The Nation GAIN

Sunday, May 6, 2012

Rising costs dent Piramal profits

Leading manufacturer of specialty glass for food and beverages, Piramal Glass Ceylon PLC last week said that the sharp escalation of costs in the recent quarter ending March 31, 2012 had negatively affected its profit during its 2012 financial year. PGC’s Chief Executive Officer and Executive Director, Sanjay Tiwari reviewing the results of the fourth quarter ending March 31, 2012 said that although turnover grew by 23% to Rs.1.3 billion during the period, Profit After Tax fell down to a mere 7% of sales at Rs.98 million as against Rs.178 million and 16% of sales it achieved during the similar period of the previous year.
“The main factors contributing towards this drop in performance figures were the energy price increase and the dollar depreciation,” Tiwari analysed. He pointed out that the increasing LPG Gas prices, electricity tariff and furnace oil had impacted negatively in the last quarter where the price of furnace oil increase of 80% and the electricity tariff increase of 15% together laid a heavy burden on the cost parameter.
Tiwari said that the company never anticipated an overnight increase of this magnitude. “In fact, the relevant authorities were requested to phase out such increases so that the burden can be absorbed by the consumers over a period of time”.
He further noted that although the company has had no option but to pass off some part of the cost increase to its customer, this pricing strategy does not hold true and sustain in the international market as this would end up with the company losing the market it has created for itself in the international shores with much effort. Tiwari urged the government to be more cautious when increases of this magnitude are brought in. “Increases should be done in a phased out manner which could be gradually absorbed by the industry. Any such further increases would definitely bring about a question mark on the sustainability of the manufacturing industry itself”. “The rupee depreciation too had a significant impact on the Foreign Exchange Loan the Company has obtained in 2009. A loss of over Rs.100 million has been booked under administrative costs by revaluing the closing balance of the US Dollar loan at March 31, 2012 rates”. However, complemented by the sharp increase in the export earnings portfolio, PGC recorded its highest ever pre-tax profit of Rs.687 million for the year ended March 31, 2012. Tiwari said their export product portfolio saw a marked increase in its shift from mass market to the high end premium market segment yielding higher realizations. “This year we have ensured the sustenance and continuity of the rich harvest we started reaping from our facility at Horana,” the CEO said.
According to financials, the firm’s revenue during the FY2012 grew by 23% to Rs.5.1 billion as against corresponding figures of FY2011 whilst profit after tax saw an increase of 19% to Rs.687 million.

Lanka, a hidden gem for outsourcing – A T Kearney

Global Management consultancy firm, A.T. Kearney, which was recently commissioned by ICTA (ICT Agency of Sri Lanka) to benchmark Sri Lanka as a destination for Knowledge Services Exports says the island nation is in many ways, a hidden gem for outsourcing as it is one of the safest, lowest risk, emerging markets both in terms of personal safety and business security. A report on the nation points out that the island is expected to become a major player in the IT, BPO and knowledge Services industry in the next few years as it is uniquely positioned to offer companies highly skilled talent and a strong business environment at very competitive costs.
“Although costs are deemed to rise, Sri Lanka is believed to maintain its competitive advantage as a very favorable business environment,” the A T Kearney report stated.
Sri Lanka was ranked 21st in the Global Services Location Index; a measure utilized by AT Kearney and was regarded as an impressive status given the emphasis of the determinant on size of workforce and scale of IT/BPO industry, as opposed to giants such as India and China. Sri Lanka’s current state was identified as a knowledge service hub focused on quality of skill base, infrastructure and business environment. The report can be found on the web at: (http://www.icta.lk/icbp/Competitive_Benchmarking_Sri_Lanka_Knowledge_Services.pdf) The findings of the exercise went on to state that “below the radar of most industry observers, however, a significant knowledge services industry has been developing in Sri Lanka.
The report encapsulated the IT industry of the country and its contribution to the economy as a whole and its contribution to the global arena in many capacities. “The specialty of Sri Lanka’s offering is that it did not merely limit itself to software development, call centers and transaction processing but spanned beyond by taking the lead in providing sophisticated services such as accounting services, financial analytics, offshore legal services, medical diagnostics and architectural requirements to many global clients.

