Sri Lanka Newspapers Sunday 25/03/2012

Geneva: No immediate impact on stocks, foreign investment
By Duruthu Edirimuni Chandrasekera

The Colombo bourse is unlikely to be negatively impacted, at least in the short term, on Sri Lanka's loss in the US-backed resolution in Geneva, according to analysts.

Some say that foreign investment in the stock market will not be hampered immediately while others believe that it's too early to make predictions. "It may be too early to comment on the expectations of the foreign investors," Thakshila Hulangamuwa Vice President, Asha Phillips Securities said. He added that what will be mostly counted on is if the country provides an investor friendly environment in all aspects along with transparency and proper policies adopted by the government on a long-term basis.

While also acknowledging that the US-led resolution was angled at certain governance issues which is also a sensitive area for investors, Mr. Hulangamuwa noted that the issue will be focused mostly on how effective the expected implementation of the LLRC (Commission) recommendations would take place on a reasonable time frame.

Analysts pointed out that the Geneva resolution is unlikely to affect foreign direct investment (FDI) to the country. "Most of the recent past and expected foreign investment into the country is from either Chinese origin or links to Chinese firms," Chamikara Gunawardane, Director Invstoreye Ltd, a private research company said.

"We have hardly got any major Western originated foreign investment to the country, except for the ones we got after privatization of strategically important state entities such as Colombo Gas, Lanka Lubricants, Ceylon Oxygen few decades back. If you look at any mega foreign investment to Sri Lanka especially since 1990's, they have been from Asian and the Middle Eastern countries, be it telcos, energy, food & beverage or tourism," he pointed out.

He noted that the resolution passed on Thursday will not have any immediate impact on Sri Lanka's economy. "I am more worried about our main export markets (majority to the US & EU) being affected.
http://sundaytimes.lk/120325/BusinessTimes/bt05.html

By Duruthu Edirimuni Chandrasekera
Last month's hike in policy rates by 50 basis points and the government's decision to allow the currency to freely float have raised real concerns on economic growth and the stock market in general, analysts say.

Deposit rates to rise
Analysts said that the average deposit rates which are near 7% are believe to rise at a slower pace facilitating bank and finance sector companies to fatten their net interest margins.
While they said that moving towards a much leaner free float would always improve transparency and drive real growth, on the negative there would be higher volatility especially when large import bills are serviced.

Economists noted that the weakening currency would bring in another set of challenges for Sri Lanka which is a consumption driven economy. "With the fuel prices expected to be jacked up, the cost of imported food items such as wheat, sugar, milk powder, etc will also rise in price," an economist said.
He said that the increase in interest rates will see an exit from the market as savings become more attractive due to high interest rates that are offered by all financial institutions. Analysts noted that as cost of borrowing becomes more expensive there will be a further reduction in money inflows into the market. "All institutions in the economy will face difficulty due to high cost of borrowings that will increase the finance costs and with imported inflation the profit margins will become thinner and further reducing the earnings of companies," the analyst said.

He noted that the real wages have currently reduced, and that most companies will benefit by this in the short run. However many say that the indices will remain at similar levels or could face further downward pressure, but the current levels seem to be holding up in the market for the moment.

Rate changes had to happen
According to some analysts, the Central Bank (CB) increasing policy rates and flexing exchange rates had to happen and it was more a matter of time. "Low interest rates had fuelled a credit growth that was primarily import-driven. This drove out liquidity in the market. In addition, the huge import bill fuelled by the credit growth in addition to the much higher reliance on thermal energy (due to a drought last year) imposed considerable pressure on exchange rates," Deshan Pushparajah, Head of Capital Markets, Capital Alliance said. He added that increasing policy rates will drive up interest rates and reduce demand for credit but, he noted that this will not be very positive for the financial services sector which, with increased competition would have had to rely on volume growth this year. He added that the increased rates could also drive down sales in the consumer discretionary sector which is generally credit driven (eg vehicles, etc.).

Danushka Samarasinghe, Director, TKS Securities (PVT) Ltd noted that curbing excessive credit growth through interest rate hikes is a positive rather than having to keep interest rates artificially low and resort to excessive money printing. "Higher interest rates would dent GDP growth rates, though over the medium term the economic health of the country would improve," he added.

Many say that the increased policy rates also increases the hurdle rate for investing the equity market. "This could render the market relatively unattractive vis-a-vis fixed income instruments and hence has an overall negative impact on investors and the recent market downturn is primarily to do with that," Mr. Pushparajah added.

