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 Ekank Goel Rohit Shaw (C017) (C028) (C051)

Peeyush Singhal (C054) Shrey Srivastava (C057) Ravi Thakkar (C058)
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We would specially like to thank our professor. 2 . Chandrima Sikdar for giving us the guidance and imparting requisite knowledge to complete our project work.ACKNOWLEDGEMENT We would like to thank NMIMS. which is of utmost importance in today’s world. for providing us an opportunity to study the subject of Microeconomics in our first trimester. Dr.

................12 Government Regulations......................................................................................................................................................Contents Industry Review ...............18 3 ..................................................................................................................................................................16 References............................................................4 Market Dynamics..

Thus production and quality of tea in the country differs across the months in a year. Assam accounts for the highest at 50 per cent followed by West Bengal at 24 per cent.INDUSTRY REVIEW Supply Side (production side) India is the second largest producer of tea in the world. In the south. 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. In north India. Regional concentration of production Tea production is highly sensitive to variation in climatic conditions. 4 . A good growing season for tea is a combination of warm days. Of the total production. Tamil Nadu has the highest share at 18 per cent followed by Kerala (7 per cent) and Karnataka (1 per cent). and accounts for about 25 per cent of the global tea supply. long sunshine hours. 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. with the region accounting for 75 per cent of total domestic production. high humidity and adequate rainfall preferably in the form of overnight showers. Tea production in India is largely concentrated in the north.

This is mainly due to the emergence of a significant number of small growers. a temperature 5 .63 hectares.Factors affecting the yield are warm climate with plenty of rainfall. 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. Suppy Side Analysis SHORT.RUN SUPPLY SIDE Production of tea depends on whims and fancies of climatic conditions as well as area under cultivation .. The average size of estates has recorded a sharp decline during the last 15 years.

they are also into exports. Area under cultivation has been signifanctly increased .Increasing profitablity has led to such an increase. Planters-cum-traders (Integrated): Apart from being tea growers. these players have diversified themselves into the packaged segment.A tea bush yields most between age of 11-15 yrs . This forward integration is primarily to insulate 6 . Hence companies keep replacing old tea bushes by planting new ones.RUN SUPPLY SIDE .between -8 to 35 0C and slightly acidic soil. LONG.making India next only to China to have such vast expense of land dedicated to tea production .replacing tea bushes and changing government regulation thereby making demand elastic. Regulations have been favourable in protecting domestic industry and subsidies are also provided under Special Purpose Tea Fund (SPTF). Parry Agro Industries. Examples of these players are Mcleod Russel.This in long run production of tea can be changed by inceasing area under cultivation . Apart from auction sales. Industry segmentation Planters: Planters are tea growers who primarily sell their produce at auctions.Thus in a particular season production is inelastic and dependent on climatic conditions.In year 2008 India had 580 thousand acres under cultivation . Warren Tea and AFT Limited.

or privately and then blending. Apart from corporate players. bought leaf factories (BLFs). 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. merchant exporters and regional retailers. Many of these players continue to sell a significant part of their production at the auctions.themselves from the fluctuations in auction prices. marketing and sale in the domestic retail or export markets. Hindustan Unilever Limited (HUL) is an example of such a player who is primarily dependent on the open market for its purchases. Market Players The industry is characterized by the presence of a large number of unorganized players. Tata Tea (TTL) a similar player. Retaining a 19 per cent stake in it. These intermediaries accounted for approximately 58 per cent of India’s tea production in India in 2006-07. Duncans Industries. Non-integrated players: These players do not own tea plantations and hence purchase tea either at auctions. Harrisons Malayalam Limited. 7 . hived off its plantation business to Kannan Devan Hills Plantation Company (Pvt) Ltd. The balance is accounted for by integrated small and medium enterprises (SMEs). The top 12 players accounted for only about 23 per cent of the total domestic production of 979 million kg as of 2009. manufacture and processing of tea. Goodricke Group Limited. blending. right from estate operations. Jay Shree Tea and Eveready Industries (India) Limited are examples of such players. packing and marketing the same. BLFs– BLFs do not have owned tea estate operations but produce saleable tea from green leaf purchases. although it has some plantations. These players are present throughout the value-chain.

000576 0.9 2.0004 8 .Ltd Goodricke Group Ltd Harrisons Malayalam Ltd Total Market Share Market Share 7.Ltd Goodricke Group Ltd Market Share 7. Largest firms as per market share are Firms Mcleod Russel India ltd Jay Shree Tea and Inds . weighted by market share.006241 0. 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.9 2.7 14 Ratio lies between 0 to 50 suggests that market has a structure similar to Monopolistic competition.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. where the market shares are expressed as fractions.4 2 Market Share^2 0.4 2 1. 4 Firm concentration ratios : It is calculated as the sum of the largest 4 firms in the market. The result is proportional to the average market share. It also indicate market power of the firm. Firms Mcleod Russel India ltd Jay Shree Tea and Inds .

