Indias coffee industry is

Sluggish demand in the European market on account of economic slowdown, incidence of pest attacks and an erratic monsoon have taken a toll on coffee exports as well as production in the just ended calendar year. Sources in the Coffee Board told The Hindu that coffee exports dropped by 9.35 per cent in 2012 (January to December) to 3.10 lakh tonnes as compared to 3.42 lakh tonnes during the previous calendar year. It is now estimated that coffee production in 2012-13 will be 3.15 lakh tonnes against the original post-blossom estimate of 3.25 lakh tonnes. Among the reasons attributed for the decline in production are the above normal berry drop during the monsoon period apart from the pest attacks in certain pockets of the coffee growing areas. The post-monsoon crop estimate for Karnataka is 2.27 lakh tonnes, Kerala 63,825 tonnes, Tamil Nadu 17,750 tonnes, non-traditional areas of Andhra Pradesh and Odisha 6,525 tonnes and north eastern region 195 tonnes. Coffee exports in rupee terms was down by 1.96 per cent at Rs.4,728.71 crore in 2012 against Rs.4,823.48 crore in 2011. In dollar terms, it was down 11.19 per cent at $926.27 million against $1,043 million. In terms of unit value, it was Rs.1,52,104 against Rs.1,40,645 a tonne a year ago. Exports in October-December of the crop year 2012-13 were also down by 16.53 per cent at 47,159 tonnes against 56,499 tonnes in the year-ago period. The unit value was Rs.163,593 a tonne. According to the Karnataka Planters Association, India is the seventh largest producer of coffee accounting for only 4 per cent of the worlds output. In 2011, India produced 5.3 million bags (60 kg). However, in shipments, India is the fifth largest exporter accounting

for 5.6 per cent of the world market. India exports about 70 per cent of the total domestic production. During 2011-12, Brazil produced 33 per cent of the worlds coffee though in the off year, followed by Vietnam (15.2 per cent), Indonesia (6.3 per cent), and Colombia (5.9 per cent). India was pushed to the seventh position from the sixth. Domestic demand for coffee was around 1.15 lakh tonnes. Xxxxxxxxxxxxxxxxxxxxxxxxxx Global production is estimated at 135 mln bags, almost matching the global consumption figure which is also around 135 mln bags. Global inventory levels for Arabica are at historical lows following steady drawdown of old stocks over the last year to meet demand for cheaper alternatives. As it was an off year for Brazil, there was no addition to stocks. Global consumption has so far, remained unaffected by the price increases and has grown at the same pace of 1.5-2% in the last year as in the past. Indias domestic production for 2011/12 is estimated at 5.33 mln bags by the Coffee Board of India versus the previous years harvest of 5.03 mln bags. This estimate is expected to be revised further downwards in view of the lower Robusta crop reported everywhere. The market for Certified coffees continues to grow at a good pace earning healthy premiums. So far as the Instant coffee market is concerned, there has been no major change in the general competitive landscape of the global coffee sector, as the strength of the major players and their positions in the core markets are well established and stable. The current global soluble coffee market is around 700 million kgs and is forecasted to reach up to 880 million kgs by the year 2015. The spray and agglomerated coffee markets are expected to grow at a CAGR of 2% and Freeze dried coffee market at CAGR of 12% till 2015. Much of the projected growth in freeze dried coffee is expected to come from emerging markets in Eastern Europe, Africa

and Asia. Russia and CIS continue to be major markets though prices are lower. Domestic coffee consumption has been growing steadily over the last several years, driven by double digit growth in instant coffee category and out of home consumption. Your Company has cashed in on this and is supplying coffee beans to Cafes, Instant coffee to HORECA segment, Vending and to Hot tea shop segment in Tamil Nadu. Going forward, your Company is looking at Vending to offer innovative products and services. Tea, apart from being the cheapest and the most preferred beverage of mass consumption across different strata of society, is over the years becoming a favourite among consumers who view it as a Health drink, not only within India but also globally. This has ensured that consumption continues to grow at a healthy 3% annually. Production in South India was mainly stagnant during 2011 as compared to 2010 on account of un-favorable weather conditions in major tea producing districts. Carried forward stock from year 2010 was nominal and easily absorbed. East African crop was down by 25.5 million kgs approx. due to not so ideal weather pattern. South Indian CTC market went up by an average ` 2.42 per Kg. Tea is cultivated in about 36 countries all over the world, but production is concentrated heavily in just a handful. In 2000, five countries (India, China,(mainly green tea) Sri Lanka, Kenya and Indonesia) together produced almost 80% of the worlds tea. While India, China and Sri Lanka have long dominated world production, the share of the African countries has increased significantly over the last two decades. In the ten years between 2000 and 2010, Kenyan production increased by 68.86% while Tanzanian production increased by 27.88% in 2010 over 2001. Tea producing countries such as Bangladesh, Kenya, Malawi & Tanzania and Vietnam, expanded their tea production area by more than 123,000 hectares in 2009. Xxxxxxxxxxxxx

