A plantation sector wage hike is expected by mid-2013 as the two-year collective agreement, which was struck between the Regional Plantation Companies and the Lankan estate sector labour unions back in early 2011, is reaching expiration.

An equities report pointed out that the impending wage hike, coupled with the increase on cess on bulk tea exports (though not large after the revision) could have a knock on effect on the plantation sector, which showed a slight improvement in the performance last year, after a gloomy year of performance in 2011.

“A plantation wage hike is due during mid2013. The wage hike that took effect in 2011 resulted in significant losses to the plantation sector companies, especially the companies with exposure to tea. Therefore, with the uncertainty of a wage hike looming, uptick in demand for the selected counters may be slightly subdued and only remain in the short term,” NDB Stockbrokers pointed out.

However, according to Planters' Association (PA) Chairman Lalith Obeyesekere, the plantation companies are not in a position to grant another wage hike after the collective agreement expires on March31.

“We want to see an extension to the existing agreement because after a near 30 percent wage hike in 2011, we are still trying to settle in. Of course the rupee depreciation helped us from the demand side but what you also have to understand is, on the supply side, the input cost has also gone up,” said Obeyesekere, adding that discussions have already been started.

Meanwhile, NDB Stockbrokers too cautioned that a major increase in cess by as much as 100 percent—which the government later had to revise—could significantly drive down tea auction prices, resulting in lower revenues and profitability for the plantation sector.

“With the revised cess structure, the impact should remain minimal, given no more increases take place,” the report noted.

The collective agreement struck between the two parties back in 2011 saw a 20.7 percent wage hike pushing the daily wage of a worker to Rs.515.

However, the attempts to link part of the daily wage to productivity enhancements are turning out to be futile, due to the objection from the unions.

According to analysts, a similar wage increase could again dent the bottom lines of the plantation sector companies, similar to what happened in 2011, because 55 to 50 percent of the production cost constitutes wages.

Sri Lanka’s cost of production per kilo of tea is twice of South India and is 35 percent higher than Kenya.

Meanwhile, the NDB report highlighted, despite the uncertainties in the tea export market, the global reduction in tea production and the rupee depreciation have seen higher tea prices during the last year.

“Auction prices have seen a significant appreciation since July 2012 with price increase most notable in high grown tea,” the report said.

According to the external sector results released by the Central Bank, tea in dollar terms demonstrated a drop of 5.3 percent to end 2012 with US$ 1,411.9 million. Nevertheless, in rupee terms, the earnings from tea recorded a growth of 9.5 percent to end the year with Rs.180 billion, up from Rs.165 billion in 2011.

The report, which analyzed the listed plantation sector companies, further noted that the sector’s growth was on par with the growth recorded by the All Share Price Index, which gained by 8.1 percent and thus, recommended to ‘buy’ the shares this year, which was an upgrade from last year’s recommendation, which said to ‘hold’.

“Despite a cess increase and a possible wage hike, given the improved financial results and possible high dividend payout, we believe there is significant upside potential for companies, which have exposure to high grown tea and a healthy cash position,” the report concluded.