Sri Lanka Newspapers Wednesday 22/02/2012

Tea industry in trouble
By Steve A. Morrell

Although seasonal quality from Western origins were attributable features of Tea sales last week, prices obtained did not reflect quality Teas on offer. Some Westerns attracted good prices but this trend was not sustained as the sale progressed. Brokers reports said the overall average was around Rs. 348. ($ 3.48 approximately), Distinctly recording minus variance of about Rs.45. per kilo.

Dip in prices were attributed to the Middle East Crisis and more to the point was that buyers were now purchasing their Tea from cheaper markets.

Comparatively India was selling at US $ 1.43, Kenya 1.41, Malawi 0.99 (dollar cents), Viet Nam 0.85, Indonesia, 0.58. The question was ‘Who would pay for high priced Teas?’

What of the ‘Ceylon Tea’, Brand, does not that count? They said it did, but not that it mattered when they could purchase what they wanted from cheaper origins.

Brokers said plantations were now faced with additional costs of fuel, price escalation for electricity, and transport. These cost factors coupled with increased wages and depressed crops because of dry weather , further aggravated an already hopeless situation.

Cost of production on Plantations was now approximately Rs. 420. Per kilo. Immediate pointers were that losses were increasing daily, and insolvency was gravely affecting the Plantation sector.

Additionally some estates are facing worker go-slows. Particularly Estates in the Bogowantalawa sub-district. Workers are refusing to increase their out-put further aggravating a bad situation.

Estates reported that pluckers bring in as little as one kilo a day.

Gulf countries including Syria, Iran, the Arab Emirates, continued to be our main buyers. Tea was exported, but they did not settle their bills promptly. This resulted in vicious chain reaction that escalating debt placed Colombo buying sources in tight financial stress.

Expectations were high that after the Presidents visit to Pakistan they would increase their Tea purchases ex Sri Lanka but that was not to be. Pakistan imports of Ceylon Tea was barely sufficient to make even a dent at the Colombo auctions.

Kenya continued to be Pakistan’s main exporter supplying 31.53 % in January this year. India, Viet Nam, Ruwanda, Indonesia, Uganda, Burundi, were all supply sources, exporting more Tea to Pakistan, than Sri Lanka. Sri Lanka exported just 1.30 % to that destination.

Two weeks ago, we concluded an exemplary Tea conference. One that brought to bear a lexicon of outstanding personnel associated with the Tea industry world wide. Chairman Asia Siyaka Brokers PLC Anil Cooke, said ‘ If you’re looking for cause and effect answer you will not get it. What you will have is that Sri Lanka emerged an important driving cog in the global sphere for Tea’.

However irrespective of the sustained power of organizational skills and successful conclusion of the Tea convention, barely a week or two later, reports from Brokering sources, Producers, and Buyers, were not euphoric in content. They collectively said there would be rough times ahead.

We were unable to glean authentic information from the Planters’ Association of Ceylon (PA) on repercussions of the fuel hike which further relegated them insurmountable costs of production.

This week we would have sufficient information on their options to bridge the growing loss situation.

Last week the loss situation exacerbated because of the fuel hike. Many Plantation Companies were loss making entities.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=45766

*Price gains on thin trades help indices

The Colombo bourse yesterday sustained its upward momentum of the previous week with both indices up and turnover topping a billion rupees with several illiquid stocks posting sharp gains on thin volumes, brokers said.

Heavy trading in Lion Brewery, where nearly 2.2 million shares were traded between Rs.181 and Rs.202 gaining Rs.14.10 to close at Rs.200 generating Rs.438.90 million turnover, dominated the day’s trading.

Brokers said that five crossings at a price of Rs.200 per share accounted for most of the trades. There were unconfirmed rumours of the company expanding through an acquisition but there was no firm word on such plans.

JKH which gained Rs.3.50 to close at Rs.166.50 was the day’s second largest turnover generator trading between Rs.163 and Rs.166.50 generating business worth Rs.59.1 million. Brokers said that there were no crossings on this counter.

