Sri Lanka Newspapers 09/02/2012

CIC gets positive rating, pressured by competitiveness and vagaries of agriculture sector

RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of A and P2 to CIC Holdings PLC CIC); the outlook on the long-term rating is stable. The Group’s ratings are supported by the dominant market positions in its key business areas as well as resilient demand for agriculture related products. The ratings also reflect CIC’s adequate gearing and debt protection metrics and the Group’s diversified business profile, the ratings agency said in a statement.

"The ratings are however, pressured by the competitive industry landscape the Group operates in, as well as its exposure to vagaries of the agriculture segment.

"CIC has diversified businesses in the agribusiness and livestock industry as well as interests in the consumer and pharmaceutical industries, paints, industrial raw material and packaging. The Group has strong market positions in most of its key business lines, particularly in its agribusiness portfolio. CIC is the largest private sector player in the domestic fertiliser industry, with an estimated 40 percent market share in the non-paddy segment. Meanwhile, the Group is one of the largest players in the pesticides market, with a share of around 25 percent .

"Additionally, CIC is also the market leader in the paint industry through its associate Akzo Nobel

Paints Lanka (Pvt) Ltd; its Dulux brand is estimated to command around 40 percent of the market.

"The ratings are further supported by the resilient demand for agriculture related products, which is the Group’s mainstay. Within the agriculture segment CIC caters to the fertiliser requirements of the tea industry which is an integral component of Sri Lanka’s economy. Furthermore, demand for pesticides is anticipated to be relatively resilient as it a crucial input in the cultivation of paddy, which in turn is processed to rice- Sri Lanka’s staple food.

"The Group’s financial profile is deemed adequate with its gearing ratio clocking in at 0.66 times in FYE 31 March 2011 (FY Mar 2011). Meanwhile, CIC’s funds from operations (FFO) debt coverage ratio stood at an adequate 0.38 times by end-fiscal 2011 (end-June 2011: 0.32 times). Looking ahead, the medium term capital expenditure (capex) plans are expected to push gearing to around 0.7 times, still manageable given the Group’s strong cash flow and annual FFO of around LKR 1.50 billion.

"Despite the above strengths, CIC’s ratings are moderated by the competitive industries it operates in. The Group’s core businesses such as fertiliser and crop protection products are highly competitive, largely due to the commoditized nature of these items. The competitive industry landscape that the Group operates is in reflected in CIC’s relatively thin profitability margins.

"On a separate note the Group is exposed to vagaries of the agriculture segment, including inclement weather and crop failure. Additionally, the Group is indirectly exposed to prices of these crops, particularly tea and paddy.

"The ratings are further moderated by CIC’s funding mismatch and weak liquidity position. As at end-fiscal 2011 the Group had LKR 666.69 million of cash and bank balances while its short-term debts amounted to LKR 4.89 billion, accounting for around 89 percent of the Group’s debt. This translated into a ratio on cash and cash equivalents ("CCE") to short-term debt of around 0.14 times.

"CIC’s current ratio came up to 1.20 times as at end-fiscal 2011. However, we derive some comfort from the Group’s LKR 700 million of unutilized funding lines.

"Meanwhile, RAM Ratings Lanka notes that the fertiliser business, the Group’s key earnings generator is highly regulated with selling prices, chemical compositions and formulation governed by the National Fertiliser Secretariat. Thus, the performance of the fertiliser division is largely exposed to changes in the regulatory framework and subsidy mechanism. Furthermore, CIC has experienced delays in receiving subsidy payments, which has in turn elevated its working capital; this had to be funded by short-term debt," RAM Ratings said.

http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44862

Harsha gives thumbs up for Nivard but says risks remain
Published : 1:31 am February 8, 2012 |
Source: http://www.ft.lk/2012/02/08/harsha-gives-thumbs-up-for-nivard-but-says-risks-remain/#comments

deleted MP, its spokesman for the economy and Consultant Economist Dr. Harsha de Silva yesterday gave thumbs up to Central Bank Governor Nivard Cabraal for the latter’s dual move of hiking interest rates and depreciating the currency, though insisted risks and challenges remain.