Analysts also added that the devalued rupee will have a mixed impact on the listed companies. "Export companies and import substitution companies will benefit with the higher value for the dollar. Low margin commodity companies would potentially benefit the most out the devaluation. On the other hand, import related companies will see sales potentially slowing down to higher pricing/ lower margins," the analyst said.

However, the foreigners were adopting a wait and see approach to the devaluation. "Now that this has happened, bargain hunting foreign investors should probably come back into the market," Mr. Pushparajah noted.

Analysts also say that the credit ceiling will potentially be a serious drawback to the banks. They say that with a ceiling imposed, banks would attempt to improve their margins and hence become more actively involved in the personal loans space (where the margins are much higher - credit cards, etc).
"This could result in lower asset quality for banks this year whilst also crowding out the middle level corporates which cannot afford to pay the same margins on business loans," Mr. Pushparajah noted.
However, he also said that the ceiling should help the macro economics of the country by checking the huge credit growth and reducing the demand for consumer money.

Listed firms attractive
Analysts said that the markets will also be affected by this due to the potentially higher interest rates/ limit impositions on margin lending. Mr.Samarasinghe noted that last year the Colombo Stock Exchange became expensive based on valuations and having nosedived since its peak, the market remains relatively attractive given its growth potential.

While the foreign inflows have improved over the last two weeks, analysts said that the valuations of the companies are finally looking attractive again on a relative basis. "In addition, with the settling down of the European situation, most emerging markets across the world have seen money flowing back their way, so it's not a unique situation," Mr. Pushparajah pointed out.

Analysts said that during the past few months foreigners were however, adopting a wait and see approach due to the impending rupee devaluation. "Now that that has happened, my guess is that you will see some good money flowing in this year," Mr. Pushparajah added.

Mr. Samarasinghe noted that given the overall macro positive with growth intact and the weakening of the rupee, foreign portfolio investments are targeting Sri Lanka. Further the weakening of the currency beyond Rs 120 per US$1 is more of short term scenario resulting due to the possibility of foreign portfolios invested in the domestic bond market pulling out, Mr. Samarasinghe added. "However we believe the foreign fund inflows would be sufficient to weather any sudden outflows although in the short term high exchange rate volatility and pressure on the rupee should be expected." He further said that in the eyes of the foreign investors Sri Lanka is a growth story, having recorded 8% plus GDP growth rates in the past two years. "Amidst the global economic slowdown we believe the country would record +6.6% real growth in 2012 which provides sound justification for their view," he said.
http://sundaytimes.lk/120325/BusinessTimes/bt31.html

Stockmarket Review
By Elton P. Ebert

The week opened with a substantial turnover of over Rs. 3 billion made possible through dealings of over 20 million Aitken Spence and two million in JKH which also brought in a foreign funds inflow of around Rs. 2.5 billion.

This was following last Friday's sensational Rs.15 billion turnover, and many expected at least a temporary bull run. But this was not to be as the market returned to its old losing ways for the rest of the week, except on Friday when a minor recovery took place promoting the All Share Index back to the 5400 mark. JKH which reached Rs.200 on Monday went into contraction with the rest of the market, but was in constant demand. Commercial Bank and HNB evoked fair interest while ERI and Free Lanka Capital were also fancied.

Nourishing interim dividends of Rs.7.50 and Rs.4.50 by Kegalle and Namunukula plantations injected enthusiasm into the two stocks which pushed the prices up while the other plantations, shares remained stagnant. Kegalle ended the week at Rs 103, while Namunukula ended at Rs.60.
Some analysts say that it is a paradox that export-based companies are still stuck in the grove because with US Dollar being quoted at these levels there should have been a big spurt in these stocks. Oil prices appear to be directed northwards which could mean plastic prices rising and as such some brokers have advised their clients to bear in mind that glass bottles will creep up in demand. Renuka Agrifoods announced a Rights issue of 2-for-5 at Rs 4 per share but the stock was on the slide ever since to close at Rs 6.

Access Engineering which issued 20 million shares at Rs.25, will commence trading on the Diri Savi Board on March 27. This stock which is in the Construction & Engineering Sector, should have many keen watchers of its price structure during the first few days of trading. Meanwhile the Rs.350-million Mackwoods IPO closed on Thursday being fully subscribed.

