SRI LANKA EQUITY ANALYTICS

Investor confidence vital for attracting FDIs

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 06 May 2012 04:22:00 +0000

The slow and inadequate foreign investment inflows into the country are a concern as FDI is vital to sustain a high trajectory of economic growth. Much foreign investment was expected after the end of the war in May 2009. Why have there not been substantial inflows of foreign investment in the post-conflict period? The answer is not difficult to find.

The uncertain policy environment, the law and order situation, lack of reforms in labour legislation, macro-economic instability and corruption are among the reasons attributed for the slow inflow of foreign direct investment, especially the type of desired investments in export industry and services.

ADB assessment

The recent Asian Development Report Outlook for Asia makes some pertinent observations that: "Investor confidence is a key factor in attracting investment and this requires a predictable policy environment as articulated and reinforced through the legal, regulatory, and institutional framework."It points out that "the lack of such an environment for the private sector is a major obstacle to private sector development."

Further, the report says that although the government was keen to obtain foreign investment "the government has taken only a few steps to reduce red tape and improve the business climate, needed to create the conditions for ramping up private investment." One of the specific deterrents to investment cited was that "the government expropriated businesses last year and thereby violated property rights of both citizens and non- citizens that had a negative effect in investment."

The need for foreign investment

The high trajectory of growth that is planned cannot be realised unless the amount of foreign investment increases substantially. This is particularly so as domestic savings are declining and the investment-savings gap is widening. The recent high-powered mission to South Korea is an indication of the government's interest in securing foreign direct investment. However, such missions are not likely to achieve much unless the ground situation is made more conducive for foreign investment.

Foreign investment is a significant driver of economic development. It fills the savings-investment gap by supplementing domestic savings with foreign savings and enhances the capacity for economic growth. While the quantum of foreign investment is important in determining economic growth, the nature and type of such foreign investment determines the long-term development of the country. Foreign investment in export industry is especially valuable in strengthening the external finances of the country. FDI contributes to improving work ethics, discipline, skills and knowledge of workers and productivity. It is an important means of technology transfer, transmission of management best practices and accessing new international markets.

International experiences

It is the realisation of these economic benefits that has made many countries both developing and developed to aggressively seek for investment. Former communist countries like China and Vietnam, and the formerly inward looking Indian economy, have sought and obtained large amounts of foreign investment. China is the world's second largest recipient of foreign investment.

It may surprise most readers that the United States is the world's largest recipient of FDI. In 2010, the U.S. received $194 billion of foreign investment, 84 percent of which came from or through eight countries: Switzerland, Britain, Japan, France, Germany, Luxembourg, the Netherlands, and Canada. FDI has resulted in 30 per cent of jobs for Americans in the manufacturing sector. In China foreign investment has increased considerably in the last decade reaching $185 billion in 2010. Foreign direct investment in India estimated at $44.8 billion in 2010 increased by 25 percent to $50.8 billion in 2011.

Factors Deterring Foreign Investment

Foreign investment is influenced by political and economic stability and an overall assessment of political and economic conditions. Tax and other incentives, labour regulations, work ethics, social and economic infrastructure, costs of production, potential domestic market have an important role in foreign investor decision making. Some investments are deterred by perceptions of corruption; others accept such costs as worthwhile incurring for favours granted. For one or more of these reasons, the international investment community does not appear to consider Sri Lanka a favourable destination for investment.

The political situation in Sri Lanka is stable only in the sense that the President and government are secure to rule for another five year period. However, international assessments consider other features in the polity as destabilising. The continuous protests and violence; religious intolerance and violence such as witnessed recently in Anuradhapura and Dambulla; issues in press freedom and disappearances of people regularly that are highlighted around the world; and murders of tourists are deterrents to foreign investors coming to the country. Investors are concerned about these security concerns as much as the safety of, and return to, investment. Perception of corruption could also deter prospective investors. It is therefore crucial that any such perception is wiped out.

Economic stability and macro-economic fundamentals are also investor considerations. The instability of the exchange rate, the large deficit in the balance of payments, large foreign borrowing, the net reserve position, fiscal deficit and rate of inflation are among important economic criteria that investors look at when determining the countries they invest in. Although the country has achieved high growth rates these other considerations matter much to investors.

Government policies

There is still a degree of uncertainty regarding government policies on foreign private investment. The experience of privatised ventures being re-nationalised such as Shell and Sri Lankan Airlines are not conducive to developing confidence among foreign investors. While inflation has been kept at single digit levels, there are fears that it may rise again owing to weaknesses in economic fundamentals.

Costs of production play an important role in determination of investment locations. Several production costs too are high. This is especially so with respect to high energy costs. Sri Lanka is no longer a cheap labour country: labour is cheaper in Vietnam and Bangladesh. Labour regulations in the country also affect investment. Investors find the lack of freedom to hire and fire in Sri Lanka a disincentive as labour regulations that do not permit labour discontinuance increases investor risks.

Conclusion

The inflow of foreign investment to Sri Lanka is low when compared to other countries. The current level of FDI is quite inadequate to raise the country's economic growth to a higher trajectory. The uncertain policy environment, the law and order situation, lack of reforms in labour legislation, macroeconomic stability and corruption are among the reasons attributed for inadequate foreign investment inflows. Investor confidence that is a key factor in attracting investment requires a predictable policy environment to attract much larger amounts of foreign investments in the types that would boost long term economic growth.

By Nimal Sanderatne

Diversification – Is it the way forward?

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 25 Mar 2012 06:04:00 +0000

Compared to the late 1970s era of the economy when big companies slowly began diversifying but essentially connected to core operations, today it has changed completely. Now new conglomerates are reaching all over irrespective whether there is expertise in th company or not and becoming ‘seemingly’ successful.

But the moot point is – by delving into hitherto in-experienced business lines, are companies – particularly those listed putting their shareholders at risk because the risk is greater in such acquisitions and a longer return on investment or, are they?

Forced to diversify
According to Deshan Pushparajah, Head of Corporate Finance Capital Alliance, conglomerates have historically been significant in Sri Lanka and in frontier markets in general for two specific reasons. One is because frontier market companies generally wouldn't have scale in operations in one business area, hence they diversified into many and some examples are Aitken Spence and John Keells Holdings. "Tourism or plantations weren't big enough on their own. Without being big enough they couldn't make best use of their expertise. Banks wouldn't lend as much to them, etc which is why they were forced to diversify,” he explained.

Conglomerates: Then and now
In the late 1970s when Sri Lanka’s closed economy opened out to the world big companies like John Keells Holdings and Aitken Spence Holdings, etc whose core business were tea and other trades slowly began diversifying into other areas. But the new businesses too were essentially connected to core operations.
Today, some 35 years later, it has changed completely with many firms putting their monies – and some of it publicly raised – into totally, unrelated new businesses. Diversification can put you on the fast track to growth but if the strategy fails it can also burn up your money.

History tells us that it’s not advisable to consider diversification until your core business is steady, stable and secure and profitable. If you’re still struggling to win orders and build a sales time for the core product, there is a real danger that diversification will take your eye of the ball.

There is a range of new and earlier established businesses like LOLC, Laugfs, Raigam, Softlogic, Vallibel, etc whose investments range from financial services, insurance, consumer products, real estate, food, banking, etc. Then there are the old established firms like CIC or Cargills that have newly expanded into core sector-related businesses.

The Business Times spoke to some entrepreneurs, analysts, academics and top CEOs to set straight this record.

The second reason Mr. Pushparajah noted was that there is very little venture capital available in Sri Lanka. “And banks are not willing to lend much to start ups either. Because conglomerates have large balance sheets, they could borrow/ source equity much faster and cheaper for start up ventures,” he noted, adding that some years ago only conglomerates could support fledgling businesses in frontier markets such as Sri Lanka.

However, he also noted that things are changing fast in Sri Lanka. “With operations scaling up, I think in four to five years you are going to see a fast de-conglomerizing (dropping non-core units) of companies. Whilst even in today's context conglomerates make sense, it won't in a few years. Most frontier markets (South Africa is a case in point) have gone through this phase,” he explained. According to him, once competition arrives in core business areas for these groups and volume and scale becomes demanding, they will start shedding non-core business areas.

Sattar Kassim, Director Expolanka Group said that diversifying is more to do with economies of scale. “For example just by building one hotel the economies of scale won’t be achieved. The real scale will come only by managing hotels and increasing the room capacity," he said.

He added that today is a specialist world where in the long run haphazard diversification won’t be a sustainable model.” One day they’ll be forced to scale down and divest the particular business or really go up the ladder and get proper economies of scale,” he added. Mr. Pushparajah noted that early conglomerates have subscribed to this thought and have slowly started shedding non-core businesses.