“The Central Bank Chief must be commended for finally realising that there is a problem. Depreciating the currency and increasing policy rates as a signal to hike lending rates, aimed at curbing import credit are welcome moves. Though it is very early to come to conclusions, both moves are positive. However we will have to wait and see the actual progress,” Dr. De Silva said.
“I am cautiously optimistic,” added the deleted MP who has been the most consistent and vocal critic of Cabraal but the initial kudos over latest monetary policy revisions is akin to ‘giving the devil his due.’
However, Dr. de Silva said that he would have preferred a slightly sharper depreciation but admitted that the Central Bank could be testing the correct equilibrium. This was in reference to a depreciation of 20 cents each on Friday and Monday. “It is important for the rupee to find its real value in the market and we hope the Central Bank will not continue to sterilise its intervention,” the deleted MP added.
The latter aspect was with regard to Central Bank defending the exchange rate by releasing Dollars and in the process mopping up liquidity and thereafter releasing more rupees to keep the interest rates intact.
The delay in implementing the twin move was previously described by analysts as “kicking the can further down the road,” but a hike in interest rates also comes despite certain sections of the Government including the Treasury having the view that interest rates could have come down further earlier on. They are of the view that interest rates need to be lower especially for the non-trade sector of the economy.
Dr. De Silva said the Central Bank needs to have an economic perspective to boost growth than having an accounting mindset. This is an apparent dig at Cabraal who by profession is a chartered accountant.
Whilst the Central Bank’s challenge is realising that it cannot please all its masters, the rise in interest rates could have a check on much needed investments as cost of funds will be expensive going forward. “This puts a greater onus on the Government to lure a higher degree of direct foreign investment,” Dr. de Silva opined. “Investment is the fuel for the engine of economy,” he added. “We feel that due to the negativities of the Expropriation Bill, foreign investments will think twice,” the deleted MP noted.
According to other analysts, the twin moves of Central Bank could have a zero effect on exports. Interestingly despite record low interest rates, exporters have shunned going for loans in 2011 (banks credit for export activity was up only 8% as per Central Bank). This could be either due to exporters using their own proceeds for working capital or not finding interest rates attractive enough to borrow. Analysts said in the event exporters borrow, higher cost of finance consequent to rate hike would negate any benefits of recent depreciation.
The Budget 2012-driven depreciation of three rupees when announced was viewed as insignificant given the long-regime of keeping the rupee artificially high. However to the Government’s credit exports have done well in 2011, growing by over 20% to an estimated $ 11 billion though chances may be very slim to repeat the same growth this year. Central Bank expects exports to grow by only 14% but from a higher base.
A more disturbing trend is the sudden spike in borrowing by state entities. Credit granted to public corporations declined by around Rs. 3.6 billion during the first nine months of 2011. Credit granted by Domestic Banking Units to public corporations reduced by around Rs. 21 billion during the first nine months of the year following partial settlements made by the CPC, while credit granted by Overseas Banking Units increased during this period with increased disbursements to the CPC. However end-November data show a total change. Credit to corporations had increased by 30% to Rs. 179 billion from Rs. 138 billion a year ago. This has been largely from the Foreign Currency Banking Units, up by 107% to Rs. 110 billion from Rs. 53.2 billion in November 2010. Net credit to Government had increased by 42% to Rs. 801.5 billion in November from Rs. 564 billion a year earlier. Monetary authorities lending to Government had risen by 163% to Rs. 216.4 billion whilst that from DBUs was up 21.7% to Rs. 473 billion and FCBUs it was up 20% to Rs. 112 billion.
Private sector credit had grown by 33.5% to Rs. 1.94 trillion by November 2011 with import related credit up 34%.

No related content found.

Selling pressure drove the Colombo Stock Exchange down sharply on Wednesday (Feb. 08) with the All Share Price Index falling 2.14 percent, losing 119.18 points to close at 5,442.25 as the market fell for the sixth straight day.

The Milanka Price Index of more liquid shares fell 1.75 percent, down 84.20 points to close at 4,721.79.

Turnover reached a little more than Rs. 877.8 million on 46.7 million shares changing hands during the day. Only 25 counters closed in positive territory with 182 closing in the red.

