MIXED BAG AMID TURMOIL

Financial year 2023/24 unpacks the stark impact of reforms and uncertainties with corporates navigating an evolving landscape

 

Despite the restoration of a sense of economic stability, political uncertainty continued to affect the country throughout much of financial year 2023/24, creating a wave of caution among business leaders in the lead up to the twin elections.

Yet, Sri Lanka thrived and the silver lining we hoped for at the end of financial year 2022/23 is somewhat visible, highlighting resilience amid adversity.

In recent years, businesses have weathered unprecedented challenges, skilfully adapting their strategies to navigate obstacles created by both national and global events. The primary focus in business circles in financial year 2023/24 was the presidential and general elections – and many corporates exercised caution ahead of the polls and their outcomes.

In turn, this sense of uncertainty fostered a climate of careful deliberation with businesses opting to hold back on hasty or impactful choices during what was a critical period.

However, one factor had a chokehold on businesses and consumers, despite its goal of stabilising finances and promoting long-term economic growth – i.e. the country’s revised tax policy.

Key changes included a standard corporate tax rate of 30 percent, an increase in VAT from 15 to 18 percent and the removal of sector specific exemptions. These adjustments, while designed to address fiscal imbalances, required businesses to adapt to higher operating costs and reevaluate pricing strategies, impacting their margins and consumer spending.

The value added tax hike in particular affected prices across the board, which dampened consumer demand and weighed on business revenues. These IMF instigated reforms were essential for increasing tax revenues and expanding the tax net, to reduce the fiscal deficit and debt reliance – and facilitate a more sustainable economic framework for the future.

Yet, interim financial reports from leading listed companies suggest that the business environment is beginning to stabilise, reflecting the positive shift in the broader economic landscape.

This edition of the LMD 100 provides an analysis of the performance of the nation’s leading listed companies, during a year marked by significant changes as a new administration took office and the country regained a measure of economic stability.

LEADERBOARD Hayleys, a leading multinational and diversified conglomerate, secures pole position in the LMD 100 for financial year 2023/24, marking its ninth year at the forefront of the rankings.

This year’s Leaderboard features a range of sectors – viz. food, beverage and tobacco; capital goods; diversified financials; banks; and energy.

The capital goods export oriented conglomerate rose from second place in the preceding year to reclaim the No. 1 spot – it last helmed the rankings in financial year 2020/21.

Meanwhile, Commercial Bank of Ceylon (ComBank) climbs five positions from the previous financial year to secure second place.

And LOLC Holdings, an entity representing the diversified financial sector, maintains its place on the podium in third position for the fourth consecutive year.

Hatton National Bank (HNB) secures fourth place, moving up five spots from ninth position in financial year 2022/23.

The capital goods conglomerate John Keells Holdings (JKH) also improved its ranking, ascending to fifth place after rising from No. 8 in the previous year’s rankings.

Carson Cumberbatch – the food, beverage and tobacco giant – slips from fourth to sixth place in the 2023/24 LMD 100 rankings. Following closely in seventh is Bukit Darah (a fellow conglomerate in the food, beverage and tobacco sector), marking a fall of two spots from the previous financial year.

Energy giant Lanka IOC (LIOC), which held sixth position in the preceding financial year, drops to No. 8 on the LMD 100 list for 2023/24.

And Sampath Bank improves its standing by moving up one place from last year.

Rounding out the top 10 listed companies for financial year 2023/24 is CT Holdings, which climbs one rung from 11th spot.

REVENUE STREAMS The cumulative revenue of Sri Lanka’s 100 leading listed companies reached Rs. 7,234 billion in financial year 2023/24, reflecting a modest annual growth of four percent.

This outcome reflects a marginal improvement over the previous financial year, when the aggregate turnover of LMD 100 entities surpassed 6,942 billion rupees.

In financial year 2023/24, only 67 companies (vs 73 in the prior financial year) within the LMD 100 achieved an annual turnover above Rs. 20 billion.

And the 22 highest ranked corporates – Hayleys, ComBank, LOLC, HNB, JKH, Carsons, Bukit Darah, LIOC, Sampath Bank, CT Holdings, Cargills (Ceylon), Dialog Axiata, Melstacorp, Ceylon Cold Stores, National Development Bank (NDB), Vallibel One, Hemas Holdings, Seylan Bank, Ceylon Beverage Holdings, Lion Brewery (Ceylon), DFCC Bank and Sri Lanka Telecom (SLT) – breached the 100 billion rupee turnover mark.

BOTTOM LINES Despite heightened concerns surrounding the tax regime, post-tax profits saw a reasonable increment from the previous financial year; in financial year 2023/24, the cumulative profit after tax (PAT) of the LMD 100 rose by 11 percent to Rs. 542 billion in comparison to the previous year (489 billion rupees).

However, the number of loss making LMD 100 companies increased to 12 – in the preceding financial year, this count stood at 10.

Eight quoted companies – led by Ceylon Tobacco Company (CTC) with Rs. 27.6 billion – reported a PAT in excess of 20 billion rupees, which is one less than in 2022/23.

TAXATION In financial year 2023/24, an LMD 100 corporate paid out over Rs. 2.7 billion on average in taxes with an aggregate tax bill of 275 billion rupees for the Leaderboard as a whole.

Hayleys contributed over Rs. 10 billion in taxes, marking a 30 percent decrease from the previous period. The largest taxpayer was CTC with a contribution of 18.4 billion rupees.

