With the likelihood of a lower tea production in the global markets, the prospects of India's tea exports appear favourable, along with the positive impact on domestic prices this year, ICRA said on Tuesday.

With Kenya and Sri Lanka, the major exporters of bulk tea, witnessing erratic cropping patterns thereby leading to supply side issues, the demand for Indian tea has increased in the global markets, the rating agency said in a report.

Export volumes during the first four months of CY2017 rose by around 5.7 per cent and the realisations also saw an increase, albeit modestly at 5.6 per cent, it said.

The continuation of such a favourable export scenario going forward, will have a positive impact on domestic prices as well. However, continuing cost pressures, primarily attributable to the increase in wage rates, would keep margins under check, ICRA said.

In the first four months of CY2017, black tea production in the major growing countries of India, Kenya and Sri Lanka witnessed a de-growth of 11 per cent, primarily due to significant drop in Kenyan production.

This decline in crop availability has led to firming up of prices at most auction centres globally. The auction prices in USD terms in Sri Lanka and Kenya have increased by 44 per cent and 24 per cent respectively, the report said.

Prices of Sri Lankan teas, which are mostly the orthodox variety, have surged to touch $4.08 per kg during the first four months of CY2017, as against $2.84/kg in the corresponding months last year; while Kenyan tea prices, which are entirely of the CTC variety, touched $2.98/kg, vis-a-vis $2.41/kg, it said.

India exports only around 20 per cent of the tea produced domestically. However, exports play a vital role in maintaining the overall demand-supply balance, and consequently price levels, in the domestic market.

“While the export performance in recent months is encouraging, the full year performance will be determined by the volumes during the period June to August, when most of the export contracts are finalised.

“With the likelihood of a lower tea production outside India in CY2017 and given the trend in international prices, the prospects of exports from India in the current year appear favourable,” ICRA Vice-President and Sector Head, Corporate Sector Ratings, Kaushik Das said.

On the domestic front, during the first four months of CY17, prices witnessed a largely stable trend – while prices at North Indian auction centres saw some softening on account of sale of carry forward teas from the previous season. On the other hand, prices at South Indian auction centres firmed up, the rating outfit said.

Domestic production witnessed a rise – driven by the surge in production in April – which offset the declining trend in the first quarter of the year, it said.

Going forward, the overall trend in domestic production during CY 2017 will be largely determined by the cropping pattern in North India during the peak tea-producing months of June to October.

The level of such production, combined with the export performance, would in turn determine the price levels in the domestic market in the current year given the continued steady growth in domestic demand, ICRA said.

“Based on initial trends, realisations, particularly for the better quality teas, in the current year are expected to remain firm. However, cost pressures will continue, which will limit the scope of margin expansion of bulk tea companies,” Das added.