKETS and BEHAVIOUR

SCHOOL OF BUSINESS MANAGEMENT

NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES

NMIMS UNIVERSITY

MUMBAI

Presented By:-

Raghav Bhardwaj (C014)

Mahesh BVS (C017)

Ekank Goel (C028)

Rohit Shaw (C051)

Peeyush Singhal (C054)

Shrey Srivastava (C057)

Ravi Thakkar (C058)

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ACKNOWLEDGEMENT

We would like to thank NMIMS, for providing us an

opportunity to study the subject of Microeconomics in our first

trimester, which is of utmost importance in today’s world. We

would specially like to thank our professor, Dr. Chandrima

Sikdar for giving us the guidance and imparting requisite

knowledge to complete our project work.

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Contents

Industry Review ........................................................................................................4

Market Dynamics....................................................................................................12

Government Regulations.........................................................................................16

References...............................................................................................................18

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INDUSTRY REVIEW

Supply Side (production side)

India is the second largest producer of tea in the world, and accounts for about 25 per cent of the

global tea supply.

Domestic production of tea in India in year 2011 stood at 988 million kg and is expected to grow

at 2-3 % y-o-y assuming weather conditions favourable to production of tea.

Regional concentration of production

Tea production is highly sensitive to variation in climatic conditions. Thus production and

quality of tea in the country differs across the months in a year. A good growing season for tea is

a combination of warm days, long sunshine hours, high humidity and adequate rainfall

preferably in the form of overnight showers. In north India, the peak season of production is

between June and October and in south India production peaks in the April-June period and

September and October period per relatively lower than that during the April-June period.

Tea production in India is largely concentrated in the north, with the region accounting for 75 per

cent of total domestic production. Of the total production, Assam accounts for the highest at 50

per cent followed by West Bengal at 24 per cent. In the south, Tamil Nadu has the highest share

at 18 per cent followed by Kerala (7 per cent) and Karnataka (1 per cent).

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.

Fragmented land holdings

The Indian tea industry is highly fragmented with approximately 159,190 tea estates (in 2007)

with average size of holdings as low as 3.63 hectares. The average size of estates has recorded a

sharp decline during the last 15 years. This is mainly due to the emergence of a significant

number of small growers.

Suppy Side Analysis

SHORT- RUN SUPPLY SIDE -

Production of tea depends on whims and fancies of climatic conditions as well as area under

cultivation .Factors affecting the yield are warm climate with plenty of rainfall, a temperature

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between -8 to 35 0C and slightly acidic soil.Thus in a particular season production is inelastic and

dependent on climatic conditions.

LONG- RUN SUPPLY SIDE - A tea bush yields most between age of 11-15 yrs . Hence

companies keep replacing old tea bushes by planting new ones. Area under cultivation has been

signifanctly increased ,making India next only to China to have such vast expense of land

dedicated to tea production .In year 2008 India had 580 thousand acres under cultivation

.Increasing profitablity has led to such an increase. Regulations have been favourable in

protecting domestic industry and subsidies are also provided under Special Purpose Tea Fund

(SPTF).This in long run production of tea can be changed by inceasing area under cultivation

,replacing tea bushes and changing government regulation thereby making demand elastic.

Industry segmentation

Planters: Planters are tea growers who primarily sell their produce at auctions. Apart from

auction sales, they are also into exports. Examples of these players are Mcleod Russel, Parry

Agro Industries, Warren Tea and AFT Limited.

Planters-cum-traders (Integrated): Apart from being tea growers, these players have diversified

themselves into the packaged segment. This forward integration is primarily to insulate

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themselves from the fluctuations in auction prices. These players are present throughout the

value-chain, right from estate operations, manufacture and processing of tea, blending, marketing

and sale in the domestic retail or export markets. Many of these players continue to sell a

significant part of their production at the auctions. Duncans Industries, Harrisons Malayalam

Limited, Goodricke Group Limited, Jay Shree Tea and Eveready Industries (India) Limited are

examples of such players.

Non-integrated players: These players do not own tea plantations and hence purchase tea either

at auctions, or privately and then blending, packing and marketing the same. Hindustan Unilever

Limited (HUL) is an example of such a player who is primarily dependent on the open market

for its purchases, although it has some plantations. Tata Tea (TTL) a similar player, hived off its

plantation business to Kannan Devan Hills Plantation Company (Pvt) Ltd. Retaining a 19 per

cent stake in it.

Apart from corporate players, other entities in the industry include:

Green leaf growers (GLGs)– These players undertake plantation activities and sell the final

produce to bought leaf factories (BLFs) and larger tea marketing companies.