The silver lining to a gloomy day was the net foreign inflows amounting to Rs. 239.45 million.

The second worst performing stock exchange in the world has fallen 10.41 percent so far this year.

"The indices dipped sharply on selling pressure across the board with activity dominated by trades on diversified and finance counters," John Keells Stockbrokers said.

JKH fell 1.55 percent to Rs. 164.9 with the counter contributing the most to turnover with 817,800 shares traded during the day.

Expo Lanka saw 11.29 million shares being traded with the counter closing at Rs. 7, down 1.41 percent.

Swarnamahal Financial Services was the third highest contributor to turnover. The counter saw 478,100 shares change hands, closing 0.06 percent lower at Rs. 160.50.

John Keells featured in a crossing involving a parcel of 170 thousand shares at Rs. 165. A parcel of 9.4 million Expo Lanka shares changed hands at Rs. 165 per share. Nestle Lanka saw 50,000 shares trade at Rs. 916 each.

The price band was slapped on ACME which would be removed on February 17.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44859

It was business as usual on Wednesday with the Central Bank continuing to defend the exchange rate amidst strong importer demand which saw intervention drain out rupee liquidity in the system which resulted in the Central Bank having to pump in Rs. 17 billion into the system.

"The exchange rate was kept unchanged at Rs. 114.30 against the dollar after falling 40 cents since Friday. Import demand is still strong and the Central Bank was still intervening in the market selling dollars to keep the exchange rate steady, so it seems it is business as usual now that the IMF Review Mission is gone," a dealer told The Island Financial Review yesterday (Feb. 08).

The dollar sales had wiped out liquidity which resulted in the Central Bank having to pump in Rs. 17 billion into the system. The bank has so far printed over Rs. 300.62 billion over the past few weeks to help banks get over the liquidity crunch. Yesterday, the bank’s Treasury bill holdings increased to Rs. 205.36 billion from zero last August.

The Central Bank last Friday increased key policy interest rates to curb credit demand, which was also expected to tighten credit for imports. The bank also said it would allow some flexibility in the exchange rate. The rupee fell by 20 cents on Friday and again by the same amount on Monday to close at 114.30. Yesterday, the rupee’s position was defended.

Interbank borrowing rates fell slightly to 9.56 percent (call money rate for borrowings not backed by collateral) from 9.63 percent the previous day on account of the Rs. 17 billion injection. However, the interbank market repo rate for borrowings against Treasury bills inched up 8.63 percent from 8.60 on Monday. A week ago the rate was 8.14 percent the call money rate was 8.80 percent.

The Sri Lanka Inter Bank Offered Rate reached 9.67 percent from 9.66 on Monday. A week earlier the rate was 9.08 percent.

"Credit demand continues to feed import demand and unless the rupee is allowed to be more flexible we would continue to face pressures on the balance of payments," a dealer said.

The Central Bank has sold more than US$ 2.5 billion since July 2011 to defend the exchange rate, despite the three percent devaluation in November.

The International Monetary Fund has been critical of the Central Bank’s exchange rate policy but last Friday it said the programme could continue after it was encouraged by the Central Bank’s decision to curb credit growth and relax its hold on the exchange rate.

Meanwhile Treasury bond yields rose across the board yesterday.

The two year bond maturing in 2014 saw its yield move to 10.60/70 percent yesterday from 10.50 last Monday and a three year bond saw its yield increase to 10.70/90, dealers said.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44858

Hemas Holdings PLC says it enjoyed its best quarter year-to-date with consolidated revenues of Rs. 5.3 billion, reflecting a growth of 15.2 percent year-on-year, and net earnings of Rs 350 million, a growth of 12.6 percent for the quarter ended December 31, 2012.

Earnings growth during the quarter was fueled by the leisure, healthcare and FMCG sectors, which grew by 170.6 percent, 33.3 percent and 22.2 percent respectively. Our Healthcare sector was the main contributor to the year-to-date performance with a revenue growth of 14.0 percent and earnings growth of 53.6 percent. Nine month earnings were mainly impacted by the underperformance of our Power sector, which is experiencing low rainfalls in the catchment areas. As a result, Group earnings for the nine months ending 31 December 2011 declined by 6.9 percent to Rs 837 million, despite our strong quarterly performance.However, the Group has sustained a healthy revenue growth of 16.6 percent year-to-date, to close at Rs 15.3 billion," Group CEO Husein Esufally told shareholders.