A business analyst noted that one can diversify his/ her business by natural progression. For instance, if you sell men’s shirts, adding ties and cufflinks to the range are an obvious next step. More radically, you extend the brand by offering a much wider range of products that will nonetheless appeal to the same customers. Alternatively, you can use the strength of a brand to move into new markets.
According to a researcher on capital markets, stock prices track productivity of firms and this tracking is equally strong for diversified and stand-alone firms.

Conglomerates don’t add value
He also highlighted that on a long term basis, conglomerates don't add much value to shareholders and in most instances they tend to destroy value. He added that this is especially so when firms diversify into business areas totally foreign to their own.“It is true that expertise can be bought, so can businesses and track records, but they will (a) come at a steep price and (b) would take on capital which could have been more effectively used by reinvesting in one's own core business,” he stressed.

What isn’t a moot point is that while expertise could be there, focus may not. This is why Mr. Pushparajah noted that shareholders stand a great chance of losing value when a firm diversifies without focus. The new age conglomerates, he added seem to be building empires instead of adding value to shareholders.

As far as risk goes - there is risk added on two fronts. The first is in terms of business risk. As much needed capital for core operations could be identified for a non-related venture, Mr. Pushparajah stressed that this is also putting the company at risk of competition and falling behind.
Second, most of the new age conglomerates are leveraged buyers. “Huge amounts of leverage could enhance return for shareholders, but also put shareholders at much greater risk. Hence the risk premium attached to the business should be much more. This is what rating agencies are warning against,” he highlighted.

On the longer term, he added that markets and investors would rationalize towards shareholders diversification viz a viz conglomerates. “This is always a much better way of diversifying risks and returns.”

Tea brokers like John Keells have diversified into other businesses.
The chairman of a heavily diversified firm, who declined to be named, stressed that a businessman in a diversification attempt has to look at what the growth sectors of the economy are during both medium and long term and align them to the growth sectors of the country.

“During this medium and long term cash flows of those growth sectors and their capital gains need to be considered. Cash flows in the short term can be mediocre, but capital gains can be exceptional and vice versa. After aligning the identified business to the country’s growth sector, one must examine whether the company possesses the internal competencies to venture into the particular business. "This follows an acquisition of a related business or starting afresh,” he explained.

Selective diversification
Nirmali Samaratunga, Co-Chairman Mackwoods Ltd noted that from Mackwoods’ experience diversification has been sustainable. "In the case of Mackwoods, with our long business experience we have, over the years strategically followed a business approach of continuously developing our core business areas whilst selectively diversifying into new businesses which primarily relate to our core domain and expertise," she explained.

She noted that this has enabled Mackwoods to create value and selectively spread the business risk whilst harnessing both institutional memory and also maintaining lean overhead costs, whilst leveraging on the broad existing knowledge base.

“This is exemplified by our theme 'tradition with vision'. This model has proved to be strong and sustainable and has worked for us,” she stressed.
In the case of new businesses’ diversification, Ms. Samaratunga noted that there's no definite 'yes' or "no' answer regarding the ability to succeed and whether this is a sustainable business model. “I feel it is subjective, dependant largely on that individual company or group's ability to undertake such diversification into unrelated lines, to ensure long term success and sustainability.

Whilst long years in the business and the accompanying reputation, trust, resilience and synergies with the existing businesses, certainly is an advantage and is an index of sustainability, still if the new business was to approach diversification in an informed manner and with an objective approach and taking a long term view of the sector it is entering, then there is no reason why they should not succeed. Many new companies have shown their ability to strongly succeed through such diversification, as is evident if one looks around.

I would (also) say the risk is not greater nor the return on investment less, provided the right approach and required conditions for success are in place and diversification is aimed at creation of value and the long term sustainability of the business. It's spreading one’s risks. We are into selective diversification into other areas. We were leveraging on our existing strengths," she explained, adding that Mackwoods always went for selective diversification in areas where they saw definite potential.

Winning strategy
Diversification, according to Dr. Ravi Liyanage, Chairman Raigam Group which has diversified during the past two years considerably said that it is a winning strategy. "It'll work if is implemented meaningfully, but not as a herd instinct or because it's the ‘in thing’.

As an academic and also as a CEO using public funds, my recommendation and also my practice in diversification decisions necessarily follow a mix of theoretical and practical formulae,” he said, explaining that fundamental in a diversification formula is the products or business units which have to be analyzed in terms of their position in the product life cycle (introduction, growth, maturity, decline) and market share plus growth momentum (BCG analysis; stars, cash cows, dogs, question marks).

With this analysis, how to go about the diversification process could be theoretically figured out. “For an example while retaining cash cows its excess cash generation could be considered for diversification, due to the fact that further investment in cash cow industry (cash inflows) is pointless as its growth potential is low,” he explained.

He also noted that when considering related diversification, that cash could be invested in good ventures which will be next cash cows. But Dr. Liyanage agreed that there are instances in the Sri Lankan context, where large businesses / conglomerates suddenly collapse due to ignoring fundamentals in diversification. “Especially once companies raise funds from the public, those are used in a wild way or as a passion for new investments / industries where management is not knowledgeable about the basic fundamentals of those businesses. They do trial and error while losing focus or sacrificing their core businesses. These new investments are ‘question marks’, it is really questionable whether it will work or not,” he explained.

Copy cats
He stressed that diversification as a 'copying others' strategy is a business model deserved for short-sight business people. “Any businessman who value sustainability of his business will never go in for such a wrong-diversification model," he added.

Prof. Uditha Liyanage, Director Postgraduate Institute of Management, noted that diversification is a matter of becoming opportunistic or sticking to one's core business. While noting that all entrepreneurs have great growth expectations, he said that the emotional factor of becoming 'big' plays an even bigger role in their diversification attempts. "With a single business, their growth potential is limited. Sri Lanka is a small country and for many businesses, the markets are small. So a single business doesn’t give those adequate numbers. In their core business the projected numbers are small, which is why they go into non-core areas.”

Prof. Liyanage noted that non-core areas come with two facets -opportunity for growth and the capability. “There should be a good fit of both these facets. What could typically happen is that they may see growth, but they won’t ask whether they possess the requisite competencies and capabilities,” he said. For instance, he noted that the tourism sector is a growth sector, but no one asks where exactly the growth is.

“One cannot work on a generalization that tourism is a growth sector,” he added, saying that getting into any sector shouldn’t be a knee-jerk reaction as invariably those businesses won’t sustain or they’ll be spreading themselves thin.

He added that when identifying an opportunity a company has to back it by getting in the relevant competencies. There’re also emotional reasons because being big is a good feeling. "The society expects them to grow their businesses and create jobs. If this sentiment overrides, it becomes dangerous. It’s important to separate each business unit and make them accountable for each of their businesses," Prof. Liyanage said.

Organic growth is painful
Nishan Sumanadeera, CEO Frontier Capital Partners noted that in business, growth can be achieved in many different ways and that organic and inorganic growth is considered two of the key methods.

"Organic growth is painful and time consuming process which requires considerable amount of time and effort. This is what most companies in the early 70's were engaged in, starting new business that compliment with their core business and tirelessly building bridges between businesses. But today’s business managers have a more dynamic and fast way to growth or conglomeration. This is via mergers and acquisition of well run businesses through capital market activities,” he explained.

Although this method can be considered as an easy way to the top, today’s business managers have the more challenging task of identifying businesses opportunities that may bring synergies with its existing business in a more complex macro economic environment, according to Mr. Sumanadeera.
“Currently we see, hospital owning companies acquiring insurance companies, financial conglomerates diversifying into hotels and media but common justification for most acquisitions are often been stated as the growth potential of the specific sector as against the corporate synergies.”

He added that sectoral diversification is good but it should come at the correct time. "Diversification should happen only after integration and consolidation of the exiting core businesses. It is difficult for a business to grow in the long run unless acquisition is planned in a way that would compliment the overall business position of the acquirer across all its businesses regardless of the sector.”

By Duruthu Edirimuni Chandrasekera
The Sunday Times

Relief, renewal and growth in Sri Lanka

noreply@blogger.com (Sri Lanka Equity Analytics) — Sat, 17 Mar 2012 06:27:00 +0000

From the floor of the stock exchange to the former security checkpoints now plastered with advertising posters to the bustling energy of this South Asian capital’s streets, the signs of renewal are plain.

Sri Lanka’s economic recovery from its long and brutal civil war has been astonishingly fast, though perhaps not so swift as the sudden, blood-soaked final chapter of that 25-year-old conflict in early 2009.

Nor has it been so decisively concluded.

While GDP growth, estimated at north of 8% last year, is among the most robust in the world, and the stock market’s three-year return would make Warren Buffett’s eyes bug out, a rising debt load, widening trade imbalance and soaring fuel prices could endanger or even derail much of the recent progress.

Still, the once-feared Tamil Tigers, who at their peak ruled a third of the nation’s land area, are dead, dying or scattered. Massive sums are being plowed into new roads, bridges, port facilities and other infrastructure.

