By Azhar Razak
As unpredictable weather patterns and labor issues haunt plantation industry, Tea sector falls behind on global stage whilst outlook for rubber remains bleak
Sri Lanka’s tea plantation industry, which had expectations for industry profitability during the current financial year, given that it was spared of wage negotiations, has been affected by persistent rainfall during the latest quarter resulting in a drop in output and profitability. According to a recent industry update by a top brokerage firm, while the rubber industry continues its decline due to bleak global market conditions and unfavorable weather locally, palm oil, on the other hand, has continued to yield positive results for Regional Plantation Companies (RPCs) with exposure to it.
“Therefore, diversity emerges as the key to success for plantation companies. It is imperative that plantations counters considered for investment be diversified both in terms of crop mix and also in terms of elevation when it comes to exposure to Tea,” Bartleet Religare Securities (BRS) advocated to investors in a research report titled ‘Sri Lankan Plantations Sector Update’ released last week.
Given the volatile nature of the industry, the BRS report stated that the sector, which although currently trades at a Price to Earnings Ratio (PER) of 9.7x and a Price to Book Value (PBV) of 0.8x deserved to trade at a discount.
During the period January-September 2014, Sri Lanka’s cumulative tea production increased by 7.2mn kg to 255.7mn kg (+2.92%). High grown and Low grown tea recorded YoY growths of 9.1% to 59.8mn kg and 4.4% to 157.9mn kg respectively. Mid grown tea recorded a drop of 10.4% YoY to 35.5mn kg.
“At USD 3.60 per kg Sri Lankan Tea fetches almost twice that of its competitors in India and Kenya. However, this phenomenon is negated by the fact that Sri Lanka has the highest unit cost of production among all major producers. Daily wages of a Sri Lankan plucker stands at USD 5.30, considerably higher than that of Kenya (USD 2.60) and India (USD 2.10). Sri Lanka’s unit labor cost alone is higher than the total unit production cost of most of its competitors,” the BRS
report outlined.
It noted that Sri Lanka’s daily output per plucker is 18 kg/day and significantly lower than the Kenyan output of 48 kg/day and the Indian output of 27 kg/day.
“Productivity among male pluckers in Sri Lanka is especially low compared to global peers and also compares to only around 60% - 70% of female pluckers. This is in contrast to the situation in Kenya where male pluckers’ daily output is significantly higher than female pluckers. In addition to high wages and lower labor productivity, RPCs are also required to provide free accommodation, healthcare facilities and other amenities to workers and their families. Local RPCs incur significant costs to provide these facilities as opposed to their global counterparts,” the report further noted.
Meanwhile, the report stated the local rubber industry has continued to decline in line with the current global stagnation of the global market for the commodity. This is due to the weak demand conditions in China and the E.U coupled with excess supply.
“Adverse weather conditions have hampered tapping during most of the year, bringing down output as many smallholders have resorted to discontinue tapping further. The slight price recovery witnessed recently has been a result of this reduction in supply,” the report said.
On the other hand, palm oil, due to its essentially low labor requirement, has successfully cushioned the impact of wage increases (which occur bi-annually) on the companies that have exposure to it. Additionally, Palm oil has also resisted volatility owing to adverse weather conditions which have plagued Tea and Rubber.
“Palm oil has accounted for over 80% of Watawala Plantations and Namunukula Plantation’s profits in FY 14. The attractiveness of the crop has lead Kotagala Plantations and Horana Plantations to diversify their crop mix to include Palm oil. Local producers also receive protection in the form of heavy import taxes.”
www.nation.lk
As unpredictable weather patterns and labor issues haunt plantation industry, Tea sector falls behind on global stage whilst outlook for rubber remains bleak
Sri Lanka’s tea plantation industry, which had expectations for industry profitability during the current financial year, given that it was spared of wage negotiations, has been affected by persistent rainfall during the latest quarter resulting in a drop in output and profitability. According to a recent industry update by a top brokerage firm, while the rubber industry continues its decline due to bleak global market conditions and unfavorable weather locally, palm oil, on the other hand, has continued to yield positive results for Regional Plantation Companies (RPCs) with exposure to it.
“Therefore, diversity emerges as the key to success for plantation companies. It is imperative that plantations counters considered for investment be diversified both in terms of crop mix and also in terms of elevation when it comes to exposure to Tea,” Bartleet Religare Securities (BRS) advocated to investors in a research report titled ‘Sri Lankan Plantations Sector Update’ released last week.
Given the volatile nature of the industry, the BRS report stated that the sector, which although currently trades at a Price to Earnings Ratio (PER) of 9.7x and a Price to Book Value (PBV) of 0.8x deserved to trade at a discount.
During the period January-September 2014, Sri Lanka’s cumulative tea production increased by 7.2mn kg to 255.7mn kg (+2.92%). High grown and Low grown tea recorded YoY growths of 9.1% to 59.8mn kg and 4.4% to 157.9mn kg respectively. Mid grown tea recorded a drop of 10.4% YoY to 35.5mn kg.
“At USD 3.60 per kg Sri Lankan Tea fetches almost twice that of its competitors in India and Kenya. However, this phenomenon is negated by the fact that Sri Lanka has the highest unit cost of production among all major producers. Daily wages of a Sri Lankan plucker stands at USD 5.30, considerably higher than that of Kenya (USD 2.60) and India (USD 2.10). Sri Lanka’s unit labor cost alone is higher than the total unit production cost of most of its competitors,” the BRS
report outlined.
It noted that Sri Lanka’s daily output per plucker is 18 kg/day and significantly lower than the Kenyan output of 48 kg/day and the Indian output of 27 kg/day.
“Productivity among male pluckers in Sri Lanka is especially low compared to global peers and also compares to only around 60% - 70% of female pluckers. This is in contrast to the situation in Kenya where male pluckers’ daily output is significantly higher than female pluckers. In addition to high wages and lower labor productivity, RPCs are also required to provide free accommodation, healthcare facilities and other amenities to workers and their families. Local RPCs incur significant costs to provide these facilities as opposed to their global counterparts,” the report further noted.
Meanwhile, the report stated the local rubber industry has continued to decline in line with the current global stagnation of the global market for the commodity. This is due to the weak demand conditions in China and the E.U coupled with excess supply.
“Adverse weather conditions have hampered tapping during most of the year, bringing down output as many smallholders have resorted to discontinue tapping further. The slight price recovery witnessed recently has been a result of this reduction in supply,” the report said.
On the other hand, palm oil, due to its essentially low labor requirement, has successfully cushioned the impact of wage increases (which occur bi-annually) on the companies that have exposure to it. Additionally, Palm oil has also resisted volatility owing to adverse weather conditions which have plagued Tea and Rubber.
“Palm oil has accounted for over 80% of Watawala Plantations and Namunukula Plantation’s profits in FY 14. The attractiveness of the crop has lead Kotagala Plantations and Horana Plantations to diversify their crop mix to include Palm oil. Local producers also receive protection in the form of heavy import taxes.”
www.nation.lk