Other major contributors include Melstacorp (Rs. 16.7 billion), Bukit Darah (over 15 billion rupees), Carson Cumberbatch (more than Rs. 15 billion), HNB (above 13 billion rupees), Sampath Bank (Rs. 13.2 billion), ComBank (over 12 billion rupees), Distilleries Company of Sri Lanka (DCSL) with more than Rs. 9 billion and Vallibel forking out nine billion rupees.

ASSET VALUES Reporting combined assets surpassing Rs. 8 trillion on their balance sheets are three of Sri Lanka’s prominent private sector commercial banks – viz. ComBank (over 2.6 trillion rupees), HNB (above Rs. 2 trillion) and Sampath Bank (1.5 trillion rupees and growing) – along with diversified financial group LOLC (exceeding Rs. 1.7 trillion).

In cumulative terms, the LMD 100’s total assets appreciated by a noteworthy nine percent to over 20 trillion rupees.

MOVERS AND SHAKERS First Capital Treasuries takes a notable leap in the rankings, advancing from 97th to 60th place for the 2023/24 period, securing top position on the LMD 100’s most notable movers list.

Similarly, First Capital Holdings improved its standing, rising from 83rd to 56th place. Amãna Bank also enjoyed significant progress, climbing from 90th to 73rd in the latest edition of the LMD 100.

Furthermore, a total of 65 leading listed corporate entities improved their rankings in the 2023/24 edition of the LMD 100.

SECTOR RANKINGS For the period under review, the capital goods sector maintains its dominance, securing the top position with a cumulative turnover exceeding Rs. 1,544 billion.

This accounts for over 21 percent of the combined revenue of the LMD 100, around 15 percent of total assets and approximately 23 percent of shareholders’ funds for financial year 2023/24. Additionally, the capital goods sector contributed 14 percent to the LMD 100’s cumulative profit after tax during the same period.

Following closely, the banking sector emerges as the second largest player in the LMD 100, reporting a total income exceeding 1,495 billion rupees. This sector contributed just over a fifth of the cumulative revenue generated by the top 100 companies during the 12 month period.

Meanwhile, the food, beverage, and tobacco sector secures third position among the 14 sectors represented in the 2023/24 edition of the LMD 100. Its aggregate post-tax profit accounts for more than a quarter of the total post-tax profit in the LMD 100.

INVESTOR YARDSTICKS JKH takes the lead in market capitalisation with a value of nearly Rs. 290 billion at 31 March 2024. Following closely in second place is LOLC Holdings with its market cap surpassing 188 billion rupees. And in third place is LOLC Finance with over Rs. 181 billion.

THE FUTURE The Central Bank of Sri Lanka in its Financial Stability Review for the Year 2024 notes that financial stability was upheld in the first half of 2024, despite the spillover effects of the challenging macro-financial conditions of the recent past.

Overall stabilisation and gradual improvement of domestic macro-financial conditions alleviated some pressure on the balance sheets of households and institutions, thereby reducing the risks faced by the financial sector, it adds.

The Central Bank says that the financial system is set to improve moving forward with anticipated enhancements in asset quality and the buildup of capital buffers while prudently managing risks. This outlook, the review notes, comes as the economy stabilises and progresses despite ongoing challenges. While the unprecedented severity of the crisis has led to substantial macro-financial imbalances, these are gradually being addressed through prudent policy measures, reforms and behavioural adjustments that support financial system stability, it asserts.

The monetary authority adds that although the financial sector’s progress in managing the spillover effects of the economic crisis has been commendable, it must continue to focus on ensuring financial stability in the medium to long term.

Meanwhile, the October Sri Lanka Development Update released by World Bank notes that Sri Lanka’s faster than anticipated macroeconomic stabilisation has boosted its short-term growth outlook to 4.4 percent for 2024. Nevertheless, continued structural reforms remain essential to unlocking greater medium and long-term growth potential.

The World Bank adds that although poverty is expected to decline gradually, it’s likely to stay above 20 percent until 2026. Inflation is projected to stay below the Central Bank of Sri Lanka’s five percent target for 2024 with a gradual rise toward the medium-term target as demand increases.

Debt restructuring, along with ongoing fiscal consolidation, is expected to strengthen the overall fiscal balance over the medium term, the bank adds.

As for a global perspective, the IMF’s World Economic Outlook (WEO) published in October 2024 (titled Policy Pivot, Rising Threats) highlights in its overview that global growth is anticipated to remain steady yet modest.

The WEO notes that since April, underlying shifts have led to revised forecasts with upgrades for the US counterbalancing downgrades in other advanced economies – particularly major European countries.

It explains that in emerging markets and developing economies, factors such as disruptions in commodity production and shipping – especially oil – along with conflicts, civil unrest and extreme weather, have negatively impacted the growth outlook for the Middle East, Central Asia and sub-Saharan Africa.

“The global battle against inflation has largely been won, even though price pressures persist in some countries. After peaking at 9.4 percent year over year in the third quarter of 2022, headline inflation rates are now projected to reach 3.5 percent by the end of 2025, below the average level of 3.6 percent between 2000 and 2019,” observes the WEO.

Growth is expected to remain steady at 3.2 percent in both 2024 and 2025.

However, several countries – particularly low income developing nations – have faced substantial downward growth revisions, often due to escalating conflicts.