Tourism is booming, with arrivals up 31% last year. New construction is everywhere. Exports are up. Land long off-limits due to the war has been brought into agricultural production, keeping a check on some food prices. Inflation has largely been tamed.

And, even more than two years on, there is a palpable sense of relief and relaxation that the conflict is over.

‘A lot is happening here’
At a sawmill outside the city of Batticaloa on the east coast, the proprietor chats with visitors as his crew saw 200-year-old logs of satin wood into planks destined for the home of a Colombo gem merchant.

An ethnic Muslim caught in the crossfire between the majority Buddhist Sinhalese and the largely Hindu Tamils, he was driven from his home for more than a decade due to fighting between government forces and the insurgents.

He welcomes the reassertion of central control, he said, and, while he has the small businessman’s typical skepticism of government motives, he is enthusiastic about the improved roads and security situation, along with the opportunities they bring.

“A lot is happening here,” he said.

Stocks cool off after record returns
As international hoteliers flood in and foreign companies move to set up manufacturing ventures, still the easiest way for an outside investor to access the growth is probably via the local bourse.

It is also relatively painless. Foreign investors only need an account with a participant of the central depository system and, after some modest paperwork, can be up and running the same day, although the country’s securities and regulator has to approve any new foreign funds. The Department of Exchange Control only caps foreign holdings in plantation industries like tea and rubber.

From there, an investor can take the pick of listed firms in banking, tourism, food production, ceramics and everything in between. As a one-stop option, several blue-chip holding companies have their fingers in all of those pies — and a few more.

Between the end of the war and the middle of last year, the All Shares Index typically placed at or near the top of the world’s exchanges, with gains of 125% and 96% in 2009 and 2010, respectively. It slipped a bit in 2011, with profit taking cited along with worries over government debt, tight credit and trade deficits. It is down about 10% so far in 2012.

There is a modest 0.03% fee on trades, but any other upside can be taken right to the bank: Sri Lanka has no capital-gains tax.

John Keell’s Holdings, with interests in tourism, transportation, retail, real estate, tea plantations and other sectors, is the largest listed company on the CSE. The company’s profits were up by 46% through the first nine months of 2011, with revenues rising 28%.

About 45% of its float is held by foreign investors, including the Janus Overseas Fund (US:JNOSX), which bought a 12% stake about two years ago.

“I certainly can’t complain” about business levels, said Krishan Balendra, Keell’s head of corporate finance and strategy. “Generally, the government is pro-private-sector, and the private sector is the main engine of growth as it always has been. The biggest difference now is that we have got an environment of no war.”

Money on the ground
On the sun-drenched shores of Weligama Bay on the south coast, Nahil Wijayasuriya, a local business tycoon and chairman of East-West Properties, is watching his 200-room hotel rise from the sands. He has an agreement with Marriott (US:MAR), which will brand and manage the property, located within easy reach of nearby Galle, and about 90 minutes from Colombo via a new Western-style expressway. It is also within striking distance from Hambantota, site of a new deepwater harbor and international airport that is, not coincidentally, the home political turf of President Mahinda Rajapaksa.

Wijayasuriya, who has or has had diverse interests around Asia including real estate and broadcasting, was holding a lot of his assets in cash.

But devaluation “threatened to turn it into toilet paper, so I decided to put some more money on the ground. And I have found that I can make more here now than I could in Singapore or the Philippines.”

Along with Marriott, other hospitality firms are eagerly eyeing Sri Lanka, which has seen annual visitor traffic double to roughly 900,000 over the last few years. Hong Kong–based Shangri-La last month broke ground on two new resorts. Starwood (US:HOT) and Hyatt (US:H) have also given the market at least the once-over, according to local media reports and government sources. Related story: Civil war over, Sri Lanka tourism blossoms.

Forecast: Cloudy, with chance of monsoon
There are some thunderclouds on the horizon — and not just related to the seasonal monsoons that lash both sides of the island depending on the time of year.

The value of Sri Lanka’s exports grew by 22% to $10 billion last year, but imports more than double that. There has been a big drive to become more self-sufficient in food, but, with little traditional heavy industry or petroleum, every car part and every gallon of gas has to come from abroad — bought and paid for in hard currency.

The government also removed some subsidies on fuel, leading to sharp price rises that are rippling through the supply chain and causing considerable pain at the lower end of the economic spectrum.

Worse, Sri Lanka gets roughly 90% of its oil, on favorable terms, from Iran. Sri Lanka has already been denied a waiver of U.S. sanctions on trade with Iran but can’t easily replace that supply as the only refinery is geared toward the specific composition of Iranian crude.

President Rajapaksa, billboard-sized pictures of whom seem to be at every crossroads, still enjoys a deep reservoir of goodwill for putting paid to the Tigers once and for all — a feat that none of his predecessors managed to get close to achieving.One aspect of his governance that rankles some is what could be seen as perhaps an overreliance on family members to help him run the show. One brother is secretary of the Ministry of Defense, while another is the minister of economic development and a third is the speaker of the parliament. Other relations enjoy high posts in government-run enterprises, the diplomatic corps, provincial governments, etc.

Late last month, a report from Fitch Ratings said that the “sharp official reserve depletion in the second half of 2011 has increased risks on the sustainability of its balance of payments.”

The IMF lends a hand
The International Monetary Fund has been lending a hand to keep things from getting too far out of whack, with loans already delivered and more on the way.

Koshy Mathai, the IMF representative for Sri Lanka, said he is generally satisfied with what the government has recently done to make the exchange rate more flexible and to tighten monetary policy, along with making money-losing state fuel and power monopolies pay more of their own way.

Sri Lanka, he said, “is blessed in that if you look at the debt-to-GDP-growth ratio ... they should be able to bring the debt down quite nicely in the next few years.”

He believes the medium-term prospects for GDP growth will remain in the 8% to 10% range, he said, especially if the country integrates more with other fast-growing economies in the region.

“More needs to be done by the private sector,” Mathai urged. “Right now, there is hardly a corporate bond market to speak of, and getting long-term finance from the banks is very difficult.”

Spreading the wealth
Whether Sri Lanka can sustain what its boosters like to call the “Wonder of Asia” will in large part depend on continuing to ease barriers to investment while maintaining political stability.

Crucial to the latter is ensuring that the newfound prosperity is shared, at least to some degree, across the ethnic and economic divides.

At the moment, unemployment, at 4.9%, remains low, while the nation’s central bank says that there has been a sharp reduction in poverty rates, from the 25% range in the 1990s to below 9% in 2009-10.

There have been a few protests, some violent, at the rising cost of living, especially when it comes to fuel and electricity. But the government has been able to keep a lid on most dissent due to the general economic expansion.

Rajapaksa Inc.?
President Rajapaksa’s office declined to grant an interview.

“The politicization of many institutions has undermined public confidence,” said one Western diplomat. And many of the appointees “lack the cosmopolitan experience or skills needed” to perform their duties.

Getting cleaner by the year
It’s impossible to know whether Sri Lanka is more or less corrupt under Rajapaksa’s government than previous ones. But Sri Lanka did move up a couple notches on Transparency International’s Corruption Perceptions Index last year, from 91st place to 86th place. That put it a bit behind Thailand and China but ahead of neighboring India, along with Vietnam, the Philippines, Pakistan and Russia. The U.S. checks in at No. 24.

The question isn't really how much corruption there may be but what form it takes and whether it drains the life out of what would otherwise be profitable pursuits for everyone involved.

“If it is predictable and consistent in its application, we can cope with it,” commented one local economist, perhaps paraphrasing the old American definition of an honest politician as one who stays bought.

Source: MarketWatch

Market downturn a natural phenomenon

noreply@blogger.com (Sri Lanka Equity Analytics) — Tue, 10 Jan 2012 12:47:00 +0000

Ceylon FT decided to share the perspectives of a renowned capital market industry professional, Nishan Sumanadeera, who pointed out the strategic way forward for Sri Lanka’s Capital Market to reposition the country as an investment safe haven for both local and foreign investors.

A top Investment Banker, Nishan Sumanadeera had facilitated the some of the top investment ventures and transactions, and has mulled some of the biggest investments made by listed companies during last three years.

In an exclusive interview with Ceylon FT, Sumanadeera shares some of his perspectives on the current dilemma faced by Colombo Stock Exchange (CSE).

Q: As a person who had been involved in the financial industry for a significant period of time, do you think the regulators should be blamed for the current crisis?

A: The Regulator’s main role and responsibility is to regulate and create an orderly market to provide a level playing field for all investors. One cannot blame or applaud the Securities and Exchange Commission (SEC) or Colombo Stock Exchange (CSE) for the negative or positive movement of the stock market. It is the market forces such as demand and supply that determine direction of a market. The outcome of many variable factors affects the creation of these negative and positive market forces.

Some factors are internal while others are external. Some may be controlled and some may not be. If any individual or institution tries to interfere with these free market forces, it will eventually result in dire consequence similarly to what was witnessed previously. Therefore I think SEC or CSE should not be blamed for the current crisis.

