Bogawantalawa Tea Estates in diversification drive

„Plans to diversify into specialty tea varieties, spices, timber plantations and oil palm cultivations

Bogawantalawa Tea Estates PLC, one of the leading high grown tea plantation companies, is diversifying into specialty tea varieties, spices, timber plantations and oil palm cultivations, said ICRA Lanka in a rating report on the company.

The producer of high quality Ceylon Tea to the world in flavoured, herbal and bulk forms may be trying to put its stamp on other sectors using its strong track record and reputation in the industry.

“Historically, the company’s high-grown tea segment has accounted for 95 percent of the total revenue and ICRA Lanka has taken note of the company’s recent/ongoing diversification initiatives into new segments such as specialty tea varieties, spices, timber plantations, and oil palm cultivations,” the rating agency said.

ICRA Lanka reaffirmed Bogawantalawa Tea Estates PLC and its Rs.850 million senior debenture with a BBB+ rating with a Negative outlook.

The rating agency said the reaffirmed ratings primarily factored in the favourable industry outlook in the post COVID-19 period as prices for Ceylon Tea rose in the auctions on the back of supply shortage from rest of the leading producers due to labour deployment issues as a result of the pandemic and adverse weather.

Despite the recent spike in tea prices, the cyclical nature of the plantation industry such as exposure to adverse weather conditions, regulatory risks such as change in interest rates and changes in agricultural practices and policies, and production cost increases due to periodical wage hikes could lead to volatile cash flows for the company.

Therefore, the diversification initiatives could be aimed at minimising such risks to the company’s financial performance by reducing the reliance on tea.

During the nine months ended December 31, 2019, the company had revenues of Rs.2.23 billion compared to Rs.2.26 billion in the comparable period a year ago.

The company however reported a net loss of Rs.292.2 million.

The identified sectors for diversification, speciality teas and spices have immense export market potential while oil palm also remains lucrative, albeit regulatory risks on cultivation.

“The company’s capital structure remains weak due to declining profitability margins and increasing debt levels, with gearing of 1.40x in FY2019 and 2.50x in 9MFY2020,” ICRA Lanka noted.