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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Merrill Fernando looks at moving speciality tea business to India

Merrill Fernando looks at moving speciality tea business to India

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Alleges harassment by Tea Board officials

Accusing Sri Lanka Tea Board officials of "indifference and lethargy," Mr. Merrill J. Fernando, the Founder of Dilmah Tea, last week told shareholders of Ceylon Tea Services PLC (CTS), his listed company, that he was looking at relocating his business of exporting specialty teas imported from China, South Korea and India and re-exported after value addition here to Coimbatore (in India).

Fernando said that this was a small business but extremely profitable. He had spoken to the Minister (of Plantation Industries) and also written to him about the problems they faced in this regard.

"Tea Board officials make our lives very difficult and I may decide to relocate this business to Coimbatore," Fernando told his shareholders at the CTS annual general meeting.

He was responding to a shareholder's question on the state of the company which posted a group profit of Rs.1.4 billion in the year ended March 31, 2013, down from Rs.1.7 billion a year earlier on account of a sharp drop in the previous year's foreign exchange gain of Rs.767 million to Rs.160 million during the year under review due to the appreciation of the rupee against the US dollar.

CTS is a highly successful company which is one of the highest dividend payers listed on the CSE. Wednesday's AGM approved the directors' proposal of a final dividend of Rs. 10 per share, on top of an interim of Rs. 30 already paid, with one shareholder smilingly telling Fernando to ``consider Rs. 50 net year.''

Shareholders unanimously approved authorize the directors to make charitable donations. The company donated Rs. 150 million in 2012/13 and 160 mn. The previous year to fund a range of charitable and environment related activities.

Fernando complained at the AGM that CTS was facing problems at the hands of Tea Board officials in trying to export their specialty teas and some varieties of green tea.

This business, although small, was very profitable - 500% to 700%. He argued that the Tea Board should not be permitted to interfere with specialty teas which are imported for re-export. They are not sold here and earned valuable foreign exchange for the country.

In a conversation following the AGM, Fernando said that Oolong tea which has long been a specialty tea enjoying a growing consumer base. CTS imported this tea at Rs.200 a kilo and exported at Rs.3,000 earning about Rs.2,800 foreign exchange per kilo.

The Tea Board had rejected Oolong teas arguing that its cost should be much higher. It was too cheap at the Rs.200 price at which it had been procured.

"We could have over-invoiced at around Rs.500 a kilo and collected the Rs.300 difference abroad. But that's not the way we do business," Fernando said.

He said that the rejection of their Oolong teas had compelled them default on several contracts including those of major airlines and five-star hotels - business they had won in the face of stiff competition against giant multinationals.

Fernando said that delivery default will discredit the company and contracts may be cancelled resulting in heavy penalties. He believed that the Tea Board should be liable for the resulting losses.

Fernando recommends that specialty tea exports should be exempted from Tea Board control as there are no yardsticks on quality or price levels. Lack of knowledge and experience in specialty teas will destroy the commitment to aggressively market Ceylon tea which has to be well supported by specialty teas.

Fernando told his shareholders that the tea plantations were thirsting for attention and the industry which is heavily taxed was getting nothing back.

"Sadly, much of the tea trade do not care a damn about the industry but wanting to take everything from it and give nothing back," he said.

While the current financial year looks good for sales, profitability was another matter. ``The exchange rate is working against us,'' he said.

``Two months ago the Australian dollar was SLR 132. Not it is Rs.118 and this would impact the company's earnings in Australia which was one of its biggest markets.''

Fernando said that although their teas were more expensive than that of most of their competitors, they retained market share thanks to their quality. Dilmah was now being served by most regional airlines and the best hotels, he noted.

The company had recently opened a T-bar near the Dutch Hospital in Fort.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=85007

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