BLFs– BLFs do not have owned tea estate operations but produce saleable tea from green leaf

purchases. These intermediaries accounted for approximately 58 per cent of India’s tea

production in India in 2006-07.

Market Players

The industry is characterized by the presence of a large number of unorganized players. The top

12 players accounted for only about 23 per cent of the total domestic production of 979 million

kg as of 2009. The balance is accounted for by integrated small and medium enterprises (SMEs),

bought leaf factories (BLFs), merchant exporters and regional retailers.

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Market Concentration

A concentration ratio is a measure of the total output produced in an industry by a given number

of firms in the industry. It also indicate market power of the firm.

4 Firm concentration ratios : It is calculated as the sum of the largest 4 firms in the market.

Largest firms as per market share are

Firms Market Share

Mcleod Russel India ltd 7.9

Jay Shree Tea and Inds ,Ltd 2.4

Goodricke Group Ltd 2

Harrisons Malayalam Ltd 1.7

Total Market Share 14

Ratio lies between 0 to 50 suggests that market has a structure similar to Monopolistic

competition.

Herfindahl–Hirschman Index: It is defined as the sum of the squares of the market shares of the

50 largest firms (or summed over all the firms if there are fewer than 50)[3]

within the industry,

where the market shares are expressed as fractions. The result is proportional to the average

market share, weighted by market share.

Firms Market Share Market Share^2

Mcleod Russel India ltd 7.9 0.006241

Jay Shree Tea and Inds ,Ltd 2.4 0.000576

Goodricke Group Ltd 2 0.0004

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Harrisons Malayalam Ltd 1.7 0.000289

Total Market Share 14 0.007506

The ratio of .007506 suggests the Monopolistic competition.

Characterstics of the market

Market Parameters Industry behaviour

No of firms in the market Large including regional players, low share of

total volume even by large players .

Product discrimination Product is different on the basis of finished

product – green tea, black tea ,white tea and

oolong tea. These tea differences are result of

different types of tea bushes from these are

made.

Entry /Exit barriers The industry has low entry and exit barriers

and government regulations mainly concerns

with tax collection and minimum support price.

Demand Elasticity Highly inelastic in short- run but elastic in

long- run .

However if we consider a particular variety of tea such as Green tea or Black tea , then market

follows the dynamics of perfect competition .

Tea Consumption (Demand side)

Tea demand is a derivative of population growth, trends in per capita consumption and export

prospects.

Domestic demand

Penetration levels of tea in India stood at over 90 per cent as of 2010. As a result, domestic tea

demand is largely dependent on two factors - growth in tea drinking population (defined by

CRISIL Research as population over 10 years of age) and rise in per capita consumption.

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Export demand

Indian exports account for approximately 11 per cent (2010) of the world tea exports. CIS, UK,

Pakistan and UAE are the key exporting countries for India, accounting for 52 per cent of its

exports. In 2010, Indian tea exports stood at 193 million kg, which constituted about 20 per cent

of total domestic tea production. Exports, which had touched a peak of 242 million kg in 1981,

subsequently fell due to several factors including the disintegration of the

erstwhile USSR, increasing competition from other countries such as Sri Lanka, Kenya and

China, and growth in domestic consumption, which led to a decline in exportable surplus.

Demand analysis

Domestic demand: Domestic demand depends on tea drinking population and per capita

consumption . The per capita consumption of the tea drinking population increased from 0.85 kg

in 2000 to 0.91 kg in 2010 at a CAGR of 0.7 per cent. Population of tea drinkers in India has

increased by CAGR of 3.3 % in the period from 2000 to 2010 and is expected to increase at 2 %

for next four years 2010 – 2014.

Export Demand: The international market has grown at the rate of .05% year on year with

exports reaching its peak in the year 2006 . From year 2007 India has witnessed a downfall in

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demand in the international market due to stiff competition from Kenya and China. The exports

also depend upon political scenario in target country and nature of relations of target country

with India.

Aggregate demand has risen year –on –year shifting the demand curve to right.

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MARKET DYNAMICS

( demand , supply and price )

P: Projected; Supply : Domestic production + Imports

The demand-supply dynamics in the Indian tea industry vary across different time horizons. The

short to medium term is dominated by supply-side issues, while the long term trend in the

industry is demand driven. The factors influencing tea prices and industry profitability in the

short, medium and long term are mentioned in the following table:

Short-term trends in supply and prices: Scenarios have been built on the basis of two varying

factors - domestic and global supplies. It has been assumed that demand at the global level would

not vary significantly. If we consider two scenarios of low production and high production in the

domestic as well as in the global market, four scenarios emerge, which have been elaborated in

the following table:

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North Indian tea auction prices depend largely on tightness in domestic demand supply, whereas

South Indian prices are determined by global demand supply. In case of North India, which

forms almost 75 per cent of overall tea production, tea auction prices largely depend upon the

domestic demand supply scenario, as 90 per cent of the production is domestically consumed. On

the other hand, 50 per cent of South Indian tea production is exported, and therefore, its prices

are largely influenced by the international market. These prices are directly correlated with

Kenyan tea prices, which like South India is predominantly a CTC tea producer and the

target destinations are also similar for both.