Many more companies are hoping to come out with their IPOs in due course. As part of its restructuring, Lankem Ceylon subsidiary Colombo Fort Hotels Ltd transfered its 19.73 stake or 118,351 shares in Beruwela Resorts Ltd. Dialog finally bought over the entire share capital of Suntel Ltd, with its share price hovering around the Rs 7 mark and ended at Rs.7.30 on Friday.

Changes in directorates: Nawaloka Hospitals - Dr. T. Senthilverl was appointed a Non Executive Director on February; People's Merchant - Dr. Chandrasena Samarasinghe was appointed CEO; Hemas Power - Husein Esufally tendered his resignation as Chairman effective April 1st and will be replaced by Imtiaz Esufally; Singer Finance (Lanka) - J.A. Setukavalar was appointed as an Independent Director. Turnover for the week was Rs.5.4 billion as against the unusual Rs.18.1 billion last week. The ASI at 5422.33 was 27 points or 0.25% lower while the Milanka was 16.39 or 0.1% better to finish at 4847.86.
http://sundaytimes.lk/120325/BusinessTimes/bt28.html

By Quintus Perera
Sri Lankans should adopt a simpler lifestyle to beat the rising cost of living which has become a burden to consumers, according to Sarath Wijesinghe, former Chairman, Consumer Affairs Authority (CAA) of Sri Lanka and the present Sri Lankan Ambassador to the United Arab Emirates.

He gave this advice while making the keynote address at the World Consumer Rights Day Forum jointly organized by the Institute of Policy Studies of Sri Lanka (IPS) and the Federation of Chambers of Commerce and Industry Sri Lanka held in Colombo last week.

He noted that the average consumer doesn’t make a fuss when spending on such comparatively non-essentials like mobile phones. “The major expenditure of a family today is for the mobile phone and tuition fees. When the price of bread goes up by Rs. 5, there is lot of commotion but when the price of the telephone bill goes up by Rs. 50, there is no resistance,” he said.

He said that the consumer is the king and kingmaker in some parts of the globe but not in Sri Lanka, saying: “People say the consumer is powerful and he is the king and kingmaker. Traders say the consumer is always right. It may be so in other parts of the world, but not necessarily in Sri Lanka.”
He said that the consumer in Sri Lanka is expected to be protected by the Consumer Affairs Authority and the other regulatory bodies. Thus, embodying all the other laws and regulations the Consumer Affairs Act of No 9 came into operation in 2003 and said that this brought in changes for consumerism by transforming the concept of price control to the practice of control of consumer items by regulatory procedure.

Mr Wijesinghe said the Act gives powers to the CAA to regulate traders, industries, businesses and professions by way of regulatory powers. He said the main objectives of the authority are to protect consumers against making of goods or provision of services which are hazardous to life and property, to protect consumers against unfair trade practices, to provide adequate access to goods and services and to seek redress against unfair trade practices.

He said that while performing all these activities, the main theme and the expectation of the Act is to encourage the consumer to organize themselves in the promotion of better standards on consumerism.
Yet it transpired at this forum despite many years of the CAA the formation of consumer associations hasn’t been successful in Sri Lanka.
http://sundaytimes.lk/120325/BusinessTimes/bt13.html

Sri Lanka's Central Bank has warned non registered finance companies against using words relating to finance in their company names. The Central Bank has issued a notice directed at companies using the word 'finance,' financing' or 'financial' as part of their company name or description, a senior official of the Department of Supervision of Non-Bank Financial Institutions of the Central Bank told Business Times.

Under the Finance Business Act, "no entity other than a licensed finance company shall use the words 'finance', 'financing' or 'financial' as part of its name or description," he said. He noted that there are large numbers of non registered financial institutions operating in the country using the word finance for their company name to mislead the public. The Central Bank has been given wide powers to take appropriate legal action against such companies under existing laws, he revealed.

The Act was passed in Parliament in September last year and became effective on February 2012, he said. He noted that it is compulsory to use the word finance in registered financial institutions and no other company can use the words 'Finance', 'Financing' and 'Financial' in the name description without the prior approval of the Monetary Board and all companies who want to engage in the business of finance should comply with the rules by May 9 this year, he disclosed.

The Central Bank has the power to publish the names and addresses of firms which use the words against the provisions of the Act and it will introduce a logo or a sign to be used by every registered finance company, he added. The requirement is not applicable to firms which are required by the Monetary Board to have as part of their name the word 'finance', 'financing' or 'financial' or their equivalent in any other language.

It is also not applicable to an association of finance companies formed for the protection of their interests, trade unions which are an association or combination of workers who are employees of a finance company, or educational bodies or consultancy services.