Q: Do you think the current inaction of the SEC and CSE is acceptable?

A: Currently the Colombo Stock Market is going through a phase of market correction. This is a natural phenomenon seen in all stock markets. Any immediate action without a clear foresight would only result in a short term result with no long-term sustainability or benefit. What is required right now is to have a uniform set of regulations that is conducive to the market, which will remain in force for a reasonable period of time. Frequent changes to regulations will only result in uncertainty in the minds of the investors and uncertainty is one of the greatest enemies of an active market.

Therefore it is important for SEC and CSE to take the Right Decisions instead of Quick Decisions. Time is not a critical factor or of an essence.

Q: What action should the SEC take in order to regulate the market?

A: Whatever decision taken by the SEC that affects the overall sentiment of the market should be taken with considerable duty of care and responsibility. It is important to consult all stakeholders of the industry such as Stock Brokers, Investors, financiers and policy makers before arriving at a decision. Currently we do not see much involvement of the investors and financiers in this process. Therefore it may be good idea for the SEC to encourage and develop these various interest groups so that the decisions taken by the SEC is not only widely accepted and also fall within the overall economic and development objectives of the country.

Apart from regulations, I also believe it is very important for the SEC to educate the investors. One of the main reasons for the anxiety of investors is the lack of proper understanding and knowledge of the risk return co-relation and inherent risk factors affecting equity markets. Any high return that can be achieved from investment in equity market comes with the greater risks. Particularly retail investors and new entrants to the stock market, which represent significant segment of the market, should be made aware of these inherent risks. This process should begin at School level.

I also believe that SEC should place considerable importance to the area of Equity Research. Currently we notice that various Research Companies and Stock Brokering companies without proper diligence release research reports and issue recommendations with regard to the direction of the market without proper analysis or basis. It may be important to regulate these areas by issuing licences confirming their competency.

Q: How could SEC and CSE ensure that the market moves towards positive territory and reaches the level that was previously achieved?

A: It is not proper for us to expect regulators to promote the stock market, value companies or speculate with regard to the direction of the market. Recently I have noticed some regulators stating that market is overvalued and fundamentally good stock are still cheap etc. I think these types of statements are inappropriate and should be discouraged, as it will only send the wrong signal to the investor community. Stock valuations and analysis should be entrusted to experts of the relevant industry that posses the required knowledge and expertise.

Q: What do you think of the current credit rule and how should it be improved?

A: Credit is an important aspect of any growing economy. Credit will provide many opportunities to businesses and contribute to the betterment of the society in general. Likewise over extension of credit could lead to many serious crises such as subprime mortgage crisis, credit default etc, which some countries witnessed during recent past. Therefore credit to any industry should also be provided with certain set of rules and guideline. Best example is how Central Bank regulates Bank and Non Bank Financial institutions.

We do not see any depositors blaming Central Bank for low interest rates or Banks complaining about statutory ratios and credit rules. But we have recently noticed many stockbrokering companies and investors talking about credit rules and blaming the SEC. My belief is that credit should be based on Net Asset Value and liquid assets of the brokering companies and SEC and CSE should monitor these ratios at Macro Level instead of Micro Managing Broker Credit.

Q: As an Investment Banker, what would you think is the best way to promote the market?

A: As we are all aware the current inflow of investment to the country is not at desired levels. Our FDIs are close to two per cent of the GDP. There are many reasons for this, some are beyond our control, but what is in our favour is the positive outlook of the country and the fact that we have peace today after 25 years of civil war. As a result the country’s economy has been growing at a steady pace of eight per cent opening many investment opportunities. It is important that as responsible investment bankers we take the responsibility to promote the country and the stock market outside Sri Lanka. This will not only increase the inflow of the inbound investment but will also help the country to strengthen the rupee against the other currencies.

It is quite noticeable that upsurge of the market beyond the benchmark valuations was as a result of local buying and selling in anticipation of large-scale inflow of foreign investment to the country. This scenario could result in a stock market bubble and crash unless carefully addressed. It is interesting to see how pension and other large-scale local funds intend to exit from their current investments. It may be a wise decision to set up an investment promotion arm with the required market expertise in investments and marketing to promote these investment opportunities outside Sri Lanka, which would certainly help the stock market and the country to move further towards positive direction.

Q: Do you think the Market is over-regulated?

A: This is a mere perception. I believe that there are certain rules and regulations that require be put under the microscope in order to determine whether it has achieved the original objective. These may include Price Band, Credit Rules etc. The market requires foolproof regulations and only such regulation can create a level playing field for investors, which will be conducive to the overall development of the market. A market without regulation would be like a car driven on the Southern Highway without brakes.

Q: How would you think manipulation of stock should be curtailed and manipulators should be punished?

A: Firstly I would like to avoid the use of the word ‘manipulation’. No person is a manipulator or involved in manipulation until such time the person is found guilty of an offence. One cannot blame investors for making use of the available opportunities to enrich themselves. This is a natural human behaviour. In the past we have noticed the collection of shares in the backdrop of bad news such as bombs, tsunamis etc. Therefore it is the responsibility and the task of the regulator to ensure that they remedy and rectify these loopholes instead of blaming the investors.

This is a very vast subject; therefore it is difficult to discuss at length now. But I will take illiquidity stocks, which have become a much-discussed topic during recent past as an example. As per the CSE listing Rules there is minimum amount of shareholdings that should remain with the public in order to qualify for a listing. This quantum will vary depending on the type of the listing sought. This is a very good rule. But then what does the Takeover and Merger Code, which is monitored by the SEC say. It says that if any shareholder or an acquirer exceed 30% threshold of a listed company will have to make a mandatory offer in respect of the balance shareholdings. This situation will make companies totally illiquid by reversing the listing rules that stipulate minimum public float. These types of rules require careful analysis and amendments.

Courtesy - Ceylon FT

http://www.ceylontoday.lk/news-detail.php?news_id=1512&news_category_id=24

Budget 2012 conducive to exports and logistics

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 11 Dec 2011 09:20:00 +0000

The shippers’ academy views the proposals made at the budget 2012 as a positive budget in respect of exports and logistics said Shippers’ Academy President Rohan Masakorala.

He said although exports were growing we have seen over a period of time exports as a percentage of GDP has been decreasing and that was not so healthy situation.

The academy believes the government must have taken this development into account and have come with multiple measures to help exporters.

“The currency devaluation by 3% announced by President Mahinda Rajapaksa shows that government was keen that our exporters were given breathing space and a jump start as the regionally competing countries over a period had depreciated their currencies and was eroding our competitiveness in the global markets”, Masakorala said.

We also saw the policy directions announced by the government to further diversify our export markets and announced the commitment of the state to work towards more trade oriented bilateral agreements with emerging markets, we sincerely hope that this will be driven as a priority and action will be taken soon.

Thirdly we saw the government announcing the three free port zones in Colombo, Hambantota and Tricomalee, this would certainly help the country’s aspirations of becoming a trading based logistics hub where the volumes could be enhanced,we believe this would help both port and airport activity to increase traffic in the medium term and also bring in international investors to set up operations in Sri Lanka to facilitate regional storage and distribution, as Asia is expanding inter regional trade volumes. The policy statements made on exports and logistics by government is very encouraging, how ever we have to have a decisive action plan to implement these in order to make a real change, whilst we have seen a major infrastructure expansion drive since the end of the war, we now need a clear reform agenda in the laws and the way we facilitate trade.

Masakorala said “Laws should be simple, transparent and should not give mix signals to the world. The trading and service laws have to be simplified along with trade facilitation with ICT to reduce process time. Government institution should be equipped with better IT environment and technology to speed up trading and logistics activities”.

We feel that the government has missed on its commitment to bring in anti-competitive laws and a regulatory reform to establish better competition as announced in the 2011 budget.

This should be task we should not forget as our exporters and importers given their size (relatively small in world standards with less negotiating power) are vulnerable to unfair trade practices by both buyers and service providers. This situation is very bad for the exporters, SMEs and consumers.

The country should now promote FDI in the field of logistics. For this purpose any entry barriers and land restrictions should be dealt with immediate action. we have to attract large investments and globally strong service providers who are looking for locations in Asia to set up hub more operations. we have to get those companies to come to Sri Lanka so that they will have the ability to move large volumes of business to the country for transshipment, storage, value addition and re-distribution. Economies of scale is a fundamental requirement for a hub. Free port concept will help this, but we feel lots of laws have to be reformed on an urgent basis.

We hope the BOI will play a greater role and will be equipped with the necessary reforms for it to be a real one-stop-shop that could help the country to be a modern trading hub.

The importance of knowledge to the work force to service such an emerging economy should be emphasized.

Our labour force with proper training, skills and attitude can beat the rest of the world.

But we need serious commitment and leadership from government to drive the policies announced in the Budget. Otherwise we may fail.

