Tea stocks still steaming hot

If you are in the habit of looking at stock prices while sipping your morning cuppa, you may be regretting the fact that you missed an
investment idea that was literally under your nose.

With tea stocks sizzling on back of an unfavourable demand-supply scenario prevailing globally, investors in tea stocks have given average returns of 242% since March 09, 2009, against Sensex returns of 117%.

The entire tea pack of 13 stocks on the BSE gained little more than 4% on Wednesday, even as broader markets took a breather.

The major gainer was McLeod Russel, the world’s largest bulk tea producer with a 10.09% jump in its stock price, followed by Jay Shree Tea (up 6.23%) and Goodricke Group (up 5.43%).

In fact, the tea stocks have been buzzing since last 10 months as the demand-supply gap keeps on getting wider on back of unfavourable weather conditions in major tea producing countries like Kenya, Sri Lanka and India.

During this period, McLeod Russel has given whopping 548% returns, while stocks like B&A Ltd, Jay Shree Tea and Harrison Malayalam have given 497%, 436% and 357% returns, respectively.

“After a period of 9 years, the tea stocks have started giving such huge returns.

During this time of acute shortage, the price realisations for tea companies go up thereby pushing their earnings up. Also market tends to give them premium valuations stretching their price to earnings multiples. These stocks look good right now,” said Daljeet Kohli, head of research, private client group at Emkay Global Financial Services.

Experts believe that global deficit in tea supply may widen to 130-140 kilograms by April 2010, which is a 7% deficit.

“The demand for tea has outpaced the production far significantly during last 5 years leading to inventory shortage as well as increase in prices. Global tea prices are expected to go up further on account of high gestation period for tea crops and lack of area addition in major tea producing countries,” said Sanjay Manyal, analyst at ICICI Securities.  

Lower inventories and a sustainable rise in global tea consumption would ensure tea prices to remain firm for a while.
“Though major part of the rally seems to be over, there is still some upside left in them. One needs to look at sensitivity and realisations and not the valuations while investing in these stocks” said Kohli.