Price rise sends tea stocks on a tear; analysts cautious

Mumbai: Shares of tea companies gained between 5% and 25% in the last five trading sessions on the back of an increase in tea prices because of production shortages in Assam and West Bengal, the largest tea-producing states. While fundamental analysts remain skeptical about the prospects of tea companies, technical analysts are bullish, and they expect a further increase of 8-10%.

The sharp upside movement was seen in the main tea companies, and they have all rallied from the lows. The climb, driven by strong volumes, comes after a long period of consolidation.

Stocks such as Warren Tea, Goodricke Group and Assam Co. have surged nearly 25% in the past five trading sessions, while Harrisons Malayalam and Jayshree Tea gained 22% during this period. BSE Consumer Durable index rose just 2.6% in the past five trading sessions.

Technically, stocks such as Tata Global, BBTC, Tata Coffee, Mcleod Russel, Assam Co, Harrisons Malayalam and Jayashree are looking promising, said analysts.

“The current upside rally in tea stocks is likely to continue for some more period and the chart patterns of above stocks are all suggesting further upside potential of another 8-10% for the next couple of weeks,” said Nagaraj Shetti, technical research analyst, HDFC Securities. “The momentum oscillators are suggesting exhibition of strong upside momentum as there is no indication of any tiredness of upside momentum at the highs”.

The long-term prospects of tea companies, according to fundamental analysts are not great as the realisation has not increased as much as the prices due to increase in labour costs and shrinking margins.

“According to the managements of some of the tea companies, tea prices have moved up by ?10-15 in the last few days, but those will not increase much the operating margins,” said Sanjay Manyal, analyst, ICICI Securities. “Stocks of tea companies rallied ahead of their fundamentals, so there is limited upside”.

Technical analysis of top 3 tea companies by Dharmesh Shah, head, technical, ICICI Securities

MCLEOD RUSSEL
McLeod Russel has broken out of a 2-year contracting triangle pattern (accumulation pattern), forming a very strong bullish candle this month along with strong volume – the highest since February 2017. The width of the triangle pattern is approximately 95 points (225 - 130), so a projected move out of the pattern from the breakout point of 203 establishes a price objective of 295-300.

JAYSHREE TEA
Jayshree Tea has broken past the neckline of an inverse H&S pattern (bullish reversal pattern) that has been forming since the last 6 years. The breakout has also been accompanied by huge uptick in volume – the highest since July 2016. The stock has retraced more than 50% of the fall from the 2010 high of 208.48 to the 2015 low of 56.10, indicating a structural turnaround. The width of the H&S pattern is approximately 55 points, so a projected move out of the pattern from the breakout point of 120 establishes a price objective of 185-190.

GOODRICKE GROUP
After advancing 125 points from November 2016 to March 2017, Goodricke consolidated until October 2017 between 220 and 300. This consolidation has been followed by a sharp rally this month, during which price has almost doubled from 273 to 530. The overall picture continues to be very bullish and the stock seems headed towards the 630-632 zone.