Entry /Exit barriers Demand Elasticity However if we consider a particular variety of tea such as Green tea or Black tea . then market follows the dynamics of perfect competition . domestic tea demand is largely dependent on two factors .Harrisons Malayalam Ltd Total Market Share 1.007506 The ratio of . black tea .7 14 0.000289 0. trends in per capita consumption and export prospects. The industry has low entry and exit barriers and government regulations mainly concerns with tax collection and minimum support price. These tea differences are result of different types of tea bushes from these are made. Characterstics of the market Market Parameters No of firms in the market Product discrimination Industry behaviour Large including regional players.white tea and oolong tea. 9 .007506 suggests the Monopolistic competition.run . Tea Consumption (Demand side) Tea demand is a derivative of population growth.run but elastic in long. As a result.growth in tea drinking population (defined by CRISIL Research as population over 10 years of age) and rise in per capita consumption. low share of total volume even by large players . Product is different on the basis of finished product – green tea. Domestic demand Penetration levels of tea in India stood at over 90 per cent as of 2010. Highly inelastic in short.

Indian tea exports stood at 193 million kg.85 kg in 2000 to 0. Exports. CIS. Export Demand: The international market has grown at the rate of . Pakistan and UAE are the key exporting countries for India. which led to a decline in exportable surplus.3 % in the period from 2000 to 2010 and is expected to increase at 2 % for next four years 2010 – 2014. UK. Kenya and China.7 per cent. which constituted about 20 per cent of total domestic tea production. The per capita consumption of the tea drinking population increased from 0. increasing competition from other countries such as Sri Lanka. From year 2007 India has witnessed a downfall in 10 . Population of tea drinkers in India has increased by CAGR of 3.91 kg in 2010 at a CAGR of 0. subsequently fell due to several factors including the disintegration of the erstwhile USSR. accounting for 52 per cent of its exports. which had touched a peak of 242 million kg in 1981.Export demand Indian exports account for approximately 11 per cent (2010) of the world tea exports. In 2010. Demand analysis Domestic demand: Domestic demand depends on tea drinking population and per capita consumption . and growth in domestic consumption.05% year on year with exports reaching its peak in the year 2006 .

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

The short to medium term is dominated by supply-side issues.MARKET DYNAMICS ( demand . The factors influencing tea prices and industry profitability in the short.domestic and global supplies. Supply : Domestic production + Imports The demand-supply dynamics in the Indian tea industry vary across different time horizons. which have been elaborated in the following table: 12 . supply and price ) P: Projected. while the long term trend in the industry is demand driven. four scenarios emerge. 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 . If we consider two scenarios of low production and high production in the domestic as well as in the global market. It has been assumed that demand at the global level would not vary significantly.

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. Over the years supply and demand of tea has increased thus following pattern has been observed. Source : Tea Board of India 13 . whereas South Indian prices are determined by global demand supply. its prices are largely influenced by the international market. tea auction prices largely depend upon the domestic demand supply scenario. which like South India is predominantly a CTC tea producer and the target destinations are also similar for both. as 90 per cent of the production is domestically consumed. 50 per cent of South Indian tea production is exported. On the other hand.North Indian tea auction prices depend largely on tightness in domestic demand supply. These prices are directly correlated with Kenyan tea prices. which forms almost 75 per cent of overall tea production. In case of North India. Types of marketing channels In India tea is primarily sold through two channels i. and therefore.

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. Profitability Profitability of planters and planters cum brand owners is largely dependent on tea auction prices. the auction prices declined by 2 per cent to Rs. operating margin of players declined during the year. Production volumes of these players grew by 4 per cent CAGR between 200607 to 2010-11.104 per kg.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 . As a result. The prices in southern India is largely determined by global demand as 50 % of tea is sold in the global markets . Operating Margins (2006-07 to 2010-11) 14 . In 2010. 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.

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This industry is also a major source revenue and foreign exchange. 1953. under the Phase-I of the program. a total area of 32. whose functions are defined under Section 10 of the Tea Act. 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). 1951 Land Reforms Act. The Tea Board. tea is governed by the following regulations: Plantation Labour Act. 1972 Packaged Commodities Order Regulations Since tea bushes are most productive in 11. As a plantation industry. 1955 Prevention of Food Adulteration Act.432 hectares for rejuvenation was estimated to be taken up for implementation during the 11th plan period (2007-12).GOVERNMENT REGULATIONS This industry is highly regulated and influenced by government policies. tea is governed by the following Acts: Essential Commodities Act.12 lakh hectares is being targeted for re-plantation/rejuvenation over a fifteen year period commencing from 2007. 1950 Forest Conservation Act. 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. The domestic tea industry is governed by the Tea Act.560 hectares for replanting and 8.15 th yr. 1980 As a food product. 16 . an area of 2. Under the SPTF. is the apex body in charge of the development of the tea industry. 1953.

the price sharing guidelines came into effect on April 1.Price sharing formula Pursuant to the directive issued by the Tea Board. permitted FDI up to 100 per cent in tea sector. in July 2002. the Government. Proposals for FDI in tea sector will require prior approval of the Central Government and would be subject to following conditions: 17 . 100 per cent FDI in plantation sector As part of the ongoing liberalisation of the FDI regime. the guidelines also provide incentives (higher retention permitted when prices exceed the monthly averages) to the BLFs to try realising the best prices possible. According to the guidelines. This has led to increase in supply side. 2004. 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. 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). including tea plantations. Integrated players and players sourcing from auctions will not be affected . Further.

http://www.crisilresearch.com/user/ 18 .capitaline. 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.www.com/ Capital line .(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. 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 .

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