Drinking A Rich Brew

The tea industry promises to move out of a long slump. A report and technical analysis on the tea majors who stand to benefit

When recession rears its ugly head, investing can paradoxically become an easier game. At least the preliminary stage of identification of likely stock picks tends to be easier. Just focus on stocks that are bucking the generally bearish trend. When the risers are few and far-between in a bear hug, they stand out more than during bull runs when everything trades above intrinsic worth.

Of the three categories of investment-worthy scrips growth, value and turnaround the latter carries the most risk and the highest rewards. Particularly when the turnaround stock is picked up early, windfall gains arise after big operators step on the gas in the latter stages.

 

Returns are even better when the turnaround is occurring in the midst of a general recession and it encompasses an entire industry rather than just one or two random companies. Thats the story of Indian tea at the moment and it has the potential to be the biggest performer this year since the plantation industry is coming out of a long slump.

Indias tea export markets collapsed with the implosion of the rupee trade with the former USSR. The Soviet Union used to swallow half of Indias total tea exports and in the 1990s. Indias marketshare in the world tea trade declined sharply from 23 per cent in 1987 to 14 per cent in 1996. In addition, several Indian companies were hit by the Iran-Iraq conflict and the Gulf War since they ended up with huge outstanding payments in those regions.

By the 1990s, Sri Lanka, Indonesia and Kenya had also muscled into the premium tea segment aggressively exporting upland teas which they called Ceylon Darjeelings etc. Meanwhile both production and marketing stagnated in India and so did auction prices.

Last year showed a promise of improvement and this year promises to be even better. By October 1997, a record crop was expected with full year production supposed to log in at around 805 million kg which is 3 per cent more than 1996-97 production levels of 780 million kg. Coincidentally, this abundance came in a year when Kenyan and Indonesian crops failed and world production dropped by 11 million kg.

The beneficial effect on both prices and export volumes was immediate. Indian marketshare in world exports jumped to 19 per cent, auction prices went stratospheric, gaining from a 1996 average of Rs 43 to over Rs 57 by December and going to Rs 134 from around Rs 102 in the prestigious packaged tea segment. In the first half of 1997-98, exports jumped 27 per cent in volumes at 140 million kg (110 million kg in September 1996) and 36 per cent in value terms at Rs 1000 crore (Rs 758 crore). Full year export estimates are around 193 million kg (153 million kg).

Company bottomlines also showed healthy growth. Most of the majors gained between 30-50 per cent in first-half PAT. And technically, that effect has already started showing up on the share pricelines of most tea companies, pulling them out of long bear markets. Taking a look at an index of the eight largest tea companies after tying it to the base value of 100 in January 1990, we find that the index had dropped to an alltime low of 63 in December 1996.

The Tea Majors index only started moving up strongly in the last six months and its gained 87 per cent since then. That is even as the index is still in the process of completing a bottoming formation and 120 per cent below its all-time high levels. This bottom formation has come along with extraordinary increases in volumes that confirm the trend reversal to bullish.

Its the kind of pattern that looks good to double from current levels. And it has come in the teeth of a market where the main index has lost 12 per cent during the same period.

This industry appears to be a cyclical with fairly long cycles. The last bear cycle for the tea industry lasted from January 1994 to December 1996. The bull market before that lasted from January 1990-January 1994.

This contrasts with the Sensex which went through several more cycles in the same period. Thus, Jan 1990-April 1992 was up, April 1992-April 1993 down, May 1993-September 1994 up, October 1994-December 1996 down, January 1997-August 1997 up, and down since that time. Almost thrice as many moves!

Individual tea scrips certainly lagged and led the industry group slightly but its doubtful that attempts to decode the tea cycle more exactly would be of great practical value. However, the fact that this tea industry cycle is definitely out of phase and more lengthy than the major market trend is useful for the portfolio manager who wants to hedge the Sensex.

We have taken a technical look at the pricelines of eight major tea companies which all look to be excellent investment bets at the current moment. The chances of doubling your stake quickly exists. Also, traditionally tea companies pay high dividends when times are good since it is impossible for plantations to utilise retained earnings to fuel growth in the same way as a manufacturing concern can.