"Our FMCG sector enjoyed a good quarter, recording a revenue growth of 17.0 percent to achieve Rs. 1.7 billion, whilst sector profits grew at 22.4 percent to end the quarter at 174 million. Many of the categories we serve; lotions, shampoos, hair grooming and sanitary napkins, in particular, have grown at healthy rates during the year.

"The Healthcare sector continued to show a healthy performance recording a quarterly revenue of Rs 1.8 billion (up 10.0 percent year-on-year) and quarterly earnings of Rs. 86 million (up 33.3 percent year-on-year). The strong performance of our Pharmaceuticals business helped maintain its leadership positionin the industry with a market share of 16.65 percent (Source: IMS). Our hospitals in Wattala and Galle continue to enjoy increasing patronage amongst local residents. During the period our hospital in Galle introduced laparoscopic surgery, which has seen an increase in popularity while our diagnostic network expanded to include two new laboratories in Gampaha and Negombo including OPD consultation facilities. Our second phase of hospital expansion began during the quarter, with the commencement of project work for our third hospital in Thalawathugoda.

"The key highlight of our leisure sector was the reopening of Hotel Serendib under its new brand name ‘AvaniBentota’. The hotel was repositioned as a design hotel to offer its customers a unique ‘on the beach’ experience. The total project cost was Rs 650 million and the hotel was closed for refurbishment from May to November 2011, as a result of which the quarterly revenues of the sector remained flat. However, excellent GOP margins by Club Hotel Dolphin, Hotel Sigiriya and Kani Lanka, coupled with gains due to exchange rate fluctuations resulted in a 170.6 percent growth in quarterly earnings.

"Our transportation sector achieved a revenue of Rs. 182 million for the quarter ended 31 December 2011, a marginal decline of 0.6 percent from the previous year, whilst profits dropped 9.8 percent to Rs. 58 million. The drop was mainly attributable to the dip in cargo volumes of our aviation sector in line with the declining market, overshadowing the growth in the passenger sales market. Our maritime arm suffered a drop in volumes, due to the drop in trade activity in the region, whilst our out bound tour operation performed exceptionally well during the quarter with a high level of growth seen in the leisure travel market.

"The power sector recorded quarterly earnings of Rs 61 million, a year-on-year decline of 25.5 percent. Throughout the year, our mini hydro plants experienced low levels of rainfall dragging the sector performance well below that of last year. With our latest mini hydro plant in Magal Ganga, which was commissioned in September 2011, we have a total of 7MW in our renewable energy portfolio, in addition to the 100MW thermal plant. Our project development team is currently working on several new projects, with a view to expanding and diversifying our renewable energy portfolio.

"We are optimistic that the last quarter of 2011/12 will continue with the same momentum gathered during the third quarter. With improved sentiments in the consumer markets and the anticipated tourism peak in the winter season, we expect to close the year on a positive note," Esufally said.
http://island.lk/index.php?page_cat=article-details&page=article-details&code_title=44860

Research or fantasy? A wake up call for broker research

Feb 8, 2012 (Daily Mirror) - With corporate earnings gradually coming in, the broker research reports on some of the Initial Public Offerings (IPOS) during the past six to nine months have come into spotlight due to colossal differences between their projections and the actual earnings by companies.

It is disappointing that most research reports that carried the ‘SUBSCRIBE' label on the big ticket IPOS have put the average investor into serious trouble with those IPOS performing very poorly in terms of earnings and share prices on the bourse as against the fancy projections the research came up with.
According to Murtaza Jafferjee, Chairman and Managing Director of JB Securities, there are two ways to look at the problem of flawed research.

