Given the high volume growth this year, plantation companies - particularly with a higher exposure to low grown tea - are likely to post better earnings in 2010, according to sector analysts. “Low grown tea grades have always commanded a higher price than high grown tea mainly due to the rising Middle Eastern and Russian demand,” Milinda Ratnayaka, Research Analyst SMB Securities said.
The Sri Lanka Tea Board (SLTB) says that tea production is forecasted to grow about 11% year on year to 320 million kilogrammes this year. Low grown tea is expected to record the highest volume growth. Last year the industry witnessed a 9% drop in tea production to 289.70 million kilogrammes which is the worst production since 1999, mainly due to drought conditions that prevailed in the first half of 2009.
However, during the fist half of this year, tea production increased 26% year on year. “The growth in volume was mostly contributed by low-grown tea, which saw a 33% increase in volume,” said Prasansani Mendis, Research Analyst NDB Stockbrokers.
The plantation sector gained 4% in view of high tea, rubber prices and volume growth compared to last year. According to some industry analysts, plantation firms such as Kelani Valley Plantations (KVAL), which saw a decline of 82% in the second quarter o this year to Rs 7 million, has exposure to both tea and rubber (on high grown area) and its production was affected by the rainy weather. “Tea prices during the second quarter of 2010 have eased off (due to the increased tea production in the national level). This together with the drop in the tea production of KVAL during this period has negatively affected the financial performance in the tea sector of KVAL,” an analyst said.
Dhanushka Perera, Research Analyst NDB Stockbrokers said that KVAL also saw worker wages increase by approximately 33% during the latter part of 2009, which has increased KVAL’s overall cost structure as opposed to last year’s corresponding period.
Mr. Perera noted that tea prices will increase in the medium term due to the increased demand in the coming winter season, and the weather condition is seen to be favourable as at now.