Tea acts as tonic to Sri Lanka stocks despite war gloom

COLOMBO (Reuters) - After a sharp downturn earlier this year as civil war flared, Sri Lanka’s stock market is recovering thanks to an unlikely tonic -- tea.

High international tea prices are boosting interest in Sri Lanka’s tea and rubber plantation sector shares, which have helped reverse the stock market’s 7 percent drop in January, when the government formally cancelled a truce with the separatist rebel Tamil Tigers.

With investors betting on strong quarterly results for the sector, Colombo’s leading All-Share index has clawed back its losses this year and analysts say tea plantation share gains could help drive the broader market back into positive territory.

The market dipped 0.26 percent on Tuesday, and is down around 0.5 percent so far in 2008. But for the year to date, the plantation sector sub-index is up more than 21 percent.

“Because of high expectations of strong earnings in plantation shares, small investors are highly attracted,” said Vajira Premawardhana, head of research at Lanka Orix Securities.

“Corporate earnings of some main blue chips are not up to the expected level. So now most investors want to recover their losses (in other shares) from plantation shares.”

Sri Lanka’s Tea Board said last month that despite a 2 percent drop in 2007 production, the country earned a record $1 billion from tea exports, helped by high global prices. Tea is a major foreign exchange earner along with remittances and garments.

The Tea Board said average tea prices at auction in Colombo rose more than 40 percent last year to $2.74 per kilogram. Rubber prices also rose 15-35 percent, depending on the type of rubber exported, though exports are much smaller than tea.

Sri Lanka was the world’s No.3 tea producer after China and India in 2006, but the leading exporter, according to Tea Board data.

Three plantation companies which have announced quarterly earnings this month have reported strong profits, fuelling interest in other plantation shares. The sector has accounted for nearly half of all bourse turnover for a week.

Kotagala Plantation posted a 57 percent jump in nine-month net profit, Talawakelle Tea Estates said its 2007 net profit grew 24 percent, and Kelani Valley Plantation increased its 2007 net profit by 62 percent.

Fifteen more plantation sector shares are set to release their earnings by the end of the month.

“High profits are mainly because of high global tea and rubber prices,” said Dharshi Ganeshan, a research analyst at Barleets Mallory Stockbrokers.

Plantation shares are minnows in terms of market capitalisation but, unaffected by a new phase in a 25-year civil war, they have shone compared to blue chip stocks such as top mobile operator Dialog Telekom.

But with small investors prone to sell stocks after sharp gains to lock in profits, can tea’s soothing effect last?

“Soon after all the plantation firms announce their earnings, investors would not find them attractive and might shift their investments to other speculative shares,” said Premawardhana.