Softlogic Capital which announced in a stock exchange filing that it was buying Arrenga Capital, a stockbroking firm, for Rs. 200 million was up Rs. 3.40 to close at Rs. 19.90 on nearly 0.3 million shares.

Retail activity was seen on PC House which closed 20 cents up at Rs.11.40 with nearly 4.7 million shares traded between Rs.10.90 and Rs.11.70 while Royal Ceramics gained Rs.2 to close at Rs.122 on over 0.4 million shares done between Rs.116 and Rs.122.

Asiri Medical Services saw nearly 6.3 million shares traded between Rs.7.30 and Rs.8 closing 40 cents up at Rs.7.90 while Tokyo Cement closed flat at Rs.40 on nearly a million shares done at that price. Three large parcels on the floor accounted for most of the trades.

Commercial Bank closed flat at Rs.100 on over 0.3 million shares done between Rs.100 and Rs.102.

Other counters that demonstrated volume and price gains included LB Finance up Rs.5.70 to Rs.140 on over 0.2 million shares, ERI up 70 cents to close at Rs.19.30 on nearly 1.4 million shares, Acme up 40 cents to Rs.27 on 0.9 million shares, Swarnamahal up 70 cents to Rs.177 on over 0.1 million shares and Vallibel One up Rs.1.10 to Rs.18.60 on over 0.9 million shares.

Dialog announced a dividend of 25 cents per share involving a Rs. 2 billion payout, payable after shareholder approval at the company’s AGM for which the dates would be notified in due course.

Overseas Realty also announced a first and final dividend of Rs.0.30 per share for 2011 following shareholder approval at an AGM on May 24. The counter will trade XD from May 25 and payment will be on June 5.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=45797

The rupee fell slightly yesterday (Feb. 21) on strong import demand as the Central Bank continued to stay way from the foreign exchange market.

The rupee closed at 118.50/60 against the greenback on Tuesday, the working day for banks this week with Monday being a public and bank holiday. Last Friday, the rupee closed at Rs. 118.25/45 against the dollar.

"We saw some import demand during the day which saw the exchange rate fall slightly. The Central Bank did not intervene in the market," currency dealers told The Island Financial Review.

Since the Central Bank stopped intervening in the market, the rupee fell to a high of Rs. 120.10/30 against the dollar but has since made some ground consolidating around the Rs. 118 range. Dealers said the Central Bank was using moral suasion to keep the exchange rate stable around this range, calling heads of banks to convey its desired range.

The Central Bank has not pumped in rupee liquidity to the market either for the past two trading sessions. Since August 2011, the bank had printed around Rs. 300 billion to infuse rupee liquidity into the system and keep interest rates from rising. Rupee liquidity had come under pressure because the Central Bank had sold more than US$ 2.5 billion since July 2011 to keep the exchange rate stable amidst severe import demand.

Interbank interest rates fell slightly yesterday, but currency dealers said liquidity was still tight and would continue to be so for the rest of the year, unless foreign currency inflows improved.

"We must narrow the trade deficit so that the country can borrow from international financial markets. This is crucial because a growing economy has to borrow," a market analyst said.

The recent policy reversals of floating the rupee, raising fuel and electricity tariffs and hiking interest rates and capping a 18 percent ceiling on credit growth would help to stabilise the economy. "We cannot say how long it would take for things to improve, but it eventually would because foreign currency inflows would improve," an optimistic analyst said.

Opposition lawmaker and economic spokesman for the deleted Dr. Harsha De Silva said the policy reversals would help the economy, but called for the end to ego-centric public investments such as the loss making budget airline Mihin Lanka and the telecommunications tower, the Lotus Tower, currently being built (see yesterday’s edition of The Island Financial Review).
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=45799

Contrary to exaggerated claims the EPF investments in to the stock market last week had amounted to only less than 10% of market activity and unlike some past contentious buys, this time around it had focused on blue chips.

The total turnover of the Colombo bourse last week was Rs. 8.6 billion and local purchases were Rs. 5.8 billion, whilst EPF buying was around Rs. 550 million as per Daily FT estimates, accounting for 6% and 9% respectively of the totals.

