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West Bengal's Proposed Wage Hike To Escalate Margin Pressure For Tea Estates
As per Icra estimates, the cost of production is likely to increase by Rs 9 per kilogram which would have a negative impact on the margins of tea estates located in West Bengal
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The proposed hike in the basic wage rate for tea estate workers in West Bengal by 8 per cent effective 1 June 2023 is estimated to increase the total wage cost per day by 6 per cent, said rating agency Icra in a report.
As per Icra estimates, the cost of production is likely to increase by Rs 9 per kilogram which would have a negative impact on the margins of tea estates located in West Bengal.
On 27 April 2023, the West Bengal government’s labour department came out with an advisory to increase the basic wage of tea estate workers in the state by 8 per cent to Rs 250/day from Rs 232/day, with effect from 1 June 2023.
Tea players benefited in CY2020 due to a sharp rise in realisations post-pandemic in the absence of any wage hike. The increase in wage cost in North India (NI) and moderation in tea prices impacted the margins in CY2021.
"Further increases in wage cost in CY2022 exerted pressure on the cost structure despite a moderate improvement in realisations," Icra mentioned.
In CY2022, NI auction prices increased by 6 per cent on the back of a supply shortage due to crop loss in Sri Lanka, aiding recovery in the profitability of domestic tea growers.
However, cost pressures emerged after West Bengal and Assam hiked the basic wage rates by 15 per cent and 13 per cent from January 2022 and August 2022, respectively.
In view of the proposed wage rate hike in West Bengal with effect from June 2023 and a flattish trend in tea prices, the profitability of the tea players in West Bengal would come under pressure.
Talking about the estimated impact on the cost of production and margins, Icra added that the cost of production for tea manufacturers in West Bengal is slated to increase by around Rs 9/kg as a result of the wage revision.
"This is likely to reduce the operating margin of the West Bengal-based players by around 500 basis points at a steady state level of realisation," it added.
Meanwhile, the impact of the increase in the cost of production for the West Bengal-based estates on the overall financial performance of the Icra-rated portfolio is estimated to be moderate because of the relatively low share of production from West Bengal.
However, historically, wage rates in West Bengal and Assam have moved in tandem. In case there is a wage revision in Assam in the near term, the profitability of NI bulk tea companies, including Icra-rated entities, will be materially impacted.