The major problem for a wannabe tea investor can be accquiring the shares. Tea companies tend to have smallish equities and be fairly tightly held. While such worries about equity availability are still valid, the targeted scrips have large enough floats for reasonable comfort. Once a stake in a tightly held company is bought, it tends to be a good investment. When demand increases, scarcity value drives share pricelines up further.

Another small clarification. For the purpose of this exercise shorterm is roughly defined as a period lasting less than two months. Intermediate term is a time period between a month and six months and longterm is anything over six months. To judge the technical position of these scrips, they have been charted over several timescales ranging from intra-day to daily, weekly and monthly, although only the weekly linegraph has been depicted. A look at eight majors

AFT Industries

Formerly Assam Frontier Tea and a sterling company. The least liquid of the lot with a small equity (Rs 6 crore) and low daily trading volumes of 300-500 shares. The scrip plummeted of a (bonus-adjusted) high of Rs 410 in August 1994 to a low of Rs 92 in April 1997. Since then it has risen to a high around Rs 225 before coming back down to the levels of Rs 185. The scrip is currently consolidating at Rs 185 where it has solid support.

It has some resistance around the Rs 205 and Rs 225 levels and then appears to have a clear upwards run to the Rs 250 level where it will encounter more serious resistance. The longterm trend is clearly uppish and there is a target implication of about Rs 260-270 looking at weekly chart patterns where the scrip has formed a rounded bottom. There is another zone of support below the current level of Rs 171.

Assam Company

The scrip dropped from an ex-rights high of Rs 320 in September 1994. It hit an eight year low of Rs 23 in November 1996 and then performed a double bottom finding support at the same price again in May 1997. Since then the price has moved upto a recent high of Rs 70 before retracing to the current level of Rs 50.

Trading volumes have spurted since May 1997 and this confirmed the rise in the priceline as genuinely bullish. The intermediate trend has been negative since the high in August and the scrip is slowly dropping back into a zone of strong support around Rs 45-50. In terms of the long term trend the scrip is slowly rising off a double bottom formation which has a neckline at Rs 60 and a bottom at Rs 25. once the scrip breaks out past resistance at the Rs 60 mark, it will have a target of at least Rs 95. The current bearish intermediate and short term trend affords a good opportunity to accumulate the scrip. With an equity of Rs 22.4 crore and 20,000 plus in the way of weekly volumes there is no liquidity problem here.

Dhunseri Tea

The scrip has a somewhat similar trading pattern to Assam Company. It hit a high ex-rights at Rs 140 and then moved down to Rs 20 in December 1996. Since then the scrip has moved upto a high of Rs 52 in August 1997 and then moved down to currently trade at Rs 37. Over the last two years it has created a pattern of rising bottoms which is a bullish signal. The trading range is narrowing in the scrip and a longterm chart pattern of a rising triangle is visible. This is either bullish with an upside breakout towards the last third of the triangle or it is a continuation pattern where the longterm trend will continue.

The longterm trend in the scrip is definitely now bullish with a clear bottom formation followed by various confirmatory signals. Volumes have expanded, longterm Moving Average systems are giving buy signals etc. The intermediate trend is negative now with the scrip dropping into a zone of support between Rs 32-37. On Daily charts a bullish saucer formation has almost been completed and there is resistance between Rs 40-43. Once that resistance is breached the target implication is a rapid move to above Rs 50. The long term chart targets would be in the Rs 80 zone. The scrip trades around 1000 shares daily.

Goodricke

The Goodricke scrip has dropped from a February 1994 high of Rs 300 to an eight year low of Rs 36 in November-December 1996. From there the priceline recovered to test severe resistance at Rs 120 and is currently trading just below Rs 100. On longterm charts confirmatory signals of bullishness are showing as the volumes have spiked up along with a buy signal from moving average systems.

The pattern may just be moving into the second shoulder of an inverted head and shoulder formation in a nine month timeframe. The neckline of this very bullish formation would be around Rs 120 with a short-term target implication at least Rs 160 if that resistance is breached. The current trading volumes while the second shoulder is apparently forming is higher than it was during July 1997 when the first shoulder was formed. This is also a classic confirmatory signal.