Over the years supply and demand of tea has increased thus following pattern has been observed.

Types of marketing channels

In India tea is primarily sold through two channels i.e auctions and direct sale (ex factory/ex

garden sale). Auction trading is a very important constituent of primary marketing channel of tea.

Primary marketing channels help in moving tea from the growers to the bulk tea buyers.

Source : Tea Board of India

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Prices

Auction prices of tea in Northern India is largely determined by demand and supply forces of

domestic market as 90 % of the production is consumed in India itself . The prices in southern

India is largely determined by global demand as 50 % of tea is sold in the global markets .

Profitability

Profitability of planters and planters cum brand owners is largely dependent on tea auction

prices. The operating margins of planters and planters cum brand owners increased from 9 per

cent in 2007-08 to 25 per cent in 2009-10. This increase was mainly due to a sharp increase in

auction prices from Rs 68 per kg in 2007 to Rs 107 per kg in 2009. In 2010, the auction

prices declined by 2 per cent to Rs.104 per kg. As a result, operating margin of players declined

during the year. Production volumes of these players grew by 4 per cent CAGR between 2006-

07 to 2010-11.

Operating Margins (2006-07 to 2010-11)

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GOVERNMENT REGULATIONS

This industry is highly regulated and influenced by government policies. This industry is also a

major source revenue and foreign exchange.

The domestic tea industry is governed by the Tea Act, 1953. The Tea Board, whose functions are

defined under Section 10 of the Tea Act, 1953, is the apex body in charge of the development of

the tea industry.

As a plantation industry, tea is governed by the following regulations:

Plantation Labour Act, 1951

Land Reforms Act, 1950

Forest Conservation Act, 1980

As a food product, tea is governed by the following Acts:

Essential Commodities Act, 1955

Prevention of Food Adulteration Act, 1972

Packaged Commodities Order

Regulations

Since tea bushes are most productive in 11- 15 th

yr, bushes have to be replanted or rejuvenated

as they cross their productive age to bring the production costs down. The government in an

effort to help overcome this problem has announced the setting up of a Special Purpose Tea Fund

(SPTF).

Under the SPTF, an area of 2.12 lakh hectares is being targeted for re-plantation/rejuvenation

over a fifteen year period commencing from 2007.

The cost of re-plantation / rejuvenation is to be financed in the following manner:

25 per cent of the cost would be borne by the government as a subsidy

50 per cent would be through a term loan to the tea planters

25 per cent would be borne by the tea planters themselves

To begin with, under the Phase-I of the program, a total area of 32,560 hectares for replanting

and 8,432 hectares for rejuvenation was estimated to be taken up for implementation during the

11th plan period (2007-12).

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Price sharing formula

Pursuant to the directive issued by the Tea Board, the price sharing guidelines came into effect

on April 1, 2004. According to the guidelines, every Bought Leaf Factory (BLF) purchasing

green leaf would have to share 60 per cent of the gross price of the tea manufactured by itself

with the Green Leaf Growers (GLG). The ratio is 52:48 for Himachal Pradesh and Uttaranchal

Impact

The guidelines will have a positive impact on the incomes of green leaf growers by way of fair

compensation for their crops. Further, the guidelines also provide incentives (higher retention

permitted when prices exceed the monthly averages) to the BLFs to try realising the best prices

possible. Integrated players and players sourcing from auctions will not be affected . This has led

to increase in supply side.

100 per cent FDI in plantation sector

As part of the ongoing liberalisation of the FDI regime, the Government, in July 2002, permitted

FDI up to 100 per cent in tea sector, including tea plantations. Proposals for FDI in tea sector

will require prior approval of the Central Government and would be subject to following

conditions:

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(i) compulsory divestment of 26 per cent equity of the company in favour of an Indian partner /

Indian public within a period of five years; and

(ii) prior approval of the State Government concerned in case of any future land use change

Taxation

This industry comes under purview of both central and state income tax acts. 40 % of industry

taxable income is subject to corporate income tax while the remaining is taxed as agricultural

income at much higher rates by the respective state governments.

References

Crisil Research - www.crisilresearch.com/

Capital line - http://www.capitaline.com/user/