Sri Lanka wage hike seen eroding plantations profitability

Sept 29, 2009 (LBO) – Sri Lankan plantations companies relying mainly on high grown teas such as Maskeliya Plantations and Namunukula Plantations would be worst hit by a recent wage hike, an equities research report says.

These are mainly small-holder farmers in the island’s southern districts making low-grown teas, which account for over 60 percent of the national tea production.

SC Securities said the wage hike would raise the average cost of production of a Sri Lankan kilo of tea by about 25 percent.

“The tea small holdings would have more flexibility around this issue we believe,” SC Securities said.

“The companies therefore that focus on having a larger bought leaf component also could have pass-over benefits due to this factor,” SC Securities said.

“We are of the view that the plantations companies that are worst off in the post-wage increase run are the companies with a focus upon high grown teas. Maskeliya Plantations and Namunukula Plantations top this list.” SC Securities said the wage hike would raise the labour cost component in the entire plantations industry cost structure to 66 percent of total cost from 59 percent previously.

They said in a report on the impact of the wage hik