Bulk (slightly over 80%) of EPF buying were on Monday and Tuesday when the market literally crashed losing Rs. 112 billion in value. It had been relatively inactive in the last three days of the market.

Analysts said that the turnaround in the Colombo Bourse late last week was powered by other investors including a host of institutional investors and retailers whilst foreigners remained bullish too being net buyers.
A welcome feature of EPF buying was its exclusive focus on blue chips and fundamentally sound second tier stocks. According to those who closely monitor the Bourse, EPF’s basket of stocks last week included JKH, Bukhit, Carson, Dialog, CT Holdings, Cargills, Commercial Bank, Asian Hotels, Keells Hotels, CIC, DIMO, Dipped Products, Haycarb, Dockyard, LOLC, Central Finance, Royal Ceramics, and Lanka Tiles.

In the past EPF’s excessive buying in to banking stocks in particular as well as some speculative counters such as Galadari had been questioned by both within and outside the market. Its stock selection last week appears to be sound perhaps after past criticism.

The Bourse’s value on Thursday shot up by whopping Rs. 96 billion in its biggest ever gain reducing the gap of the massive Rs. 112 billion lost on Monday and Tuesday on account of margin calls, negative sentiments over volatile exchange rate, rising interest rate scenario and fuel price hike impact on the economy. Given the attractive valuations of most stocks, the market saw a flood of institutional investors including corporates, unit trusts, insurance funds etc. The momentum was spiced up by a host of high net worth individuals with retailers chipping in.

Analysts said that whilst EPF buying in may have prevented a worse collapse Monday and Tuesday, it failed to push indices up hence allegation on the latter by sceptics wasn’t correct. Apart from EPF, the other state fund active in the market last week was Employees Trust Fund (ETF) which however was seen on the selling side as well booking profits or realigning its portfolio.

“What drove the indices up from mid-week was return of bargain hunters on attractive valuation,” said analysts who however admitted that presence of EPF did strengthen investor sentiments. “The rebound was largely fuelled by aggressive corporate and high net worth investor buying,” they added.

Assertion that valuations are attractive is manifested by the fact that during the past one year, CSE’s market capitalisation has dipped by over Rs. 700 million, of which around Rs. 200 billion had been in the month of February. The Price Earnings ratio is around 13 times as against 30 times in February last year. There are several fundamentally sound stocks whose PER is at single digit levels whilst in terms of forward PER the market is attractive as well.

This view was endorsed by Asia Wealth Management in its last week report. Noting that “time is ripe for large investors,” Asia said the Colombo bourse concluded an astounding week with high activity levels and influential legislative changes together with the reactivation of both local and foreign investors. Attending to number of months prior to this week, turnover levels were barely above LKR1 billion levels whilst at the same time stocks with less attractive valuations were dominating investor preferences. However this trend has now reverted with investors accumulating fundamental stocks with attractive valuations. Commercial Bank of Ceylon was one such counter which attracted heavy investor concern.

“The current exchange rate is very much attractive to potential foreign investors to enter the market and we observed foreigners being positively responding to this stimulus, and a continuation of this would lead fresh capital flowing to the market. But we strongly believe that stability in the economic policies is vital to retain investor’s confidence,” Asia added.

“Recent changes in selected macroeconomic fundamentals would impact the overall market with varying degrees yet the outlook is positive in fundamentally established stocks. On a separate note, we believe that amount of funds getting attracted to the market via retail investors would curtail to a certain extent as a matter of increased cost of living. So we strongly believe that the time is ripe for large investors to enter the market at the prevailing attractive valuations. Where, the Sri Lankan stocks currently trading on a 12.6 times trailing PER,” Asia Wealth said.

Acuity Stockbrokers said “with corporate earnings thus far being robust (approximately 50% of the corporates reporting earnings recorded Y-o-Y growth) we expect retail sentiment too to be positive in the week ahead.”

http://www.ft.lk/2012/02/21/other-investors-turn-bullish/