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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Some plantation firms plan exits or joint ventures

Some plantation firms plan exits or joint ventures

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics

The current 'tea crisis’ has forced some Colombo firms to contemplate exiting from tea plantations, handing management to others or bringing in fresh capital in a bid to avoid the losses eating into their bottom lines, industry officials say.

They point out that most firms in tea are looking at selling their tea plantation stakes owing to a host of reasons starting with unbearable wage hikes in May this year followed by the Middle Eastern crisis and tea’s cyclical nature. “Tea estates aren’t bringing in the promised returns when they were (first) privatized as a series of adverse conditions has put this industry in a rut,” a tea plantation CEO told the Business Times.

Skyrocketing COP
Explaining the industry’s ground situation, Roshan Rajendra, Deputy Chairman Planters' Association of Sri Lanka (PA) noted that the adverse weather conditions, wage hikes (which don’t correspond to productivity) and the recent shrinkage in the Middle Eastern markets have shot up the Cost of Production (COP).

“We're now selling high grown teas at a price range of Rs. 300 to Rs. 310. This corresponds to more than Rs. 100 loss per kilogramme," he said, noting that since 2002, most tea based firms weren’t running at a profit owing to the high COP.

Mr. Rajadurai went on to say that the Middle East commands one third of the country’s high value teas and the crisis in that region, starting with the Libyan unrest has shrunk purchasing power. “They try to economise on buying value added tea. Also the adverse weather conditions coupled with 28% increase in wages without corresponding improvement in productivity along with statutory requirements to grant facilities, etc. to workers are affecting the industry badly,” he explained.

He pointed out that most firms are 'really' taking a hit on tea and cross subsidising from their rubber plantations. Mr. Rajadurai pointed out that in the tea small holders’ sector as well more than 400,000 operators with their dependants which total about 1.5 million people are affected due to the industry crisis.

Skirting the problem
In this backdrop, many tea plantations are either being divested, bringing in fresh capital or looking for new managers. While Metropolitan’s Bogowanthalawa Plantations was handed over to an US management company, Walters Bay Tea Estates in late September, Lankem Tea and Rubber Plantations (Pvt.) Ltd's Agarapathana Plantations is in the market for sale. Officials say that Lankem's 62% stake will however be sold at the 'right price'. “We’re not completely negative about it, because we have invested heavily in it. We won’t sell unless we get ‘that’ price’,” a company official, on the basis of anonymity, told the Business Times.

While Richard Pieris Group’s Maskeliya Plantations has been on the market for ‘that right price' as well for sometime, Aitken Spence’s Elpitiya Plantations is looking at a possible joint venture (JV) with preferably a foreign partner.

“We don’t mind a JV with a partner. We also have oil palm and rubber at Elpitiya and we’ll be happy with some foreign investment,” an Elpitiya official told the Business Times, adding that they are already talking to large firms in the Asian region. He pointed out that had they only been in tea, they would lose about Rs. 40 million a month. “We are fortunate to be in oil palm and rubber oil palm and rubber as well,” he added.

Fancy prices
Analysts say that firms with upcountry tea estates may want to bail out at some stage, but their asking prices aren’t realistic. “With so many uncertainties the sellers won’t pay fancy prices,” an analyst said, adding that the highly politicised nature in the industry coupled with wage hikes every two years is not exactly attracting buyers. "Also they are loss making, which is another concern."

Manik Weerasinghe, CEO Maturata Plantations noted that the high COP along with the drop in tea prices have affected the company’s bottom-lines. “There haven’t been any rains since May in the up country. “The tea production has dropped 30% to 40% with the price also dropping from Rs. 40 to Rs. 50 below last year which is a big issue,” he said.

He noted that a better quality product will do the trick in moving away from this crisis. “Also the low grown tea prices are up this week, which is a good sign. But the tea industry has its ups and downs and one needs to take the downs as well as the ups,” he said, adding that Maturata will not be sold.
PA Media spokesperson Dayan Madawala, told the Business Times that many tea plantation owning companies' have made large investments into these plantations, which cannot be disregarded in turbulent times.

“We’re in agriculture and we need to accept these turbulent times. Bad weather can’t be year on year,” he noted adding that some such firms are diversifying some unproductive tea plantations to rubber, forestry (for their fuel wood), cinnamon and pepper. He said the PA has had discussions with Plantations Minister Mahinda Samarasinghe who in turn has taken their concerns up with the Treasury.

Courtesy - Sunday Times
By Duruthu Edirimuni Chandrasekera
http://www.sundaytimes.lk/111009/BusinessTimes/bt01.html

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