Longer timeframe charts also show a bullish rounded bottom saucer formation over the past 30 months. The long term target is around Rs 250 if the scrip trades past the Rs 140 mark. There is good support at Rs 90 and lower down again at Rs 75. The resistance at Rs 120 is absolutely critical and the key move will come on high volumes in that zone. The scrip has plenty of liquidity trading 20-30,000 shares a week.

Harrison Malyalam

The scrip moved down from a high of Rs 175 in February 1994 to bottom at a nine year low of Rs 24 in May 1997.

Since then it has consolidated to reach a current level of Rs 41. The scrip is still in the process of bottoming on the basis of monthly chart spreads. But in shorter timespans the scrip has already established a bullish rising peaks and bottoms formation. Trading volumes have also risen in confirmation of the bullishness.

The intermediate trend is bearish but the scrip has reached a zone of strong support. It has resistance around Rs 44 and then again around Rs 50. The Rs 50 zone forms the lip of a saucer on daily charts. Any breakout past that zone will lead to a target around Rs 70. The scrip initiated a bullish pattern rather more recently than the other stocks in this study. As such it is difficult to predict long term targets. However investors here are getting in really close to the bottom and there is lots of support below the current price. The monthly moving averages are just crossing over into buy zone in contrast to the other scrips which have seen that confirmatory signal several months ago.

Jayshree Tea

The scrip crashed out of a symmetrical triangle in late 1993 dropping from a high near Rs 420 to a low of Rs 92 in December 1996. Since then the priceline has recovered to Rs 200 plus. It has the most well-developed bullish formation of this set with an inverted head and shoulders formation nearly complete and heavy volumes along the second shoulder in weekly chart formations traversing three years.

In daily charts the scrip is trading along a Dowline or range between 200-220 with occasional breakouts in either direction. The neckline must be somewhere in this zone though it is tough to pinpoint to the rising nature of the H&S pattern. The target implications are difficult to make for the same reason but it is definitely bullish in the longterm. This is also confirmed by the volumes and Moving Average systems. The short term trend is negative while the intermediate trend is neutral. The trading volumes are surprisingly large for a closely held company with an equity of Rs 6.16 crore. The scrip often trades 5000 shares or more daily.

Tata Tea

The big daddy of the plantation industry. From a (bonus-adjusted) high of Rs 615 in January 1996, it dropped to Rs 185 in December 1996. From there, Tata Tea is has risen to test resistance at Rs 475, fallen back to support at Rs 350 and currently trades at 408.

The chart patterns are fascinating. The scrip has a rising inverted H&S on long term charts which is completing over a time period of 32 months. Volumes have shot up around the second shoulder. The rising neckline makes targets difficult to compute but Rs 575 could be expected.

On a shorter daily timeframe, the scrip is also completing a minor inverted H&S with a neckline at Rs 432. This is a flat formation with a reliably computable target of Rs 510. Second shoulder volumes are also higher in this timeframe. The scrip is bullish in the long term. It is moving sideways in the intermediate term and negative in the short term. Liquidity is obviously not a problem here.

Warren Tea

In January 1994, the stock was trading at a high of Rs 425. By December 1996, it was down to Rs 46. In August 1997, it hit a high of Rs 150 plus before trading down again to the current level of Rs 122. Volumes have been noticeably better since May 1997. But the scrip is tightly held and it rarely trades more than 2500 a week. It has an equity of Rs 8.7 crore.

The scrip has established a longterm pattern of rising bottoms which is a bullish signal confirmed by buy signals from moving average systems. The intermediate pattern seems neutral while the short term trading pattern is mildly bearish.

There is solid support at Rs 120 and again around Rs 105. There is critical resistance at the Rs 130 level and higher. If the scrip should breakout past Rs 130 it will trade in the Rs 130-145 zone for quite awhile before it overcomes selling pressure there. A longterm target of Rs 240 would be set up if the scrip breaks out past Rs 150 since it would complete a bullish saucer formation.