Courtesy - The Sunday Observer

by Lalin FERNANDOPULLE

Sri Lanka Equity Forum celebrates two years of success

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 11 Dec 2011 09:18:00 +0000

Having launched Sri Lanka’s first-ever equity investments and financial information portal, Sri Lanka Equity Analytics (www.srilankaequity.com) recently celebrated its successive second year of operations by reaching the milestone of 5,000 registered online memberships and over five million hits.

Sri Lanka Equity Analytics is a financial portal designed to address varying needs of the investment community of Colombo Stock Exchange (CSE) and had been live since July 2009. The Portal is already gaining momentum among international investors to attract equity investments to Sri Lanka according to company’s officials.

Sri Lanka Equity Forum had been grown steadily with over 80,000 articles relating to the Colombo stock market and boasts over 500 live members during active trading hours. In addition to the live discussion forum, Sri Lanka Equity Analytics has ventured into other ancillary services such as to equity research, live broadcasting of stock market events via live streaming TV, web based news and travel information and expected to launch first-ever virtual stock market simulation game based on live stock market data.

“We are very proud to say that Sri Lanka Equity Forum had become the country’s No. 1 stock market news and live discussion platform for equity investments in Sri Lanka with strong base of social network,” said the Administrator of the Forum Loren Quibit.

She further noted that the forum itself had been reflecting the true investor sentiments in Sri Lanka and many instances have given right signals to its members. “This was evident in posts and replies made by members,” Quibit added. “We need to emphasise that this is only the beginning, as we move along we will add more features and information. This will eventually make the array of information on the portal bigger and better,” she said.

There are many people who had benefited from the Sri Lanka Equity Discussion Forum. “I have been one of the keen followers of Sri Lanka Equity Forum. I must confidently say that this Forum has helped me to enhance my knowledge on stock market investments. Thanks to Sri Lanka Equity Forum I have made reasonable income much more than bank interest from the Colombo Stock Market,” said Samantha Jayasuriya, who trades from Anuradhapura.
Since 2008 the local individual investor contribution to Colombo Stock market turnover increased from 22% to 44% in 2010 and Sri Lanka Equity Analytics had been one of the driving forces that mustered retailers to connect with market and the large investors according to analysts.

Members highlight that the forum helps the retail investor through its well structured categories and sub-domains which provide stock market research, fundamental and technical analysis with the support charts and graphs, expert analysis and member help section. Further, there are separate sections to keep the astute investor community entertained during off market times with poems, sonnets, songs and riddles about the country’s listed stocks. The forum had developed with many local and foreign moderators in different time zones such as the United States of America, United Kingdom, India, Malaysia and Australia to monitor the activity around the clock. This forum itself could be described as a free resource centre platform that could be helpful for financial and research analysts, investment advisors to identify, study and analyse investor sentiments on the market and stocks, a top analyst said from the industry.

“The forum is a tool for financial journalists to get their scopes and master the headlines in print and electronic media as well,” another member of the forum Janith Wijenaike said.
“We are very excited about our Sri Lanka Equity Forum launch and we hope to provide quality information to the very active and enthusiastic investment community here in Sri Lanka,” said Dylan Koelmayer, the Head of Information Technology at Sri Lanka Equity. Founded by a team of professionals with many years of experience and expertise in the equity and capital markets and journalism in Sri Lanka; with the launch of the forum.srilankaequity.com; that was deployed by Colombo-based Global Media Networks Ltd. for the Colombo Stock Exchange (CSE) acts as a real time data vendor and a hub that connects retailers and big time investors at CSE.

The Sri Lanka Equity Forum further keeps Sri Lankan investors connected via the other features such as RSS feeds, email alerts, Twitter and Facebook. Sri Lanka Equity Forum also provides a free Short Message Service via mobile operations in over 100 countries including Sri Lanka to keep the global investors updated with latest information about the CSE.

Courtesy - Daily FT

http://www.ft.lk/2011/11/29/sri-lanka-equity-forum-celebrates-two-years-of-success/

Lanka on track for fast economic growth in 2012

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 11 Dec 2011 09:15:00 +0000

Leading international market research company, Nielsen said that Sri Lanka would record rapid economic growth in 2012, with consumers in rural areas coming to the forefront of economic activity. Nielsen, launching its 2012 Outlook for Sri Lanka, called upon investors and the private sector to focus on the rapidly developing rural areas.

Nielsen forecasts increased consumer spending in 2012, adding that Sri Lankan consumers were aggressively moving towards lifestyle products that have now become essentials and engaging in impulse buying.

Nielsen’s Managing Director in Sri Lanka Shaheen Cader told the launch of the Report that companies should work to leverage the growth momentum. “Sri Lanka is slightly different from the rest of the world in that we see more growth in 2012.There is an emergence of a savvy rural consumer that companies need to consider,” he said.

The other key points highlighted by Nielsen include the large-scale buying of vehicles with over 50 percent of Sri Lankan households owning at least one vehicle in Sri Lanka. (There are around three-million vehicles in use countrywide). Vehicle sales and registrations have risen sharply following duty cuts for all categories of vehicles, including hybrid and electric vehicles.

Nielsen, said that there was a trend where consumers were moving more towards borrowing for their spending. Inflation effects resulting in higher food prices remain the main concern towards 2012, even though Sri Lanka has maintained a rate of 7 percent on average this year, Nielsen said.

Meanwhile, Sri Lanka has secured a record US$ 1 billion in foreign direct investments this year, Deputy Economic Development Minister Lakshman Yapa Abeywardene said.”By November 2011 we had posted the highest ever volume of foreign direct investment,” AFP quoted the minister as saying.

In 2010, Sri Lanka raised US$ 516 million in foreign direct investments, compared to the US$ 602 million in 2009.Sri Lanka is attracting many regional investors, with India in the lead.

Indian investors are exploring emerging markets such as Sri Lanka as they offer higher returns than investments in developed countries whose economies are slowing down, PriceWaterhouseCoopers (PWC) officials told a forum in Colombo. Many Indian companies have shown a keen interest in infrastructure, financial services, tourism and healthcare.

Indian firms have acknowledged Sri Lanka’s rapid growth and rising personal incomes, Anand Dikshit of PWC India said. “Indian investors are exploring emerging economies such as Vietnam, Africa and Sri Lanka.”

Sri Lanka is back on the investment radar after the end of terrorism in May 2009. The economic boom has increased imports of machinery, building material, transport, and petroleum products this year.

Courtesy - The Sunday Observer.

Thirty Five New Hotels On The Cards

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 11 Dec 2011 08:50:00 +0000

The Galadari and Hilton Hotels in the heart of Colombo, Be ready for a change in landscape with the construction of 35 new hotels AND Eleven five star hotels to be constructed in Colombo

As Sri Lanka prepares for the arrival of 35 new hotels in the country, concerns have emerged over the human resources to accompany such ventures. According to Srilal Miththapala, President of the Tourist Hotels Association Sri Lanka, the population in the rural areas will not be enthusiastic about the hotels.

Minister of Economic Development, Basil Rajapaksa, told the media that the 35 hotels will be set up all around the country. Eleven five star hotels will be constructed in Colombo: two five-star hotels in Gampaha, one in Negombo, four in Beruwala, two in Jaffna, seven each in Batticaloa and Trincomalee and one in Nuwara Eliya. The government has not yet released the names of these hotels. Project manager of Sri Lanka Tourism Development Authority, Nimalka Morahela, told The Sunday Leader that the Marriott, the Hyatt and the Shangri-La have all expressed interest in these areas.

The Sunday Leader spoke to Miththapala about the new hotels that will be constructed and what impact it will have on the tourism trade. He explained that despite this move being welcomed, there is a concern over whether or not Sri Lanka has the human resources to sustain these hotels. ‘In rural areas many people are still hesitant to work in the hotel business due to their culture. Employing and training these people could be an issue, something that will have to be rectified before the hotels are established,’ he said. Miththapala added that the people will need to be educated on the benefits of such hotels being set up in their areas.

When asked about the reaction in the local hotel scene to the news of the 35 new hotels, he responded that both the Tourist Hotels Association and the local hotel chains have supported the venture. He said the local chains viewed this as assistance in promoting the tourism trade. Miththapala explained that ‘when an international hotel chain sets up in a country, they will make sure that they advertise not only the hotel but also the country. They would make the destination attractive in order to sell their hotel to tourists.’
Miththapala’s sentiment was shared by Chairman of the Jetwing Group, Hiran Cooray, who welcomed the news of the international chains arriving in the country. He explained that he was unaware of the 35 new hotels, but was excited about the Shangri-La setting up a hotel in Colombo. He stated that such hotels would only serve to lift the standards in Sri Lanka, while also adding that the Jetwing Group is looking forward to competing with these hotels.