Apparel firm says NO to organic expansion

IPO money to partly finance purchase of a fabric mill within south Asia soon
Sri Lanka’s leading producer of value-added knitted fabric, Textured Jersey Lanka Plc (TJL) said last week that it intends to soon use part of its proceeds raised through its Initial Public Offering (IPO) last year towards the purchase of an operating fabric mill located within South Asia for which negotiations are in progress. According to a disclosure filed with the Colombo Stock Exchange, the apparel exporting firm said that given the changes in the global and local macro-economic environment, immediately after the listing in July 2011, the firm’s Board of Directors had decided to hold back the proposed organic expansion within the Avissawella BOI Zone.
“After evaluating different options, the Board feels that TJL’s expansion should be by way of acquiring an operating fabric mill within the South Asian subcontinent. Evaluations with regard to these acquisitions are currently ongoing. However a timeline has not been decided yet,” the firm said adding that this will provide the company the access to an operating fabric mill and the results would be faster than investing in an internal expansion.
Meanwhile, the CSE filing also revealed that TJL had invested a small portion of the funds raised through the IPO in addressing bottlenecks within the production facility which has assisted in increasing capacity as well as improving efficiency. However, the filing did not specify as to how much money was spent or is needed to acquire the proposed fabric mill in future. The disclosure further noted that the recent fuel price hike which resulted in a Rs.40 increase in the price of furnace oil has adversely impacted the energy cost of TJL. “In this respect, the Board is evaluating options on an alternative energy source, including but not limited to coal and bio-mass, which will require an investment by the company into the relevant technology. Such investment will enable the company to enjoy substantial savings to its future energy cost,” the disclosure further added.

AHS mulls SL entry

Top hair replacement company, Advanced Hair Studio (AHS) in India is to soon form joint ventures with local partners and its UK-based parent company to establish its presence in Sri Lanka apart from Bangladesh and the Gulf region, a foreign media report states. According to the report, AHS India, which has rights to operate in the Indian sub-continent and the Gulf region, will be the majority stakeholder in these overseas ventures.
“The company, which took five years to establish five hair replacement studios in India, has now accelerated its pace of expansion. It will be opening 15 more studios in top Indian cities, while entering Colombo, Dhaka, Dubai and Abu Dhabi by 2015,” the report stated.
AHS India had started its operations in the country in 2007 as a 50:50 joint venture between $2.3 billion Advanced Hair Studio International and the entity owned by Sanket Shah who is also the CEO of Planet Education and Elite Infrastructure in India.
“We will soon be partnering with a Sri Lanka-based business house,” said Sanket Shah, CEO of AHS India.
Globally, 200 celebrities endorse the brand and of this 20 are cricketers, including Saurav Ganguly, Shane Warne, Graham Gooch and Michael Vaughan.

Small motor dealers cry foul

Small scale vehicle importers, who consist of more than 70% of the total vehicle dealers in the country allege that they will go bust if the recent proposal requiring a vehicle importer to obtain an annual license is implemented while the authorities maintain that such measures are necessary to save the vehicle buyers from the unscrupulous traders who compromise on quality.
Chairman of Vehicle Importers Association of Lanka (VIAL), Sampath Merenchige says that the government’s plan to impose an annual license fee of Rs 5 million for small players would push the small player out leaving only a few large firms competing in the industry.
“This is no more an industry which is dominated by a few large scale dealers limited to Colombo. There are people who bring down one or two vehicles depending on the requirement of the area and could be the bread and butter of large number of people who directly and indirectly depending on this trade. They would certainly go out of business overnight because I don’t think they can even dream of paying such a colossal amount annually for a license,” Merenchige said.
He noted that although they were prepared to help the government in making the industry more organized, even possibly with a licensing scheme, they were not capable of spending the reported ‘huge’ amount as annual fees.
The VIAL Chairman further stated that the recent policy changes by the government including hikes in excise duty, interest rates, appreciation of the dollar, higher transportation cost due to shifting the port to Hambantota and the more recent directive to obtain a permit will eventually increase vehicle prices.
“These measures will result in owning a vehicle a dream forever for the poor masses,” he highlighted.
Meanwhile, according to the government, the recently proposed requirement to obtain annual permits for vehicle importers is expected to streamline the industry which has been long ailing with haphazard entry of players who compromise on the quality of vehicles thus affecting the consumer.
Explaining the underlying reasons behind this new initiative, the Director General of Department of National Planning at the Ministry of Finance, Dr B M S Batagoda told The Nation “We saw there has been a continuing issue with the quality of the vehicles which are imported by some unorganized vehicle importers in the country and this is something we cannot keep a blind eye on as responsible authorities because ultimately it’s the poor customers who are affected”.
He further noted there was a racket by some of these parties who attempt to evade from the country’s excise duty system by deliberately undervaluing the vehicle’s real value at the point of exporting from a foreign country. “We cannot let it happen because the country is losing at the end of the day due to less taxes paid,” he added.