He said that approved micro-finance companies registered under the Finance Business Act may continue to use the words 'micro finance' as part of their names or descriptions until a proposed Micro Finance Act is enacted. Unauthorised acceptance of public deposits will be made an offence and those violating the law can be indicted in the high court.
http://sundaytimes.lk/120325/BusinessTimes/bt12.html

“Buddhism provides benefits for a peaceful life and Asians are blessed with it and I suggest that the West too should be more acquainted with Buddhism for the world to be peaceful,” according to Prof Suvit Vibulsresth, Founder Executive Director, Core-Informatics and Space Technology Agency of Thailand.
This was his parting advice while delivering the 4th Memorial Oration of ‘Sir Arthur C Clerk” organized by the Arthur C Clarke Institute for Modern Technologies (ACCIMT) held this week in Colombo.

While paying tribute to Sir Arthur C Clarke for his contribution to satellite communication technology, Prof Vibulsresth devoted his lecture on how meticulously developed this technology over the years has been for the benefit of the people of Thailand, such as farmers, etc.

He advised Sri Lanka to purchase a satellite that would cost around $ 30 to 40 million which could be put to immense benefit to people. He said that the world incurred heavy losses in kind and in lives due to tsunamis, earthquakes and floods. He said that the world is now depending on historical data on these major disasters. Prof Vibulsresth said that using modern data earthquakes and other such disasters could be forecast and in that manner lot of lives could be saved.

Prof Lalith Gamage, Director, ACCIMT said that it was four years ago that the great visionary - Sir Arthur C Clarke, died and noted that he was a literary figure and an unparalleled science fiction writer. Sir Arthur’s predictions were always plausible within the laws of science, Prof Gamage asserted.

He said that Sir Arthur came to the limelight of science and global fame as a visionary scientist with his concept of the “Possibility of worldwide wireless communication through Geo-stationary Satellites” as an article that appeared in the “Wireless World” journal in October 1945.

He said that the concept was put into practice within two decades, since his prediction. Prof Gamage said “It is needless to stress the phenomenal impact the advent of Satellite Communication has had on humanity during the decades that followed.”

He said that it has greatly contributed to the changes that have since taken place in the way people communicate, the way people learn, the way business organizations do their transactions and the way the government maintains its relations.

He said that they at the ACCIMT carry out research and technology development in electronics, robotics, communication, information technology and space applications. Prof Gamage said that in addition to these research and technological development work they also have undertaken some result oriented projects.

These, he said, are: Recovery of train engines including reverse engineering of controllers that saved over Rs 100 million for the Railway Department; Automated quality grading system; Remote control and monitoring of systems using mobile networks; Intelligent traffic control systems and improved medical access for rural communities through telemedicine.

He said that they also undertake laboratory testing for certification of equipment and Incubation facility.
Pavithra Wanniarachchi, Minister of Technology and Research and Poldej Worachat, Ambassador of Thailand in Sri Lanka also spoke.
http://sundaytimes.lk/120325/BusinessTimes/bt11.html

The Sampath Bank celebrating 25 years brought US$ 62.5 million or Rs. 7 billion which they raised through a syndicated loan into their coffers this week, officials said. “We brought in the monies on Tuesday, and now we’re liquid,” Aravinda Perera, the bank’s Managing Director told the Business Times, adding that this Rs. 7 billion will help Sampath grow its assets by 23% this year.

"It's a 1-year loan," he added, saying that Sampath had wanted only US$ 30 million, but there was an oversubscription of US$ 63.5 million. He insisted that the bank won’t increase their deposit rates to be competitive with the other banks. “This is because we’re liquid,” he added. He said that Sampath will raise its Tier II Capital both locally and foreign through debentures.

Mr. Perera noted that during the last three years, Sampath’s loan growth has been higher than its deposit growth. Responding to a query on where the deposit rates are heading, he noted that largely depends on the credit growth in the country. “Loans won’t grow at the same rate this year, whether or not there’re Central Bank restrictions," he noted. He added that with the rising interest rates, banks will be more mindful of their Non Performing Loans (NPL). He also added that deposit mobilization remains highly challenging, as the growth in the economy’s deposit base is lagging behind the current rapid growth in demand for credit. On recent reports that Sampath has outdone some industry stalwarts in the credit card business, Mr. Perera said, “We’re arguably Number 2 in the credit card business,” adding that this business is in its growth mode.