Asked whether he believed Sri Lanka attracted the tourists from the economic bracket that would patronise these five star hotels, Cooray responded that it is necessary for such hotels to establish themselves in the country if they want to attract such visitors. He admitted that currently the number of high end tourists is not where they would like it to be, but added that the figure would rise. Cooray said that he welcomed the news of the arrival of the Shangri-La as, ‘they were a chain that not only brought plans but also invested their own capital in the hotel’. He added that many other international chains often expect the local country to invest capital in the hotel.

When Srilal Miththapala was asked about whether the current tourists visiting Sri Lanka would furnish five star hotels, he responded that, ‘at this point it is essential that the government attract such tourists. The existence of these hotels will go a long way in doing so’.

Miththapala admitted that the current figures for tourist arrivals is misleading, explaining that in Sri Lanka there are two segments that fall within the bracket of tourists but do not contribute to the tourist trade. First is the transit tourist, consisting of tourists who come to Sri Lanka and stay as long as 36 hours before travelling to another destination. He added that often these are South Indian tourists who use Sri Lanka as a gateway to Europe. Unfortunately they contribute very little to the local economy, choosing to stay in cheap accommodation close to the airport. The second segment is the Diaspora which visits family still living in the country and as such they contribute little or nothing to the tourist trade.

When these two segments are removed from the tourist figures, the overall figures drop by about 15 percent according to Miththapala. He explained that the actual number of paying tourists may not be enough to fill all 35 hotels all year round.

With concerns over whether or not the current batch of tourists visiting the country would choose to stay in five star hotels, the existing hotels occupancy rate was examined. The Cinnamon Grand and Galle Face Hotel in Colombo have both recorded their occupancies at close to 80 percent. Down south, hotels such as the Fortress has an occupancy rate of 65 percent. Despite these figures, the coastal towns see most of the tourists choosing to reside in the cheaper guest houses.

The new hotels will also be forced to compete with the growing number of boutique hotels, something which tourists in this region appear to prefer. A British tourist, James Wilson, told The Sunday Leader that he was staying at the Cinnamon Grand in Colombo before travelling to the Sun and Dutch house in Galle, a boutique hotel. When asked why he did not stay in a five star hotel, he responded that the boutique hotel is a more attractive and comfortable option.

Certainly if this is a growing trend, it will be a cause of concern for both the government and the international hotel chains planning on coming in to Sri Lanka.

Courtesy - The Sunday Leader

Unprecedented Opportunities

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 11 Dec 2011 08:37:00 +0000

Unprecedented opportunities for Investment Banking - Frontier Capital Partners CEO Nishan Sumanadeera

Frontier Capital Partners Ltd, under two years from its inception, has reached the forefront of the investment banking industry in Sri Lanka, surpassing many renowned and leading investment Banks. During this period, it facilitated many mega deals, including many investments made by listed and unlisted companies. In 2009, it facilitated the C.W. Mackie sale to Lankem worth over Rs.1.4 billion, the Confifi Hotel Group sale to LOLC and Browns group worth Rs. 2.5 billion last year and this year, the Softlogic Holdings’ acquisition of Asian Alliance Insurance worth over Rs.3.3 billion, surpassing all big numbers of major acquisitions this year. Here, the company’s Managing Partner/ CEO Nishan Sumanadeera is in conversation with The Island Financial Review.

Q: What is your core business?

A: Ours is a boutique investment advisory firm doing fee and fund based activities both in Sri Lanka and abroad. Our core team, with their diverse expertise and experience in different disciplines have leveraged their professional experience and personal relationships with the extensive networks throughout the world to bring the best solutions to business needs of our clients.

We provide cutting edge and tailor-made investment strategies and solutions to our clients throughout the entire spectrum investment cycle from the point of entry to the exit. These solutions range from the initial formation of businesses, financial feasibilities, business modelling and appraisals, to promotion of investment, facilitation, arrangement of equity and other types of funding into new and existing projects. Mid term strategic solutions include capital market activities, business expansions and diversification, corporate finance services such as takeover and merger advice, deal facilitation and execution, mezzanine finance arrangements and equity placements.

We also provide advise and assistance relating to restructuring, recapitalization and end term solution such as disposals, divestments and liquidations of businesses in order for our clients to realize capital gains and exit from a particular investment.

Apart from the core business activities of investment banking, we have refocused on some of the activities traditionally considered as cost drivers by many organizations. We have revolutionized and created a platform to monetize these cost centres/activities to be core strength of our business. These services include Legal & Company Secretarial Services, Equity Research, Media and Information Technology.

Apart from our fee-based activities, we have already made few strategic investments in Sri Lanka. We continue to identify new opportunities and make further investment in niche growth sectors. Currently we are in the process of raising US$ 10m from strategic foreign investor who had already pledged to be our long-term technical and financial collaborator. We are targeting a listing on the Colombo Stock Exchange by 2015.

Q: What made you venture into these specialized businesses?

A: Being involved in Investment Banking and Legal services for over 15 years in many investment banks including that of Asia Capital PLC as the Head of the Investment Banking and Legal Divisions, it was very easy to understand the synergies of providing complete legal and financial solutions under one roof. However, integrating information technology and media into the core business was novel and revolutionary. Regardless of these synergies, we always maintain Chinese walls between each activity to ensure confidentiality and independence of advise.

Q: What are your perceptions of the recent legislation for acquisition of under- performing Assets and the decision to depreciate the Sri Rupee against major currencies?

A: Any legislation or initiative to improve the efficiency and the performance of any enterprise or underperforming asset should be welcomed. As businessmen and entrepreneurs we constantly compare Earnings per Share (EPS), Return on investment and assets (ROI). There are other performance measurement yardsticks of competing businesses to determine the efficiency and performance. When performances of our companies and its subsidiaries are below benchmark, we as stakeholders often take decisions to divest, capitalize or liquidate businesses. As a responsible government it is important to maintain a steady pace of growth by ensuring efficient performance of assets and businesses that have greater impact to the country and its people. Therefore government decision should be welcomed for greater interest of the country provided that such acquisitions are handled transparently in an accountable manner.

Devaluation is imperative against major currencies in the backdrop of the global debt crisis. Although I am great believer of free movement of currencies, in which demand and supply determine the equilibrium of the exchange rate, I believe current exceptional global crisis requires timely and more radical action to redirect our economy. Overnight depreciation of the currency though radical, I believe is the only way to prevent market speculation, which would have resulted in greater risk to the economy. Sri Lanka being an import- driven economy this move is likely to have greater short term pressure on inflation and interest rates.

Q: What are the future opportunities for Investment Banking?

A: They are unprecedented. As an investment banker, you live in your own imagination, the essence of success. It is hard to find textbook investment banking solutions to complex real life opportunities. Every investment banking solution needs to be tailor-made and requires out- of- the- box thinking. Imagination has no boundaries. It is only when the last tree has died and the last river has dried and the last fish been caught that the investment banker will run out of solutions. Sri Lanka is not for sale but businesses will change hands at least one more time during the next decade paving way for many opportunities.

Decades ago, investment banking solutions revolved around resurrecting sick companies via restructuring, but today Mergers and Acquisitions (M&A) activities have become order of the day. I would see many opportunities in this area. Further, Sri Lanka needs capital to rebuild and grow in this post-conflict period. The capital available in Sri Lanka’s corporate sector is limited and it is here that Investment Bankers can play a major and catalytic role in promoting foreign direct and portfolio investment. Sri Lanka’s corporates must engage Investment Bankers with international reach in order to access foreign capital. For example, John Keells Holdings would not have been able to build South Asia Gateway Terminals if it did not access international capital markets via investment bankers in 1994. SAGT now contributes nearly 40% of JKH’s earnings. Therefore, the role that Investment Bankers can play in developing Sri Lanka is immense.

Q:How did the local investment banking industry evolve in the last two decades?

A: Investment banking has evolved from being just an impressive word spoken in corporate boardrooms into real life, everyday solutions practiced and adopted by investment bankers and investors collectively to add shareholder value via capital market activities.

With the introduction of the Companies Act in 2007, legislation in Sri Lanka added more flexibility and diversity, which has undoubtedly helped investment bankers to innovate new solutions within the existing legal framework of the country. This was a welcome change, and I must say was the turning point of the industry.

With these changes together with capital market boom, current day Investment Bankers have the opportunity to provide a variety of services, which was far-fledged and unimaginable two decades ago.

Q:What are the growth ingredients for Sri Lanka?

A: As an analyst it is very difficult to determine ingredient or conditions for growth. We can characterize the successful economies of the postwar period, but we cannot name with certainty the factors that sealed their success, or the factors they could have succeeded without. It would be preferable if it were otherwise.

Many countries have grown, for a time, on the back of a much shorter set of policies and reforms. But we suspect that over the course of 10 or 20 years of fast growth, all of these ingredients will matter. Low inflation, for example, will not compensate for poor education or backward infrastructure. To sustain growth over a long period, a set of things needs to come together. Doing some basic things may produce beneficial results. But the items the policy maker neglects will eventually haunt the economy’s progress.

