Better prospects could turn tea stocks hot

Global prices may maintain upward trend

M.R. Subramani

Chennai, April 6 One of the industries that is looking forward to a better performance this year is the tea sector. There are quite a few factors that are seen helping the industry, which has been in trouble for the last couple of years.

In the view of the Food and Agricultural Organisation (FAO), global tea prices are expected to maintain their upward trend this year. This will be on the heels of a tighter supply, particularly due to lower production in Kenya.

FAO estimates

Kenya is currently seen as the primary force behind better prices. Kenya is facing two problems. One, on the political front, where the unrest in that country has affected tea estates and violence in some parts has even led to burning of the gardens. The second factor is drought in the growing areas that have already affected production. The FAO estimates that production in the African country could be lower by as much as 10 per cent.

What adds strength to the tea sector at home is the domestic scenario. Though exports last year were low, the situation has been salvaged to some extent by a lower production. Growth in consumption has also been helping matters, as the carryover stocks from 2007 are projected at a minimum.

Last year, exports were estimated to have declined to less than 160 million kg (mkg) from 218.73 mkg during the previous year. But production is also estimated to have decreased to 944.7 mkg from 955.9 mkg in 2006. The difference between exports and production is estimated to be domestic retention.

With growth in domestic consumption seen at 3-4 per cent, the carryover stocks are projected to be negligible.

Payment problems

With exports seen increasing this year, what with the Centre and industry going all out to woo Egypt and Islamic nations, there is all the more reason for tea prices to rise. If India can solve the payment problems in Iraq, then the scope for the industry can really improve.

It is possible that tea companies during the January-March quarter could report better results and probably, even better during April-June since they could have bagged more orders during the Kenyan strife. One report has projected the fall in the production during the first quarter at 35 per cent.

Since the beginning of the year, prices at the auctions have ruled higher than last year and a firm trend is being witnessed.

Now, let's look at what has been happening to the tea stocks this year. A glance shows that for investors, who have bought these stocks, there has been nothing to cheer. All tea stocks, without any prejudice, have declined since the beginning of this year — in line with the general meltdown of the equity markets.

For example, Tata Tea stocks, which touched Rs 1,000 on January 3, has slid to Rs 832.85 on April 4. Similarly, Warren tea shares are ruling at Rs 67.75 down from Rs 72 at the beginning of the year and Dhunseri Tea at Rs 98.50, sharply lower from Rs 165 at the start of the year. The stocks have not reacted even to the news of some of the companies announcing an increase in the prices of their products.

In fact, all tea stocks are way down from their 52-week high, offering some scope for investors. However, the one point of worry could be the Centre's policies, especially the way it has panicked in dealing with soaring inflation. But going by FAO outlook, there is something for the industry to look forward to and, in turn, for investors who hold the tea stocks