Your Companys business, like any other business is subject to volatility in the market. Production, stock, demand and supply are the prime indicators in any business and your Company is no exception. Arabica prices are under downward correction while Robusta prices have increased. Arabica prices fell by 8% from 182.29 US cents/lb in February 2012 to 167.77 US cents/lb in March, the lowest monthly level since October 2010. Robusta prices increased by 1.6% i.e. from 101.93 US cents/lb in February 2012 to 103.57 US cents/lb in March, 2012. The increased production of Arabica during 2011/12 may have contributed to the decrease in prices. However, though better crop is expected in Brazil for crop year 2012/13, there is limited prospect of significant production increase in other countries. The second important factor that governs the demand/supply chain is the quality of coffee. In India, majority of the coffee holdings are small growers with only a small percentage of large growers and corporates. With the present surge in coffee prices and due to the economic conditions, the small growers normally sell their coffee to the small traders at the farm gate and these small merchants process the coffee at their in-house small mills or hullers without paying much attention to quality. Xxxxxxxxxxx

Another big threat for any plantation company is the vagaries of nature and uncertainty of weather conditions during critical months. Plantations being very sensitive to nature, however much we try to substitute nature, the change in weather plays a very important role in the production of plantation crops. Your Company has taken all possible steps to protect the plants and crop during extreme weather conditions by creating additional capacities for irrigation, ideal shade pattern, control of pest and disease etc. The threat to human life and damage to property by wild animals, especially Elephants is another critical area. As this is an ongoing threat, your

Company has taken all measures to ensure safety of its employees. The movement of wild animals are monitored constantly and information is passed on immediately to all concerned. Electric fence is always being maintained in good condition. The Company is in close contact with the Forest Department and local law and order authorities in an effort to find a solution to the elephant problem. The major threat faced by the Soluble Coffee Division is volatile prices of green beans, rising energy costs and emerging low cost producers. The Company is making efforts to mitigate these risks by consolidating in the non-Russian markets through development of new products and channel partners. To handle the price volatility of coffee beans, your Company has taken several steps like optimizing the inventories and close tracking of the market terminals. The experience of plantation business is proving to be the competitive edge. The utilities (Power and Water) threat at manufacturing sites is being addressed by switching to renewable energy sources and optimization techniques. On the domestic front, Coffee consumption is expected to grow very fast over the next five years. This will be predominantly seen in the Instant coffee segment. Private label coffees could see a rise through increasing modern trade. Rural markets and semi urban markets are expected to drive consumption. Freeze dried coffee is expected to form a new segment in the domestic market. Health and Wellness platform being appropriated by other beverages, could limit growth in coffee consumption. New technologies in Vending could also increase competition in the domestic market. So far as Tea is concerned, the climate change initiatives adopted by the Company have opened opportunities to look at alternative fuels, such as Agri Briquettes instead of firewood, which is fast becoming a scarce commodity. This has led to a 60% reduction in the usage of firewood in 2010-11. Production in general showed a decline, thereby impacting global supply situation/availability. The ongoing political instability and turmoil in the Middle East and North Africa could possibly impact

exports in 2012. Changing weather patterns and volatility in the south Indian Orthodox markets are other factors that impact the industry and this is a continuous feature affecting exports, particularly of Orthodox tea. Re-emergence of Helopeltis (Tea Mosquito Bug) in the district after many years and Shot Hole borer continue to be a risk to tea production and the same is effectively controlled as per guidelines issued by UPASI. Insofar as the plywood industry is concerned, availability of low priced imported plywoods and the unorganized small time players passing on poor quality plywood in the market are the main threats to this business. Outlook Though dry & hot conditions prevailed for a long period at the plantation, your Company has provided blossom irrigation followed by backing. The showers received during late March and April has acted as backing and will help in crop setting. With these initiatives, normal crop is expected for 2012/13. With our continued thrust on producing quality coffee and increasing the production of Specialty coffee, we should be able to increase our share in international coffee market. The Companys association with the global major Starbucks should help in marketing our products through their supply chain all over the world. The Companys thrust towards community service as a good corporate citizen has been continuing. So far as the Instant Coffee Division is concerned, continuous improvement in quality, capacity up-gradation and focus on new product development will be the driving factors for sustenance and growth. Your Company has taken up the debottlenecking exercise at Theni site, which is on the verge of completion. To enhance the quality of Freeze dried coffee, a state-of-the-art extraction unit is being set up. The conceptualization and design part has been completed and the project is expected to be commissioned by March 2013. This coupled with a planned long-term capital expenditure programme, focusing on modernization of equipment, adoption of best practices and development of new products to cater to different segments will go a long way in making the

business sustainable. The future for 3 in 1 and other non-core categories of soluble coffee (chicory mix products) looks promising and depends on new product launches & packaging. Your Companys New Product Development (NPD) cell has generated 4 new product variants this year. The Company is also making major strides in reducing carbon foot print, thus helping bring down cost and ultimately improve profitability and long-term sustainability. Your Company has started using Wind power in the manufacture of Freeze dried coffee. As regards Tea, with the current year, unlike 2011, starting with a lower production coupled with negligible carry forward stocks and demand growing at 3 %, the supply situation as of now is low in India but is likely to improve in May/June. Once again quality teas will witness good demand from the domestic markets and shall continue to sell well at a premium while Medium / Plainer varieties for both Orthodox/CTCs should sell well but in line with quality and even more so today than earlier. Demand for quality teas in CTC and best Orthodox shall continue to show a positive growth. The dynamics of the market could change over the coming month or two with the start of the season in North India, bigger offerings in Kenya/Sri Lanka and possible continuing unrest in the Middle East and North Africa. Global demand remains buoyant and with the lower opening crop in 2012, a bullish trend should prevail.