Q:What are the inherent risks in investing in Sri Lanka?

A: Emerging Sri Lanka vouches for economic, regulatory and political stability, the hallmark of any good investment destination. No place on earth is risk-free, likewise no investment. Each country has its inherent risks factors, currently geopolitics affecting Sri Lanka should be an important factor in your watch list.

Private investment and Investment Banking needs policy consistency, coherence and transparency in order to flourish. Therefore the government should look to build on these areas, which will in turn help build confidence in Sri Lanka’s capital markets.

Q:After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the market euphoria is now gradually receding with the index falling below its lowest ever during the last two years. What do you think of the direction of the Stock Market?

A: The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns. Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

The market is in the stage of correction and consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviors which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. Valuations of the stocks are likely to get attractive in the backdrop of higher quarterly earnings and market correction, which had resulted in nearly 25 percent decline from its peak.

Q:What are the best investment sectors in the CSE?

A: In an emerging market, as Jim Rogers said, you need to own a bank, a brewery and a newspaper!! The Banking sector will always remain, as a proxy to any emerging economy whilst beverages and media would have more than proportionate growth.

Sri Lanka is historically known to be a travel destination; hence the leisure and travel sector would always remain in the top drawer. There will be new lines of tourism; many people will come to Sri Lanka for their medical and higher education needs paving way for new opportunities. These new opportunities coupled with ageing Sri Lankan population will help health and education sectors to have a phenomenal growth. The infrastructure development, which is considered as the most, promising opportunity by emerging market investors, also should remain in your shopping list.

Q: How do you cope with market fluctuations?

A: It is generally easy to deal with matured investors because they understand the risk involved in capital market activities. It is retail investors that require frequent advise. As a seasoned investor you generally invest funds in different asset classes with varying risk return combination. Market investment is an art not a science.

Q:What factors are considered by "matured" companies when buying assets in certain sectors?

A: There are many factors considered by investors prior to engaging in a M&A deal. Some of these opportunities can be considered once in a lifetime, a dynamic businessman would not want to miss. It is their vision, dynamism, business acumen that drives them towards these opportunities. Mature companies and investors do not place too much significance on past financial performance, more weightage would be given for business synergies. Historical financial information cannot be considered a yardstick of the future growth potential as it has been proved wrong many times. Most of these mergers and acquisitions have happen depending on investment objective, appetite and style of the respective investor.

Q: What measures do you propose to arrest the declining stock market which seems to be sinking faster than the Titanic?!!

A: Any artificial measures taken by regulators against the free market movement is likely to result in prolonging the eventuality. Hence we should allow free market forces to determine the bottom. In the past we have seen many ad-hoc remedies resulting in failed attempts to rejuvenate the stock market.

Q: Can you spell out as to how much more it will fall?

A: Stock markets are subject downward and upward movement due to varying factors. These factors and its future implication usually result in negative or positive by sentiments of the investors. The global debt crisis and some of the international factors have resulted in negative sentiments of the investors’ community. These factors have resulted in lower demand for equity investments as against the other asset classes.

The Market is currently is in the phase of correction and consolidation. It is likely to result in a downward trend until valuations become more realistic and reasonable. It is surprising to see some companies without any real business or assets of any value trade at very high multiple to its earnings or at a substantial premium to assets value. These valuations have to get corrected and total market capitalization should be close to value of businesses.

Likewise there are many companies with future earnings potential, which still trade at cheaper forward multiples. Share Prices will have to eventually reflect the corporate earning. Hence I consider this down trend to be an opportunity.

Q: Investors, who have pumped in US$ 2 billion into Treasury Bonds are aghast at getting less Dollars with the depreciation when they exit. Some say that they want to exit what ever the losses were. Your comments?

A: Foreign Exchange Rate usually affects returns of the inbound investments. Sri Lanka used to have a steady Rupee depreciation of approximately 2% per annum during last 20 years. Comparatively our bond rates still far more attractive to foreign investors especially inconsideration of the investment risk and current global factors.

Q: The Government is also keen to commence local industries in consonance with the theme : Apema ratak, Apema Deyak. How do you see the private sector sentiments in that regard? Granted that earnings is the core business of business. But, don’t you think that this is more noble than blue chips investing in hotels abroad ?

A: All business decisions of the private sector will have to make commercial sense regardless of whether these investments are inbound or outbound. Private sector would be more than willing to invest in local businesses in consonance with special themes, provided that theses investments which are commercially and financially viable.

Q: Sri Lanka is spending US$ 400 million in subsidizing the New Zealand milk farmer and another US$ 300 million in sugar imports. What is stopping blue chip corporates looking at both these sectors not only in terms of growth in corporate earnings, but also in the national interest as well given that the trade deficit is projected at US $ 11 billion this year?

A: Sri Lanka is considering the benefits of import savings similarly to the export earnings. Corporate would certainly look at new investments in the area of import substitutes such as local Milk Powder and Sugar if necessary incentives are provided to the investors.

Q: There is a lot of hype on public sector- private sector partnerships. Given that each IPO is oversubscribed so many fold running into billions, why can’t the government and the private sector team up for, say, major infrastructure projects where the funds are raised here, without running to the World Bank, the International Monetary Fund and the EXIM bank of China where the latter’s interest rates are even higher than the donor concerns?

A: Oversubscription of IPOs does not necessarily means there is an abundance of excess cash. Some oversubscriptions were due to large sums of monies being given to investor by way of margin lending by banks. Agree that there should be fund raising with regard to infrastructure project, which could be funded jointly by government, Private Sector Companies and private investors.

Q: Don’t you think that there should be more companies obtaining listings, especially in the apparel sector?

A: Among factors which discourage companies from obtaining listings are stringent disclosure policies and regulation. Regulators should make listing simpler and straight forward. Regulators should provide more incentives for listed companies. There are more than 30,000 registered businesses but only 300 listed companies. This ratio should be at least 30%. Central Bank’s directives to make Finance and Insurance companies listed can be considered as a step taken in the right direction.

Courtesy - The Island

Sri Lanka National Development Bank PLC (NDB) to reach greater heights

noreply@blogger.com (Sri Lanka Equity Analytics) — Wed, 02 Nov 2011 07:21:00 +0000

National Development Bank (NDB) with a branch network of 51 as at June 2011, and an asset base of LKR124.7 bn (as at 30th June 2011) is the fifth largest private Commercial Bank in Sri Lanka (in terms of asset base).

Interest income, has shown a compound average growth of 12% over a period of 6 years. A detailed analysis on quarterly performance for FY2010 would reveal overall interest income has declined due to continued dip in interest income earned on other interest earning assets.

Other income is mainly derived through gains from investments held for trading which is comprised of quoted and non quoted securities and government T bills. In addition to the above, a significant portion of other income is earned as commission and fees. By the end of FY2010, the other income increased by 9%

During FY2010, there was a reversal in the loan loss provision of LKR172. mn as compared with a provision of LKR287 mn for the previous year. During a period of 6 years, overall operating expenses have shown a CAGR of 3%. The current cost to income ratio calculated based on non interest expenses (excluding loan loss provisions) and operating income stands at 43% which is marginally better than the sector.

Gross non performing loan ratio as at 2QFY11 is 1.6%, which is relatively low, compared with the sector gross NPL of 4.9% for June 2011. The bank’s statutory liquid asset ratio stands at 23.96% as at end 2QFY11, comfortably above the regulatory minimum of 20%. Having hit a low of LKR117.5 in August 2010, NDB’s share price has given a 21% negative YTD return. And based on the projected net profits, NDB is currently trading at a PER of 8.64x for FY11E and 7.28x for FY12.

Corporate Profile

National Development Bank of Sri Lanka (NDBSL) was established under an act of Parliament in 1979 as a fully state-owned licensed specialized bank, with the aim of providing long term project financing to the private and public sectors. NDBSL was listed in 1993, with 61% of its equity transferred to the private sector, and state involvement has remained minimal since.

Later on a merger between NDBSL and its commercial subsidiary NDB bank limited in August 2005 resulted in the creation of NDB (as a Licensed Commercial Bank (LCB)). NDB’s formation in to a LCB has allowed it to diversify both product and funding streams. The NDB group has exposure to Insurance, Investment banking, stock broking brokering and fund management through its local subsidiaries and associates. NDB with a branch network of 51 as at June 2011, and an asset base of LKR124.7 bn (as at 30th June 2011) is the fifth largest private Commercial Bank, accounting for approximately 3% of the banking system assets.

