Tata Consumer Sees Tea Volume, Margin Improvement In Q2 As Input Costs Ease

Tata Consumer Products Ltd. expects tea volumes to improve by September quarter and margins to expand aided by softer input costs.

"We expect tea cost to soften rather than pricing going up if the tea crop is normal," Tata Consumer's Chief Executive Officer and Managing Director Sunil D'Souza said in a post-earnings call.

Tea prices in North India came off the highs in the fourth quarter, falling 30% sequentially to Rs 152 per kg given the lean season, in line with the yearly trend, showed data from Tea Board of India. South India tea prices also dipped 6.2% to Rs 137 per kg. Kenyan tea prices remained stable at $217 per kg.

Early indicators suggest that crops in both South and North India are also coming in better than last year, he said. "By the time new tea crop costs come through into my supply chain, it would be end of the first quarter, middle of second quarter. Therefore, we would see margins to start normalising to be in the ballpark of 15-16% by end of Q2 or early Q3, and volume growth should also start coming back if we hold current prices for some time."

Adverse and erratic weather conditions in 2024 spiked the tea costs, prompting packaged companies such as Tata Consumer and Hindustan Unilever Ltd. to gradually raise prices to protect margins. Tea prices are now starting to come down due to seasonality but they're still about 15% higher than what they were in the same quarter last year, D'Souza added.

Tata Consumer has recovered about 30% of tea costs in the financial year ending March 2025 through the price hikes, however the maker of Tata Tea and Tetley had been wary of passing too much of the costs to consumers in a bid to stay competitive and protect market share. In the fourth quarter, it absorbed 54% of the tea inflation to aid volumes.

Higher tea costs weighed on the company's Ebitda margin for the year, which stood at 14.2%, down 110 basis points year-on-year. Adjusted for tea inflation, margin would have expanded 80 basis points year-on-year, D'Souza said. In Q4, the company's margin contracted 250 basis points year-on-year to 13.6%.

Tata Consumer also lost market share of 40 basis points in terms of value in the tea business during March quarter, according to its investor presentation.

But tea volumes for the March quarter rose 2%, while revenue was up 9%.

"In the last 2-3 months or so, we are seeing growth across the portfolio, slightly stronger at the lower end, but overall, even the premium and mass premium segments coming back to growth," according to D'Souza. "So, I'm keeping my fingers crossed...If it is a normal crop this year, and if supply is greater than demand, then we would probably see an easing of prices and relief on margins and also volume growth coming back decently."

Buoyed by signs of recovery in its core tea business, the Tata Group company is staying firm on its goal of delivering 30% top-line growth.