"HOW are the Richmond Tigers doing? How's Rex?" The man asking is a Sri Lankan septuagenarian standing in a white lab coat in a tea-tasting room in downtown Colombo, a long way from the MCG.

The chaos of a South Asian metropolis swirls around us. A day later, the jerry-built air force of the Tamil Tigers will drop bombs on the city.

But Merrill J. Fernando, the 77-years-young patriarch of Dilmah Teas, has a large soft spot for Australia. It is where, in 1988, he launched Dilmah onto the world, Australian tea-drinkers helping grow the Fernando family business into a sprawling $500 million tea empire spanning 93 countries.

The footy question is simply a conversational gambit for the savvy Fernando. He knows precisely how the Tigers are doing this year — like Rex, badly — because his big mate in Australia, the broadcaster and football legend Rex Hunt, keeps him apprised of the AFL's ups and down.

Fernando often speaks to the 3AW footy panel, now that Kamahl, Dilmah's long-time public face in Australia, has been dumped. As Kamahl might put it, people can be so unkind, but Fernando knows cheap publicity is good in Dilmah's best market.

Business is very personal for the Fernandos. Though slower after a recent illness, Merrill Fernando spends part of his day personally responding to Dilmah customers around the world, with handwritten letters explaining the mysteries of the cherished leaf. He got his start in tea in 1950, when elephants would lug materiel to the upcountry estates.

Today, Fernando is regarded as an industry legend, while the modern cut and thrust is being handed to his 40-something sons, Dilhan and Malik, after whom Fernando named Dilmah. The sons are busy remaking Dilmah as a modern brand, trying to pitch the family's single-origin teas as the Grange Hermitage of the humble cuppa, with evocations of terroir, of sommeliers and rare vintages. Dilmah's elegant packaging is heavy with wine iconography; descriptive labels equating shiraz to a robust black tea, or champagne for a fine white leaf.

Long derided by the world's fast-growing legions of trendy latte-sippers as the favourite tipple of your eccentric great aunt, Dilmah is positioning tea as a gourmet product, clawing back some of the $US70 billion world "hot beverage" market, where a 75 per cent share has been conceded to coffee. They want to make tea fashionable, and even exquisite.

The world might drink more than a billion cups of tea a day, but big producers have struggled to add value to the brew. Then there's the explosive growth of coffee giants such as Starbucks, opening an average five stores a day and also targeting tea drinkers. Dilmah presents Sri Lankan tea as the purest — and most expensive — in the world, while also salving high-minded consumers' health concerns and rising enviro-consciousness. "You have to regard tea in the same way as you would an immaculate vintage," says Fernando. "People need to know what they are drinking." The pitch doesn't wash with Dilmah's main competitors, such as Anglo-Dutch giant Unilever, whose Lipton brand is world leader with 15 per cent, and Associated British Foods, second globally with Twinings at 6 per cent. "The wine analogy is fairly ridiculous in big wine-drinking countries, which also tend to be tea-drinkers," says John Cornish, Twinings' London-based international marketing director.

Running Dilmah from Sri Lanka has unique challenges that Twinings and Unilever in Europe don't face. Sri Lanka is hardly business-friendly; its creaking infrastructure and labour laws are very 1940s. Getting goods from plantation to port is tricky for a product that stresses freshness. Dilhan Fernando cites a 150-kilometre journey from Dilmah's estates that can take as many as seven hours. Colombo's port often gets locked down, and military roadblocks go up.

Sri Lanka has been crippled by a bitter civil war between its minority Tamil-Hindu community, pining for a separate state in the island's north-east, and the majority Buddhist-Sinhalese of the south. Some 70,000 people have been killed since 1983. A Norwegian-sponsored ceasefire in 2002 briefly brought peace — and a short-lived economic boom — but the fighting is back with a vengeance. On April 29, as Sri Lanka's Dilmah-sponsored national cricket team was playing Australia in the World Cup final, the Tamil Tigers bombed Colombo at 2am, as Sri Lankans were locked into the TV broadcast from Barbados. The capital was plunged into panic, as government anti-aircraft gunners blazed indiscriminately at commercial airliners barely 50 metres from my hotel.

Guests ducked for cover but the gunners failed to shoot down the invaders. Dilhan Fernando apologises for his country's extremism. "We've been able to manage and grow the business around the conflict," he says, "but we watch things very closely."

Politics can be tricky in Dilmah's tea country too. The Fernandos' tea gardens are equidistant to Colombo and the self-styled Tamil homeland, known as Eelam. Most of their 37,000 workers are ethnic Tamils, mostly female tea-pluckers descended from the indentured labourers on estates bought by Scots from India in the 1800s. Known as "Estate Tamils", they are regarded by Sri Lankans as an ethnic group distinct from Eelam Tamil communities.

The tea region is peaceful, but estate managers note the effigies of Tiger leader Vellupillai Prabakaran in some Hindu temples. That's also been noticed by the Tigers' mortal enemy, the JVP (People's Liberation Front), a party of Sinhalese Marxist nationalists who regard the tea country as their stronghold. The politics is reflected in Dilmah's marketing. Though the island has been called Sri Lanka since 1972, Dilmah and Colombo's state tea board market themselves as producing "Ceylon" tea, as it used to call itself. The Fernandos are no forelock-tuggers to former colonial masters; its just good business. "Sadly, too many people associate the term Sri Lanka with strife," rues Malik Fernando.

Dilmah is rare in the tea industry in being a vertically integrated operation; a producer, packager and marketer of its own teas. But that has often been a thorny place to be in Sri Lanka. As the biggest foreign exchange earner in one of the world's poorest countries, Sri Lanka's tea industry has endured nationalisation by greedy governments, followed by half-hearted privatisations by reformers. Post-colonial administrations tried loosening the grip of the British tea houses, eventually succeeding in the 1970s by seizing estates. But that move backfired when the estates declined under state rule. With bureaucrats in control, Sri Lanka's tea industry almost collapsed as planters moved their skills to Kenya.

The impact was devastating. From virtually nothing in the 1970s, Kenya now vies with Sri Lanka as the world's fourth-biggest tea producer and biggest exporter, after India and China, which consume most of their domestic output.

Fernando's best years were through the late 1970s and '80s when he sold bulk tea to the then Soviet Union and Saddam's Iraq, lucrative business that helped set up Dilmah. "Moscow was a very good customer," he says. "They paid on time in pounds sterling via London and were very courteous," he says. "I had more money than I knew what do with." In 1988, in the midst of civil war, he used his windfall to start Dilmah, with a vision to develop a high-end branded tea, adding value to the bulk tea he was trading. Then Fernando's bulk markets in the USSR and Eastern Europe were collapsing so he launched the brand in Australia, where many of his countrymen had fled from the civil strife at home.

The next challenge confronting Dilmah might be internal. Patriarch Merrill recently fell ill and is handing more control to his sons. Besides, the company seems a well-oiled operation and against the backdrop of a very difficult homeland, such a transition is nothing special.

Eric Ellis is South-East Asia correspondent of Fortune Magazine.