He added that Sampath is studying the pros and cons of going abroad. “We’re studying how profitable it is against the capital requirements,” he added. He said Sampath’s investment in Lanka Bangla Finance (LBF) in Bangladesh will not be divested mainly due to the Bangladeshi regulatory requirement which stipulates that significant shareholders of any stock market investment shouldn’t sell. “This is also not the best time to sell and they (LBF) are going for rights issue soon" he added.

Sampath's pre-tax profit of Rs 5.5 billion last year reflected an increase of Rs 1 billion or 23.9% over the pre-tax profit of Rs.4.5 billion for 2010. The post-tax profit of the bank recorded a growth of 15.6 % over the last year. Mr. Perera added that the key challenges faced by the bank included the narrowing of Net Interest Margin from 5% in 2010 to 4.13% in 2011 and the mark to market losses on its trading portfolio held, which amounted to Rs.189.6 million in 2011, as against the net gain of Rs.333 million in 2010 and the significant increase of 25.5 % in operating expenses.
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The Sri Lankan insurance unit of German financial services company Allianz recently reported that its 2011 ‘General Company’ after-tax profits (PAT) had gone up 43% year-on-year, to Rs. 240 million, according to a statement by the insurer. Further, it also noted that "a pure underwriting profit of Rs. 180 million was achieved, which is a 43% growth over the last year".

Additionally added, the company's Life Fund's "solvency margin was maintained at 16 times above the regulatory minimum requirement" while the "General Company's solvency stood seven times higher than the regulatory requirement". It also indicated that its "Life Fund grew from Rs. 66 million to Rs. 179 million during the year, a growth of 171%".

Meanwhile, Allianz Lanka also highlighted its Gross Written Premiums (GWPs), a measure of revenue in the insurance sector. For its Life Fund, GWPs had grown by 72% year-on-year, to Rs. 351 million. And the "General Company achieved a GWP of Rs. 1,501 million against the GWP of Rs. 1,470 million in 2010".

r also revealed that that these achievements, which also included a 40% growth in first year premiums that it dubbed "impressive", had resulted in its Life unit declaring a credit rate of 8.5% for Life policyholders.
http://sundaytimes.lk/120325/BusinessTimes/bt33.html

Aitken Spence, in a bid to reap the peace dividends, has expanded its resort portfolio, a TKS Securities Research report said. “The former Neptune Hotel has re-commenced operations after an extensive repositioning process as Heritance Mahagedara, a 64-room up market wellness resort.

Further, the Ramada Resort property in Kalutara is scheduled to be re-opened in second half 2012 as ‘The Sands’ following a re-positioning as a 4-star resort after which a further expansion in room capacity to 200 is planned," the report said. It said that Aitken Spence's hotel arm, Ahungalla Hotels has tied up with one of world’s renowned hotel chains “Six Senses Hotels and Spas” to build an up market hotel with 54 villas in Ahungalla at an investment of some US$ 40 million.

The report said that Spence’s Brown’s Beach Hotel, which is an associate company, is currently being demolished with plans afoot for a brand new 100-room luxury resort, the report added. Heritance Kandalama, property of Spence, is also a cash cow and the report noted that further plans are also being drawn up to develop 100 acres of beach front property in eastern Nilaveli, with the aim of harnessing the tourism upbeat in the area. “Against this backdrop the company would enjoy strong and steady revenue streams from the leisure arm in coming years,” it added.

The report also said that during the last financial year there was significant growth witnessed in international trade and growing volumes handled in the port of Colombo. “This buoyant economic condition in Sri Lanka augurs well for Spence. Further given the emerging growth opportunities, the company has strategically increased its scale of facilities retaining its position as the largest Sri Lankan cargo and logistics provider,” the report said.

The group’s association with shipping firm Hapag Lloyd was uplifted to a joint venture during last year. "With the principal now becoming an investor to the company, a more mutually beneficial relationship can be expected in the future," the report said.

The investment of the group in Logilink”, a specialized facility that supports the requirements of the garment industry has begun to generate revenue and going forward, it will be a large focus in the sector.
Further the land of nine acres the company owns in Welisara is expected to be developed to extend its yard operations while another Rs 150 million would be invested in modern container handling equipment in this financial year.
http://sundaytimes.lk/120325/BusinessTimes/bt29.html

Sri Lanka has a lot of potential, as good as the Maldives, to attract dozens of Chinese travellers but a group of top, visiting travel agents says much needs to be done before this could be achieved.
China is the Maldives' biggest source market with nearly 200,000 tourists in 2011, against just 41,500 in 2008 compared to Sri Lanka which attracted only 16,000 last year with half of them being workers.

