A Cheering Cup

After many years in the doldrums, the tea industry appears poised to regain some of its former glory. A technical look at some worthwhile scrips.

The whole of the Eastern Himalayas and substantial portions of the North East owe their basic development profile to the British habit of drinking a cuppa. For the last 125 years, tea has been the basic cash crop and over the years the spinoffs from the tea industry has sustained the economy of an entire region.

There have been tea companies incorporated since the 1880s and they have always been considered extremely worthwhile longterm investments. Generally closely held entities they have been noted to pay extremely high and reliable dividends. Some such as Goodricke have uninterrupted dividend records for over 50 years. Generally they have high dividend payments since they tend to be cash rich and it is not easy to plough earnings back into an agro business.

 

But tea appeared to have passed its heyday in the late 1980s. For a combination of reasons the agro industry started to go into the doldrums. The top end of the market - the Darjeeling tea which fetches record prices abroad was affected first by aggressive competition from Sinhalese and Kenyan brands which also advertised themselves as Darjeelings. Then Darjeeling itself was rocked by the GNLF agitation that put many gardens out of business.

The lower end of the export market was demolished by the end of the USSR. Most of the Indian companies depended on exports to that region and when the Soviet state collapsed, their business dwindled. In addition, several Indian companies were affected by the economic recession in Iraq following the Gulf war as well as by the increasing international isolation of Iran. Some have huge outstanding payments in that region. Meanwhile, Indian exporters in this segment also faced competition from exporters from Sri Lanka, Malaysia and Kenya. Tea gardens in Assam also had operational problems because of the ULFA and Bodoland militancy. As a result of these problems, the tea industry has lost much of its lustre and hasnt been recommended as a reasonable investment in the 1990s.

Technically most tea scrips have suffered losses that far exceeded the market pullback in the last 3 years. While the Sensex has pulled back 17 per cent since its peak in September 1994, tea scrips have pulled back an average of 75 per cent since their three year highs. They have also lagged the market. While the Sensex appeared to hit bottom in December 1996, some tea scrips appear to have bottomed only in May 1997. Others are still in the doldrums.

However, the industry now shows signs of pulling out of the doldrums and selective investment seems to have started in some scrips. There have been appreciable increases of trading volumes along with price increases in several tea scrips in the last month. The downside risk is low though it cannot be discounted totally because the threat of militancy remains alive in Assam at least. But auction prices are better this year than in the past, and Indian companies seem to have finally coped with adjusting to the threats of increased international competition and the demise of the Soviet market. Many have now successfully transited to supplying successor states like Russia and the CIS. Others have tried to expand the domestic market.

One generic problem with buying tea scrips is their lack of float. Since most companies are still closely held and dont have very large equities anyway, it isnt very easy to accumulate large holdings. However, once acquired, the lack of float proves an advantage for the share holder. Rapid losses are not likely and, as most tea companies pay high dividends the shareholder is insulated. But this makes only the larger companies investment worthy. A look at some tea scrips.

Assam Company

Among the larger tea companies, in the sense that it has paid up equity of over Rs 20 crore - . It is a Fera company with over 70 per cent of holdings being with Assam Investments (UK).

The stock traded at a high of Rs 325 (ex rights) in September 1994. Since then it has been a continual downslide for the scrips priceline with a five-year bottom coming in at the price of Rs 21 in November 1996. Since then the scrip recovered marginally and then moved sideways for several months before hitting a second bottom at Rs 23 in early May. This creates a powerfully bullish double bottom pattern indicating a major support and accumulation point. Another bullish signal is that trading volumes have improved in the phase when the scrip moved sideways and expanded noticeably as it has risen from its second bottom. It has already pulled back to about the Rs 40 mark.

The upside targets could be very strong if the scrip passes the resistance at Rs 46 which it has not penetrated so far. In that case the Assam Company scrip could see a rise to the Rs 70 in rapid fashion. The downside risk appear minimal while the upside prospects appear good. Despite the initial explosive rise, inve-stors could still reap a lot of gains in the medium to long term.

Tata Tea

By far the largest of Indian tea companies Tata Tea has the most gardens, the largest equity, the biggest shareholder base and consistently trades the largest volumes by a wide margin among tea scrips. Floating stock is not a problem as it is also a forward scrip.

Despite being on a continuous downtrend since it peaked at an adjusted price of Rs 615, Tata Tea had offered a bonus in September 1994. The scrip fell continuous through the last three years, hitting bottom only in December 1996 at the price of Rs 187. Here it performed a bullish double bottom signal in successive weeks and began an explosive climb.

Since then the stock has risen back to the Rs 320 mark on increased volumes. At this level it has met a resistance and appears to be consolidating a long term saucer pattern. If it completes this bullish pattern with a further topside breakout the scrip will possess an upside target of Rs 450 plus. Prospects appear excellent of that occurring in the next six months. On the downside there is certain risk. The next reliable support is at Rs 271 and then again there is support only at Rs 220.

Goodricke Group

Another sterling company with Duncan Lawrie holding the lions share of the Rs 22 crore equity. Goodricke had a bad time in the mid 1990s with a huge payment being blocked in Iraq. The company went into the red in 1995-96 as a result after a half century of uninterrupted profits.

The scrip dropped from a high of Rs 300 in February 1994 to a low of Rs 36 in November 1996. Since then, it has a dramatic pullback on spectacularly high volumes to reach its current price of Rs 81 where it has almost completed a classically bullish inverted head and shoulders pattern. Much of the recent buying is attributed to FIIs who have apparently targetted the scrip.

When an inverted H& S completes with the second shoulder being formed on high volume and the critical neckline is also broken on high volume, the scrip usually zooms very fast. In the case of Goodricke the scrip is poised just around the neckline resistance.

It is still hitting very high volumes. If the neckline is broken there will be a minimum upside target of Rs 125 to be achieved in the near term. The downside risk here appears minimal for the stock has solid support at around Rs 75. The long term prospects for an investor in the company also appears good.

Dhunseri Tea

A typically small equity for a tea company. Dhunseri Tea has an equity of only Rs 5 crore. It also went through the typical profit contraction in 1995-96 and 1996-97. Things are believed to be better now. The scrip typically trades between a couple of hundred to 3,000 shares in a week depending on how bullish the market is feeling. In the last couple of months volumes have been consistently high with the scrip regularly logging around 2200 shares weekly.

In March 1994, the scrip was trading at an adjusted high of Rs 145 before it went ex-rights. Since then, a continual downslide ended only at a low of Rs 19 in December 1996. Subsequently the scrip has pulled back to the current price of Rs 37 after hitting a second recent low at Rs 25 in early May. On each bottom, it has risen with a sharp volume expansion, thus performing a bullish rising bottom pattern on increasing volume. It has also broken the falling trendline created by joining a succession lower peaks performed since March 1994.

All these are bullish signals and indications that the scrip may have bottomed and reversed its longterm trend. Investors right now would be getting very close to the start of a long term bull-run.