Arbitrary laws on palm oil hurt Watawala 3Q

Arbitrary regulations surrounding palm oil cultivation have pinched Watawala Plantations PLC while the group’s still fledgling dairy business reported losses, although its top line is expanding and losses narrowing. 

Watawala Plantations recorded revenues of Rs.775.4 million for the quarter ended December 31, 2019 (3Q20), little changed from a year ago. 

The group is engaged in two of the country’s import substitution industries—palm oil and dairy. 

The palm oil business generated revenues of Rs.628.2 million for the three months, up slightly from Rs.622.5 million in the same period last year, while the two-year old dairy business under  Watawala Dairy Limited recorded revenues of Rs.147.2 million, up from Rs.145.8 million. 

“The palm oil sector revenue increase stems from the shifts in the yield curve and improvements made to the fertilizer regime. The dairy sector recorded a revenue growth as a result of higher milk selling prices and volumes,” Watawala Plantations Managing Director Vish Govindasamy said. The group reported earnings of 86 cents a share or Rs.174.1 million for the three months under review compared to 97 cents a share or Rs.210.7 million in the year earlier period. 

“…during the period under review, the company has been challenged by the regulations imposed on palm oil and thereby was unable to continue the planting programme. 

The industry had requested at least planting of the seedling materials laying at the nursery. 

“The industry is engaging with the ministry authorities to get a clear future direction on the regulation relating to the industry,” Govindasamy added. 

Palm oil is a relatively low-priced alternative to that of coconut oil but concerns are often raised of its suitability for human consumption despite it being widely used world over in food preparation.  Meanwhile, from time-to-time the government imposes tariffs on the import of oil palm to protect the local coconut industry. Local palm oil prices are determined by several factors— Malaysian ringgit, crude oil prices, import duties and the government policy. 

In 2018, Watawala Plantations cleaved off its tea plantation business under Hatton Plantations PLC.

During the December quarter, Hatton Plantations PLC reported subdued performance due to perennial problems associated with the tea sector. Its earnings halved to Rs. 46 million from Rs.84.7 million a year ago. 

However, the company’s revenues rose 13 percent to Rs.1.1 billion, but the surge in cost of sales swallowed much of those revenues resulting in lower gross profits. 

Over two thirds of tea sector costs originate from labour and an increase in the daily wage of estate workers to Rs.1,000, which is under negotiation, could further dent profits, or perhaps render plantation companies unviable, as claimed by the owners.   Meanwhile, Watawala Plantations’ dairy segment, which began operations just under two years ago, cut losses to Rs.42.1 million from Rs.47.2 million a year ago. 

“The improved milk yield was driven by majority of the herd moving into the second lactation cycle, while the stringent cost optimization measurers resulted in improved performance during the period,” Govindasamy stated.