“What we should find out is whether these research reports have not tried to truly understand the dynamics by putting in adequate labour or have they been biased with their own objective. See page 22
I would say the answer is 50-50,” Jafferjee said. In the cases of Expolanka and Softlogic IPOS, the two big ticket IPOS that have been criticized for poor share performance and earnings despite top recommendations, the brokers were closely associated with the issue managers, prompting some analysts and market experts to point at the issue of ‘conflict of interest’.
“When we look at the past six to nine months, we have to find out whether there have been significant economic changes both globally and locally. My intuition is that I don’t see any huge changes. In other words, there hasn’t been any unseen shock.”
“For example in 2008, when the global financial crisis came, it came as a total shock despite people like Nouriel Roubinin warning about the possibility of such a crisis. Now the problems in Europe, imbalances in Sri Lanka and higher interest rates, these were not things that somebody wouldn’t have foreseen. There was a larger visibility of these issues,” Jafferjee explained.
He also noted that the whole research industry in Sri Lanka is under-developed. “There is a lack of professionally competent people and there is also a lack of experience. There is also a lack of appreciation by the management of brokering companies towards research. Good research needs time and effort.”
“In forecasting the forward move, there is a degree of uncertainty. But there can’t be colossal differences such as Rs.500 millions. What we should look at is not the accuracy but the direction of the research, Jafferjee added.
Reiterating Jafferjee’s point that brokers associated with issue managers are rarely independent, another senior analyst who preferred anonymity stressed that it’s not only the investors but also research analysts have ‘herd instinct’, and they tend to mimic others’ reports and recommendations, probably with fear of being ostracized if one comes up with a different opinion.
“How many ‘DO NOT SUBSCRIBE’ recommendations did you see while the market was booming?” he questioned.
It is no secret that broking firms are influenced by issue promoters and their connected parties in certain instances to give positive coverage.
The senior analyst also said that research analysts are usually heavily influenced by IPO prospectus contents as some are even ‘cut and paste’ reports. And also they are easily swayed by issue mangers and company forecasts made at cocktails and investor forums, he added.
He further noted that most of the times research analysts are pressured by sales persons to put ‘SUBSCRIBE’ recommendations, so that they can get commission by selling shares.
“If clients do not subscribe, there are no shares to sell, and no commission to gain. So shares are promoted at the cost of clients. Most brokers do not look after investor interest first. They mostly look at short term gains to themselves,” he averred.
He also pointed out the discounted private placements as another reason for the failure of the big IPOS such as Expoalanka and Softlogic, which subsequently sourced investor sentiment against IPOS in particular.
In both Expolanka and Softlogic IPOS, beneficiaries of heavily discounted private placement shares unloaded their stakes fully or partly quickly at large profits. Although previous IPOS such as Free Lanka Holdings and Union Bank of Colombo had executed private placements, the discounts were not so large compared to the offer price.
At present, Securities and Exchange Commission (SEC) rules impose a 12 month lock period only in the case of ‘new share issue’ private placements, and sale of existing shares is not covered.
According to the senior analyst Mirror Business talked to, the said rules should be amended to cover all pre-ipo transactions, regardless of new issues or sale of existing shares by promoters.
“The rule can be even tightened to say that such shares cannot be sold for 12 months after listing, and not the current rule of 12 months after issuing,” he said.
He also said that limits should also be imposed on maximum number of investors a ‘private’ placement can have, as certain private placements were a travesty to the word ‘private’.
According to Srimal Liyanage, former Head of Research at Lanka Securities and who is currently a financial analyst at Saudi Arabia’s Bank Aljazira, most of the stockbroking companies in Sri Lanka have low budget allocations for research as opposed to developed countries where they have separate budget allocations for research departments and regulations to protect the independence of the research. He also said that managements of broking companies focus on having people, mostly trainees and internship analysts, with low salaries just for the sake of preparing research papers regardless of the quality. ”When the research personnel gain experience, they require high salaries. So what the Sri Lankan broking companies do is to let them go and recruit new people. So there is lack of experienced people in the field. New guys will try to apply their theoretical knowledge and base their research on available information and what the company says. They don’t know how to give a proper weight age on it and arrive at a forecast closer to the actual,” Liyanage said.
http://epaper.dailymirror.lk/epaper/viewer.aspx