Wednesday, May 2, 2012

Tea hub aims global market leadership

By Dilina Kulathunga

Sri Lanka would have the capacity to increase its annual global market share in tea exports from the current 15% share to at least 20% through the adoption of the tea hub concept, which has been a debated topic in recent times, says a top industry official. According to Rohan Fernando, a member of the Tea Exporters Association of SL (TEA), the tea hub concept which allows importation of tea from other tea producing countries and blend, pack and re-export from Sri Lanka is likely to position the country as a dominant player in the world map and will have no deterrent impact on the long-term sustainability of the tea industry.

“The reality that we all have to realize is that Sri Lanka is only exporting about 300 million kilograms of tea out of the total world exports of 1.8 billion kilograms but using a tea hub concept, we would be able to substantially improve revenues from tea exports,” Fernando said refuting allegations leveled against the concept that Sri Lanka would open way for ‘cheap tea’ to dominate the market.

When the issue was recently taken up for discussion with the Minister of Plantation Industries, Mahinda Samarasinghe, some exporters voiced concern that allowing a tea hub would allow ‘cheap tea’ to be blended with Pure Ceylon Tea which affects the premium quality synonymous with Sri Lanka.

“There is nothing called ‘cheap tea’, either there is good tea or bad tea. We have a clear strategy to position the ‘Pure Ceylon Tea’ to a niche as a premium product which is more expensive but unique in taste while the ‘blended multi-origin tea’ will be positioned separately with a clear distinction,” Fernando said denying that this is an effort to sell cheap tea to the world.

He says that tea blending and packaging is not a new phenomenon and if the tea hub concept is not allowed in Sri Lanka, local exporters may think of even expanding their present blending facilities in other countries.

“Sri Lanka might run the risk of becoming isolated or somebody else would come and set up similar facilities unless we become proactive. After all, how many kilograms of Pure Ceylon Tea are we exporting under our own brands?” he asked pointing out that only around 12% out of our total tea exports consist of our own brands.

Meanwhile, a director of MJF Group and an established tea exporter under Dilmah brand, Malik J Fernando said: “we are totally against this proposal on the grounds that, this proposal is intended to facilitate packing of multi-origin foreign brands and ‘trading’ local brands and not to develop the premium, Sri Lankan brands”.

“It is my well-considered opinion that the quality of Ceylon tea and its image as the world’s finest tea will be irreparably tarnished if free importation of black tea is permitted. At the present time, CTC manufactured tea, green tea and speciality teas not grown here can be imported, subject to certain regulations,” he said concluding that with the current exchange rate policy of the government resulting from the balance of payments problem, the request by TEA makes even less sense.

“All exporters, including packaged tea exporters, are getting windfall rupee profits as a result of the progressive devaluation of the rupee,” he further pointed out.

Chicken surplus to dent margins

By Azhar Razak

The Chairman & Chief Executive Officer of Three Acre Farms PLC (TAF), the largest poultry player in Sri Lanka says that margins of poultry firms in the island will be affected in the coming years as the poultry industry is anticipated to be over capacity in the coming years due to the rapid expansion of key players in the market.

“With growing market trends and the Sri Lankan economy predicted to reach over 8% growth in 2012, it can easily be said that the poultry industry’s contribution to the economy will increase multiple-fold in the coming years. We expect that the consumption of Chicken Meat will increase to about 8Kg per capita by 2016, which is highly favourable for the poultry industry in general and TAF in particular,” TAF Chairman and CEO, Cheng Chih Kwong, Primus said in the Annual Report released last week.

Reviewing operations for the year 2011, he noted that with the intervention by the government to import layer hatching eggs to increase supply of day old chicks (DOC) during the 4th quarter of 2010, the industry entered into a cycle of excess supply of DOC in 1st quarter of 2011 and that subsequently the market showed a shortage of demand for poultry products in the 2nd and 3rd quarter of 2011, when major players were forced to scale down their operations to reduce losses.

“Consequently when the market normalized around the final quarter of the year, the local production was insufficient to meet the demands for day old chicks. These fluctuations in demand pattern greatly contributed to increased operational costs within the Company and the poultry industry as a whole,” Primus analysed.

Meanwhile, Primus who also heads TAF’s parent company, Ceylon Grain Elevators (CGE) said that CGE had achieved its highest ever feed sales volume in 2011 despite facing numerous challenges.

“The Company continued to expand its farming capacity with the addition of 4 new modern environmental controlled (EC) broiler houses, and will continue to increase our farm capacity in the future,” Primus mentioned in his message in CGE Annual Report which was also released last week.

About 70% of the contribution to livestock sub-sector in Sri Lanka comes from chicken meat and eggs. Chicken meat and eggs remain the cheapest source of animal protein. While the country’s economy progresses, the domestic per capita income also increased, and improving Sri Lankan purchasing power. Currently the annual chicken meat consumption in Sri Lanka is approximately 5.7Kg and 54 eggs per person.