CORPORATE TIPPING POINT?

The fate of Sri Lanka Inc. hangs in the balance as economic and fiscal policy statements are set to impact growth in 2015/16

It’s been a year of revelations for Sri Lanka, particularly on the political front, with groundbreaking repercussions for both business and the economy. And with only a matter of weeks to go before calendar year 2015 comes to a close, corporates find themselves in the midst of digesting the finer points of the Government’s recent economic and fiscal policy statements.

KEY INDICATORS According to the Department of Census and Statistics, Sri Lanka’s GDP for the second quarter of 2015 grew by 6.7 percent year-on-year (y-o-y), to nearly Rs. 2,100 billion. As in previous quarters, the highest contribution to GDP came from the services sector (61.2%), followed by industry (23.5%), and agriculture, forestry and fishing activities (7.5%).

Meanwhile, the Central Bank of Sri Lanka (CBSL) reveals that “despite the slowdown in imports during the first eight months of 2015,” the cumulative trade deficit at end August increased by five percent, as a result of “mediocre export performance, on account of dampened global demand.”

CBSL also notes that its decision “to accommodate greater flexibility in the determination of the exchange rate from early September 2015 would help the external sector to gather momentum gradually.”

The Balance of Payments (BOP) recorded a deficit of US$ 1.8 billion in the first eight months of 2015, compared to a surplus of 2.1 billion dollars in the corresponding period in 2014.

BUSINESS SENTIMENT The LMD-Nielsen Business Confidence Index (BCI) registered two peaks during calendar year 2015 – in January, when the index surged by 52 basis points (to 194), following the presidential election; and then in September, in the aftermath of parliamentary polls, when the BCI jumped 29 basis points (to reached an all-time high of 204).

In its most recent edition of the BCI, the index recorded a drop of six points (to 152), in November – this, on the back of a 46-point decline recorded in the prior month, once the post-election euphoria had worn off.

Nielsen’s Managing Director Shaheen Cader observes that the BCI has continued to decline mainly due to concerns about the sustainability of economic growth, driven by increasing concerns about “sleaze in politics, recent tax increases on vehicles and the depreciation of the rupee.”

CONSUMER CONFIDENCE Consumer confidence also eroded in November, with Nielsen’s Consumer Confidence Index (CCI) shedding five basis points (to 84) – this is possibly due to higher taxes on motor vehicles and the rupee depreciation having a double whammy impact on middle-class aspirations.

BUDGET PROPOSALS Early indications from activity on the Colombo bourse suggest that, despite the spate of positive – even salutary – statements made by businesspeople and the chambers of commerce and industry on Budget 2016, there are concerns about the macro landscape: after all, we’re in the midst of a forex crisis, our BOP is in negative territory and whether Government’s ambitious revenue targets are achievable is in question.

INTERIM RESULTS The latest interim results of the LMD 100 Leaderboard suggest a mildly positive growth trend, with cumulative turnover up by two percent y-o-y, to nearly Rs. 449 billion. However, aggregate post-tax profits slumped by seven percent from the interim results at this time last year, to 34 billion rupees.

So far this year, nine of the LMD 100’s top 10 companies have reported profits – up from the corresponding period of 2014, when the bottom lines of only eight entities on the Leaderboard were in the black. At the same time, three of the top 10 in the LMD 100 have had to contend with a squeeze on profits in their interim results.

Hayleys announced a three percent contraction in turnover for the six months ended 30 September, to marginally above Rs. 44 billion. But its bottom line expanded by two percent y-o-y, in the first half of 2015/16, to in excess of two billion rupees.

A statement issued by the conglomerate reveals that its bottom line was supported by “strong results from the transportation and logistics, agriculture, purification products, leisure, textiles, construction materials and industrial inputs sectors.”

It adds: “Multiple issues faced by the plantation sector, including lower prices for commodities in the world market and inclement weather, saw the sector incur a loss during the six-month period.”

Chairman and Chief Executive Mohan Pandithage also notes: “Most of the sectors continue to perform strongly, despite a challenging operating environment.”

Second-placed John Keells Holdings (JKH) saw its turnover grow by three percent y-o-y, to just under Rs. 44 billion, in the first half of financial year 2015/16. The group’s Profit After Tax (PAT) for the period (Rs. 6.2 billion), however, marks an improvement of 17 percent from the prior year.

The improved performance of JKH’s transportation segment reflects the fortunes of the group’s ports and bunkering business. Chairman Susantha Ratnayake reveals that “the bunkering business witnessed an improvement in volumes, on the back of an increased demand for supplies over Colombo, and maintained its market leadership position.”

In the leisure segment, the partial closure of Cinnamon Lakeside (for refurbishment) affected the hotel segment’s overall occupancy and profitability, although “Cinnamon Red performed well, recording an average occupancy of 89 percent for the period under review,” the Chairman notes.

Meanwhile, in relation to the group’s property segment, he notes: “Pre-sales of the first residential tower and commercial space of the Waterfront Project [Cinnamon Life] are currently underway, and progressing satisfactorily.”