"The travel industry (on both sides) did a lot of promotion of the Maldives and in just 2-3 years it increased by over 100,000 visitors. The same can happen in Sri Lanka if there is a coordinated promotional effort," said Sketic (one name) from Shenzhen Shenhua International Travel Service. Sword Lai, Vacations Division Product Manager at China International Travel Service Shenzhen Co Ltd among China's top three travel agencies, told the Business Times that while Sri Lanka has some fantastic offerings and is 'such a compact destination', the key is communications.

"There should be Chinese-speaking guides and staff in hotels should also have some knowledge (of the language)," he said, adding that Chinese travellers prefer destinations where they can communicate in their own language.

The third official, Trigger (one name) also from a reputed travel agency, echoed the same views of the other two adding that the beauty of Sri Lanka was reflected in the tea country, beaches, resorts and the historic sites. The trio, hosted by Colombo-based Viluxor Holidays founded by Shafraz Fazley - Managing Director - a new entrant to the Sri Lanka leisure industry but having an established practice in the Maldives where it accounts for about 30% of the Chinese market - travelled across the country during their 3-day visit.

The trip took them to Negombo, Sigiriya, Dambulla, Nuwara Eliya, Yala and the coastline to Colombo from Hambantota. Mr Lai said one location which would attract the Chinese is Sigiriya which is steeped in history and a wonderful place to visit.

Mr Sketic said there was a need for a lot of promotion from Sri Lankan authorities too. "Sri Lanka needs to do a lot more promotion as the Chinese know little about this country except maybe black tea and elephants," he said adding that travel brochures should also be available in the Chinese language similar to French, German and English and also in hotels and other sites of interest.
China is the world's biggest outbound market and many countries, including the US, are eyeing this market.
http://sundaytimes.lk/120325/BusinessTimes/bt06.html

Retail interest in the Colombo stock market is expected to revive this week as the CSE upgrades its trading system on Monday, Acuity Stockbrokers said in a market report.

It noted that government’s recent sale of large blue chip stakes to foreign investors failed to ease pressure on the rupee with the rupee hitting a new low against the US dollar on the back of import demand.

The Central Bank (CB) however hastened to reassure markets saying that it expects further foreign exchange into the country in addition to the recent inflows via equities, capitalizing by private commercial banks and investments in Sri Lanka investment bonds and treasuries, the report further said.

"The CB added that this increase in foreign exchange inflows, along with a deceleration of import demand should stabilize the rupee in coming weeks," it added.

The Acuity reported noted that markets slumped last week as net foreign inflows which bolstered volumes the previous week and on Monday dwindled over the week.

By Friday however, markets won back some of its mid-week losses with the ASPI picking up 72 points and volumes hovering just below Rs.1 billion.

The All Share Price Index closed the week down 26.72 points (0.49%) from a week earlier while the MPI was down 16.39 points (0.34%) with Aitken Spence, JKH and Commercial Bank dominating turnover.

These three counters together accounted for 59.18% of the total turnover with Spence alone contributing 43.98% of the week’s total turnover value following he EPF sale of 5% stake of the company to a foreign buyer.

Nevertheless, the week’s turnover value was down 70.3% to Rs.5.42 billion from 18.22 billion the previous week.

Acuity said that market capitalization too had declined 0.48% last week to Rs.1,988.3 billion.

Foreign investors remained net buyers posting a net buying position of Rs.2.39 billion last week against the previous week’s net buying position of Rs.14.93 billion. The total inflow was Rs.3.33 billion was mostly accounted for by Aitken Spence. Meanwhile, total foreign sales increased significantly by over 100% to Rs.937.3 million from Rs.283.1 billion a week earlier.

John Keells Stockbrokers (JKSB) also noted that the market had declined during the week before rebounding sharply on Friday with activity driven by large cap diversified counters and Commercial Bank. Foreign purchases of Aitken Spence resulted in a net foreign inflow of Rs.2.4 billion for the week, JKSB said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=48220

Following success with fridges, Regnis does well with washers

Regnis (Lanka) PLC that had concentrated on refrigerator manufacture in recent years is now focusing intensively on its washing machine manufacturing business growing unit refrigerator production 21% in 2011 and washing machine production 54%.

