09/02/2012 (LBO) - Sri Lanka's Watalawa Plantations Plc said cash from the sale of a marketing arm will be used to expand oil palm, boost efficiencies in its tea estates and cut debt, as interest rates continued to rise.

"The business of the company is growing and processing of tea, rubber and oil palm," the firm said in a statement to shareholders.

"The directors are of the view that considering the current financial environment the company's core activity has to be strengthened.

"Palm oil business, which has become the main stay of the company has the potential to be widened and further improved.

The tea sector requires new land to be developed and the processing further re-structured."

Watawala Plantations sold its wholly owned unit, Watawala Marketing Ltd to its parent, Estate Management Services for 741 million rupees. The carrying value in its books was 335 million rupees, the statement said.

Watalwala Marketing owns its own brand Zesta. The firm has posted profits of 232 million rupees in the last financial year. In the nine months to December the unit has made profits of 165 million rupees.

Watalwala Plantations is one of the victims of an expropriation drive announced in the budget for 2012. The state is taking back land leased to plantations firms, which are deemed unused, for distribution to small farmers.

Sri Lanka has started to violate property rights of citizens and non-citizens through expropriation after a gap of several decades, creating a new investment risk and deterrent, analysts have warned.

Shortly before the budget, through an ad hominen law the state took back land leases and assets of several firms.

Though only the land leases were listed the in the law, the state has also taken back management and related business. There have been no legal challenges so far.

Watawala Plantations told shareholders, the profits from rubber and oil palm was not enough to cover losses in tea.

The firm said a wage hike at the beginning of the year and rising interest costs were eroding margins in tea which were already negative. Gratuity liabilities were also up. Its debt to equity ratio was 41 percent by December 2011.

"Long term debts and other borrowing need to be at least partially settled and if possible re-structured to bring down the interest burden and funding costs," the first said.

"The performance of the current period leaves no room to achieve the plans that requires to be carried out due to shortages of funds."

"the rising interest cost coupled with negative margins in the tea sector has created additional stress on the cashflow."