JKH’s consumer goods and retail industry group was buoyed by sustained growth in consumer spending, where volumes continued to demonstrate encouraging growth.

Bukit Darah’s turnover rose by six percent from a year back (to Rs. 44.6 billion), in the six months ended 30 September. However, profits slumped by as much as 96 percent during the period, to 155 million rupees.

While the spike in group turnover was aided by higher revenues from its beverage business, setbacks faced by the oil palm plantations segment – including low crude palm oil prices – a decline in fresh fruit bunch crop and sharp depreciation of the Indonesian Rupiah against the US Dollar, led to a sharp fall in operating profits.

Bukit Darah’s oils and fats segment’s operations in both Malaysia and India witnessed an improvement in performance during the period in review, underpinned by comparatively higher sales volumes and gross margins.

Amid mixed sentiment at the bourse and relatively subdued market activity, Bukit Darah’s portfolio and asset management segment registered a fall in income in the first six months of financial year 2014/15. Meanwhile, the leisure segment – comprising Pegasus Reef Hotel and Giritale Hotel – also reported a drop in turnover, “led by the competitive nature of room rates.”

As for Lanka IOC, the top ranked energy company fell into the red in the first half of financial year 2015/16, recording an after-tax loss of Rs. 202 million, versus a profit of 2.3 billion rupees in the corresponding period of the prior year. It also reported a lower turnover – down 21 percent y-o-y, to 34.7 billion rupees.

Commercial Bank (ComBank) reported an income of Rs. 56.9 billion (up 5% y-o-y) for the first nine months of calendar year 2015, while PAT appreciated by seven percent y-o-y, to reach 8.4 billion rupees.

In September, the bank announced plans to commence fully fledged banking operations in the Maldives – this would be ComBank’s third overseas venture, following Bangladesh (which it entered in 2003) and Myanmar, where the bank opened a Representative Office in June.

Telecommunications giant Dialog Axiata saw its top line expand by eight percent in the period under review, surpassing Rs. 53.8 billion for the nine months to 30 September. However, after-tax profits were down one percent y-o-y, to 4.5 billion rupees.

In October, Dialog inked an agreement with the Board of Investment (BOI), to invest an additional US$ 175 million in Sri Lanka’s ICT infrastructure.

The investment agreement envisages a broad scope for ICT infrastructure development by the Dialog group, encompassing the expansion of high-speed broadband services, alongside further development of the its fibre-optic transmission network, international telecom network and digital satellite television infrastructure.

Sri Lanka Telecom (SLT) reported turnover of nearly Rs. 50.9 billion (up 6% y-o-y) for the nine months to 30 September, while PAT fell by 19 percent y-o-y, to 4.1 billion rupees.

A statement released by SLT attributes the bottom line contraction to “foreign currency translation losses relating to foreign currency-denominated borrowings, due to the sudden depreciation of the rupee against the US Dollar.” It explains that “most of the borrowings of the group are dollar-denominated.”

In the nine months ended 30 September, Hatton National Bank’s (HNB’s) top line grew by five percent y-o-y, to Rs. 50.8 billion. Meanwhile, its tax-paid profits increased by a more impressive 17 percent from the prior year, exceeding 7.2 billion rupees.

Commenting on HNB’s performance, its Managing Director observes that “during the third quarter alone, advances and deposits grew by approximately Rs. 35 billion, which represents an annualised growth of over 30 percent.”

CT Holdings generated a consolidated turnover of Rs. 34.8 million (up 9% y-o-y) in the first half of financial year 2015/16, while its half-yearly profit soared to 872 million rupees, from 62 million rupees a year ago.

The group’s improved financials were propped up by the retail and wholesale distribution sector, while all segments other than the real estate sector – which was impacted by the deferment of a joint venture property development project undertaken with foreign collaboration – posted improved results, compared to the previous year.

Group entity Cargills (Ceylon) also posted positive results in the interim period to 30 September, with turnover increasing by nine percent y-o-y to Rs. 34.5 billion and PAT reaching 770 million rupees, versus a loss of Rs. 80 million in the corresponding period of 2014/15.

However, its retail business “continued to be challenged by the policy environment, where the application of ‘deemed VAT’ on VAT-exempt essential commodities dampened the market potential of smallholders.”

The photo finish in this year’s rankings, with the nation’s two most respected conglomerates vying for honours, could well be followed by a three-way race in financial year 2015/16, with Bukit Darah joining Hayleys and JKH in the tussle to win the LMD 100 prize.

Literally speaking, the bottom line for corporates in this country could well be the implications of the newly installed Government’s recent economic and fiscal policy statements.Without doubt, they will impact the bottom line of Sri Lanka Inc., and it is left to be seen whether this will – as the Finance Minister has said – produce a watershed in the medium term.

In the meantime, Sri Lanka’s macroeconomic landscape also hangs in the balance, with the rupee in jeopardy, the Balance of Payments in rough waters, a ballooning trade deficit and the prospect of a post-budget inflation spiral.