The company’s Chairman, Mr. Hemaka Amarasuriya, said that 2011 had seen the company moving closer towards achieving the character of a mid-sized corporate and away from dependence on manufacture of refrigerators by enhancing inputs in a newly emerging line of washing machines.

The year under review saw Regnis posting revenue of Rs.2.34 billion, up from Rs.2.04 billion a year earlier, and an after-tax profit of Rs.83.3 million against the previous year’s Rs.71.8 million.

Amarasuriya claimed a share of the credit for his company for approximately 2.5 million of the country’s households enjoying the convenience of a refrigerator in their homes.

Penetration levels had today topped the 50% mark whereas at the turn of the last century only 10% of the population could afford a fridge.

"Thanks to our pioneering efforts, Sri Lanka’s penetration compares favourably with those of other Asian countries, i.e. penetration in China 60%, India 18%, Indonesia 25%, Philippines 48%, all of Asia 50% (Reference "Mr. & Mrs. Asia – Moving up the ‘j’ curves’ Spring 2010)," he said.

Amarasuriya explained that model releases were directed more towards broader mass markets rather than supplying just the urban elite. This had helped grow the number of both refrigerators and washing machines sold.

"Price competitiveness from imported models, riding the crest of a wave of tariff reductions at entry point, prevented us from translating unit growth in direct proportion to sales value," he said.

He cautioned that investment goods comprised 60% of the country’s imports and consumer goods accounted for 47%. Both industrialists and economists alike feel that both fiscal and monetary adjustments may be needed to manage the emerging balance of payments shortfall.

"We are however quietly confident that government will recognize the role played by pioneering manufacturers in stimulating productivity at the base economy and sustaining a supportive fiscal policy for the white goods industry, as local industry needs to expand to manage the import bill," he said.

He was hopeful that consumer markets will remain for another year at least. One reason for this was the inward remittances from Lankans working abroad with much of these funds being spent in the consumer market.

"(The) continuity of inward remittances growth, even at a slower pace, will enable sustenance of mass market buying power," he said.

Regnis CEO Asoka Pieris said that the year under review had seen the company moving from the assembly of washing machines to the manufacture of most models as most plastic components were now made in-house.

They had also commenced the assembly of air conditioners and manufacture of high quality plastic chairs.

During much of the year, the business environment was unfavourable to Regnis as the duty for imported refrigerators was lowered in November 2010. They were happy that the duty protection had been partially restored in the November 2011 budget.

The company had introduced an incentive scheme for production staff and Pieris attributed increased production to be partly a result of this. Disruptions in industrial relations in the last quarter of the year had been fully resolved by January this year.

Reduced duties for imported refrigerators had compelled the company to lower prices and this was reflected in the lower gross profit margins and lower profit before-tax. But income tax levels reduced enabling the group to post a higher after-tax profit than in the previous year.

The Regnis directors have recommended a first and final dividend of Rs.6 per share for the year under review maintaining the previous year’s dividend level.

Regnis has a stated capital of Rs.100.1 million, group revaluation reserves of Rs.251.9 million and group retained earnings of Rs.191.7 million in its books. Total assets ran at Rs.1.3 billion and total liabilities at Rs.757.9 million.

Singer (Sri Lanka) BV with 53.45% is the controlling shareholder with majority of the company’s 1,263 shareholders owning up to a 1,000 shares. Union Investments (1.1%), Mr. N. Dinapala (1.06%) and Mr. J.M.R.P. Jayasekara (1.02%) are among the major shareholders.

The directors of the company are: Messrs. Hemaka Amarasuriya (Chairman), H.A. Pieris (MD/CEO), G.C.B. Wijeyesinghe, S. Kelegama, V.G.K. Vidyaratne and G.J. Walker.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=48232

Business Times
Rate changes raise real concerns on economic growth and stock market future
By Duruthu Edirimuni Chandrasekera

Last month's hike in policy rates by 50 basis points and the government's decision to allow the currency to freely float have raised real concerns on economic growth and the stock market in general, analysts say.

Deposit rates to rise
Analysts said that the average deposit rates which are near 7% are believe to rise at a slower pace facilitating bank and finance sector companies to fatten their net interest margins.
While they said that moving towards a much leaner free float would always improve transparency and drive real growth, on the negative there would be higher volatility especially when large import bills are serviced.

