With surge in tea prices, do you see the tea stocks like Warren, McLeod and Jayshree doing well in the market?

There has been a surge in tea prices across the country as massive floods in the north-eastern parts of India and the tea growing regions of southern India has led to supply disruption of tea inventory. This has created a shortfall and spiked tea prices.

It has been observed that the price of tea in auctions has gone up sharply this year due to supply shortages. Since the lows of March, many team companies have rallied more than 100% and these include McLeod Russell, Jay Shree Tea, Rossell India and Tata Coffee.

Other team companies that have also spiked during the say also and included Dhunseri Tea by 7%, Diana Tea by 5.5%, Goodricke Group by 5.1% James Warren Tea by 5%, Rossell India by 4.6%, and Bombay Burmah up marginally by 1.7%.

However, tea companies have a problem on hand. Whenever there has been a sharp price hike, it has been offset by loss of production due to weak demand. This makes the game a virtual zero-sum game for team companies. Hence tea stocks need more caution.

Tea production in India typically happens during March-June which was impacted firstly by COVID-19 and then by the prolonged lockdown as well as the erratic weather conditions oscillating between floods and drought conditions. Demand is gradually picking up.

For investors the benefit will come from improved EBITDA margins. It is not clear if the benefits of the tea industry are long term and sustainable. For now, it looks more like a blip from a low base and hence traders and investors have to be doubly careful.