Economists noted that the weakening currency would bring in another set of challenges for Sri Lanka which is a consumption driven economy. "With the fuel prices expected to be jacked up, the cost of imported food items such as wheat, sugar, milk powder, etc will also rise in price," an economist said.
He said that the increase in interest rates will see an exit from the market as savings become more attractive due to high interest rates that are offered by all financial institutions. Analysts noted that as cost of borrowing becomes more expensive there will be a further reduction in money inflows into the market. "All institutions in the economy will face difficulty due to high cost of borrowings that will increase the finance costs and with imported inflation the profit margins will become thinner and further reducing the earnings of companies," the analyst said.

He noted that the real wages have currently reduced, and that most companies will benefit by this in the short run. However many say that the indices will remain at similar levels or could face further downward pressure, but the current levels seem to be holding up in the market for the moment.

Rate changes had to happen
According to some analysts, the Central Bank (CB) increasing policy rates and flexing exchange rates had to happen and it was more a matter of time. "Low interest rates had fuelled a credit growth that was primarily import-driven. This drove out liquidity in the market. In addition, the huge import bill fuelled by the credit growth in addition to the much higher reliance on thermal energy (due to a drought last year) imposed considerable pressure on exchange rates," Deshan Pushparajah, Head of Capital Markets, Capital Alliance said. He added that increasing policy rates will drive up interest rates and reduce demand for credit but, he noted that this will not be very positive for the financial services sector which, with increased competition would have had to rely on volume growth this year. He added that the increased rates could also drive down sales in the consumer discretionary sector which is generally credit driven (eg vehicles, etc.).

Danushka Samarasinghe, Director, TKS Securities (PVT) Ltd noted that curbing excessive credit growth through interest rate hikes is a positive rather than having to keep interest rates artificially low and resort to excessive money printing. "Higher interest rates would dent GDP growth rates, though over the medium term the economic health of the country would improve," he added.

Many say that the increased policy rates also increases the hurdle rate for investing the equity market. "This could render the market relatively unattractive vis-a-vis fixed income instruments and hence has an overall negative impact on investors and the recent market downturn is primarily to do with that," Mr. Pushparajah added.

Analysts also added that the devalued rupee will have a mixed impact on the listed companies. "Export companies and import substitution companies will benefit with the higher value for the dollar. Low margin commodity companies would potentially benefit the most out the devaluation. On the other hand, import related companies will see sales potentially slowing down to higher pricing/ lower margins," the analyst said.

However, the foreigners were adopting a wait and see approach to the devaluation. "Now that this has happened, bargain hunting foreign investors should probably come back into the market," Mr. Pushparajah noted.

Analysts also say that the credit ceiling will potentially be a serious drawback to the banks. They say that with a ceiling imposed, banks would attempt to improve their margins and hence become more actively involved in the personal loans space (where the margins are much higher - credit cards, etc).
"This could result in lower asset quality for banks this year whilst also crowding out the middle level corporates which cannot afford to pay the same margins on business loans," Mr. Pushparajah noted.
However, he also said that the ceiling should help the macro economics of the country by checking the huge credit growth and reducing the demand for consumer money.

Listed firms attractive
Analysts said that the markets will also be affected by this due to the potentially higher interest rates/ limit impositions on margin lending. Mr.Samarasinghe noted that last year the Colombo Stock Exchange became expensive based on valuations and having nosedived since its peak, the market remains relatively attractive given its growth potential.

While the foreign inflows have improved over the last two weeks, analysts said that the valuations of the companies are finally looking attractive again on a relative basis. "In addition, with the settling down of the European situation, most emerging markets across the world have seen money flowing back their way, so it's not a unique situation," Mr. Pushparajah pointed out.

Analysts said that during the past few months foreigners were however, adopting a wait and see approach due to the impending rupee devaluation. "Now that that has happened, my guess is that you will see some good money flowing in this year," Mr. Pushparajah added.

Mr. Samarasinghe noted that given the overall macro positive with growth intact and the weakening of the rupee, foreign portfolio investments are targeting Sri Lanka. Further the weakening of the currency beyond Rs 120 per US$1 is more of short term scenario resulting due to the possibility of foreign portfolios invested in the domestic bond market pulling out, Mr. Samarasinghe added. "However we believe the foreign fund inflows would be sufficient to weather any sudden outflows although in the short term high exchange rate volatility and pressure on the rupee should be expected." He further said that in the eyes of the foreign investors Sri Lanka is a growth story, having recorded 8% plus GDP growth rates in the past two years. "Amidst the global economic slowdown we believe the country would record +6.6% real growth in 2012 which provides sound justification for their view," he said.