Banking Sector Overview

The banking sector, being the most vital sector in the economy has concluded its year 2010, delivering an outstanding performance. The high performance was reflected through high rate of business growth, improved credit quality with favorable credit loss provision coverage, a high level of profitability and the maintenance of capital adequacy ratios well above the statutory limits. As at end of year 2010, the number of banks stood at 31, comprised of 22 licensed commercial banks and 9 specialized banks. By the end of year 2010, the total asset base of the banking sector reached a level of LKR 4,533.2 bn, a growth of 18%, compared with a LKR 3,835.2 bn asset base in year 2009. This was mainly the result of the significant growth in loans by 23% compared to a negative growth of 2% in 2009, where the growth was majorly driven by agriculture, consumption, infrastructure, trade, and construction sectors. Further, overdrafts and term loans including housing loans recovered from its negative growth prevailed during 2009.

In addition, the growth in deposits within the banking sector, have approximated to 16% whilst claiming for almost 73% of total funding base of the banking sector. Moreover, the overall capital funds of the banking sector improved during the period, thus increasing the cushion available for absorbing risks.

Financial Performance

Interest income

Interest income as the major source of income for the bank, has shown a compound average growth of 12% over a period of 6 years. However, irrespective of very high annual growth rates of 21% in FY2006, 42% in FY2007 and 26% in FY2008, the cumulative growth rate has compressed due to a decline in interest income during FY2010 by 14%. A detail analysis on quarterly performance for FY2010 would reveal overall interest income has declined due to continued dip in interest income earned on other interest earning assets, where above 50% of these include government securities. On the contrary, interest income earned on loans has trended upwards. Apart from the above, overall interest income for 2QFY2011 has increased by 7%, facilitated through an improvement of 10% in interest income on loans and advances.

Interest Expenses

During FY2010, interest expenses have declined by 23% due to declining deposit rates. But with reference to latest quarterly results (2QFY11) both interest expenses on deposits and interest expenses on other interest bearing liabilities have marginally increased by 5% QoQ and of a slow phased decline in Average Weighted Deposit Rates, interest expenses have increased 5.8% QoQ respectively. Therefore, irrespective due to an aggressive growth in overall deposit volume, where, as at end 2QFY2011, the deposit growth was 12% QoQ. Adding more to the interest expenses, more expensive time deposits have continued to increase over the years and as for 2QFY2011, time deposits have increased by a 10% QoQ. However, due to the nature of NDB’s lending portfolio, the company has to rely on longer term sources of funds such as Term deposits as to match with long term lending (including long term projects). In addition to that, bank maintaining adequate CASA (Current accounts, Savings accounts) deposits to fund retail lending which is comparatively short term. During 2QFY11 Current accounts and Savings accounts have increased by 15% QoQ and 20% QoQ respectively. The second component in total interest expenses, interest expenses incurred on other interest bearing liabilities have also increased by a 6% QoQ during 2QFY11, owing to a7% increase in total borrowings.

Net interest income and interest spreads

Despite fluctuations in lending and deposit rates, bank has maintained a Compound annual growth rate (CAGR) of 8% in net interest income over a period of 6 years. During FY2010, the net interest income has shown only a marginal increase of 1% YoY. This is due to a compressed interest spreads of 5% recorded in FY2010 as opposed to previously high spreads of 7%. Squeezed margins are due to continued decline in Other income is mainly derived through, gains from investments held for trading which is comprised of quoted and non quoted securities and government T bills. In addition to the above, a significant portion of other income earned as commission and fees. By the end of FY2010, the other income has increased by 9% and the increase has been

Non- Interest income

facilitated through an impressive 109% YoY increase in fee based income, 6% YoY increase in forex income, 54% increase in commission income and 92% increase in gains from dealing securities. Consequently, the contribution from other income to the operating income had been around 37% on average over a period of 6 years. However based on the latest available 2QFY11 results, the overall non- interest income is showing a marginal dip of 2%. This was majorly due to a loss of LKR15.8mn made on quoted and non quoted securities. These losses were primarily due to the recent downturn in the stock market

Net income/ Operating income

Bank has maintained a CAGR of 3% in operating income over a period of 6 years and referring to latest quarterly results the growth had been 8% QoQ, where the growth had been facilitated via a growth of 4% and 17% in net interest income and non- interest income respectively.

Non- interest expenses

Non- interest expenses of the bank include personnel costs, staff retirement benefits and other administrative and general expenses. Almost 20% of the non interest expenses are personnel costs. During a period of 6 years, overall operating expenses have shown a CAGR of 3%. The current cost to income ratio calculated based on non interest expenses (excluding loan loss provisions) and operating income stands at 43% which is marginally better than the sector. However, during FY2010, the ratio has increased from a previous level of 39%. This is due to a higher growth in operating expenses which has beaten the growth in operating income.

Provision for bad and doubtful debts

During FY2010, there was a reversal in the loan loss provision of LKR172. mn as compared with a provision of LKR287 mn from the previous year. Provision reversals occurred due to settlements made by borrowers and extra provisioning made on non performing loans in accordance with CBSL regulations getting transferred back.

Tax

The effective overall tax rate inclusive of the financial services VAT was at 54% for the year as compared with 52% for the previous year. At the same time, the industry effective tax rate was 60%. And the lower rate was due to higher equity income earned by NDB, where equity income is exempted from income tax.

Asset Quality

NDB’s asset quality is deemed healthy due to the bank’s stringent credit standards, which have resulted in lower than industry NPL ratios. Banks asset base is dominated by loans and advances; where as for FY2010 contribution from loans to the overall assets were 68%. In the meantime, 25% of the assets were investment securities. Therefore, the quality of the loan portfolio is vital for the bank.

Non- performing loans of the bank has a negative compound annual growth of 0.74% over a period of 6 years, while total loan growth reaching a CAGR 8%, indicating that on overall, non performing loans are declining irrespective of an expansion in the loan book. Gross non performing loan ratio as at 2QFY11 is 1.6%, which is relatively low, compared with the sector gross NPL of 4.9% for June 2011. Similarly, net NPL ratio (Non performing loans for in which provisions are not made) is a minute 0.42% (sector average 2.9%), affirming that asset quality of NDB is high and they are maintaining adequate provisions as to absorb potential risk arising from the loan book.

Apart from the above, in order to mitigate the overall credit risk, the bank is maintaining a well diversified lending portfolio covering all of the sectors in the economy. Whereas 19.5% of the loans are given to the consumer sector while 17.6% to services, 11.6% to metals chemicals and engineering, 11.6% to textiles and garments 15.5% to agriculture.

Further, NDB’s project loans remained at 19% while loan to corporate (excluding project loans but including loans to SME’s) and retail customers accounted for 54.3% and 26.3% of the total loans respectively at end FY2010.

Funding and Liquidity

NDB’s funding base is dominated by deposits, claiming for 65% of the bank’s total funding as at end FY2010, (end FY2009: 60%). This was followed by shareholders funds of 17% and borrowings 18%. The bank’s deposit base expanded 19% YoY to LKR59.4 bn as at end FY2010 irrespective of declining interest rates paid on deposits. Similarly, the deposit base has expanded further by 12% during 2QFY11 to LKR67.9 bn. As the second major source of funding of the bank, borrowings were given a weight of 40% historically in FY2007, which is soon after bank attained status of a Licensed Commercial Bank in 2005. However, with passage of time, bank has strengthened their deposits as a source of funding.

As per the latest available data, as at 2QFY11, the weight given on borrowings was 29% whilst 57% being given to deposits.

Most of the NDB’s deposits (73% as at end 2QFY11) were in the form of long term, expensive time deposits (compared with CASA). Cheaper CASA deposits are amounting to 27% of the total deposits. When compared with peers, NDB’s CASA products are relatively low. However, this has been due to the business model of NDB, where bank has to maintain long term funds such as time deposits as to fund long term lending.

NDB’s Asset Liability Maturity Mismatch (ALMM) in the “less than 1 year bucket” widened from a negative gap of LKR4, 317.5 mn as at end FY2009 to a negative gap of LKR7, 786.0 mn as at end 2010. This amounts to a 12% of interest earning assets as at the same date. The widening of the gap was primarily due to an increase in short term fixed deposits during FY2010.

Funding Base

The Loan to deposit ratio (LTD) ratio—a bank's gross loans divided by total deposits—indicates the percentage of a bank's loans funded through deposits. An upswing in the LTD may indicate that a bank has less of a cushion to fund its growth and to protect itself against a sudden recall of its funding. The LTD for NDB is above 100%, indicating illiquidity. However, the loan to deposit ratio’s traditional role as a liquidity measure has been weakened by non deposit funding sources. Especially in a bank with higher exposure to funding large development projects, the concentration on deposits is low leading to a higher LDT.

Hence, the loans are funded more through borrowed funds. Therefore, resorting to non deposit funds such as borrowings in an economy with declining interest rates, would deliver substantial benefits. This is due to borrowings obtained on floating rates getting easily adjusted faster than deposit rates. Despite a high LTD, the bank’s statutory liquid asset ratio stands at 23.96% as at end 2QFY11, comfortably above the regulatory minimum of 20%.

Capital adequacy

High levels of profitability, coupled with modest earnings retention (retention of 39% for FY2010) had supported the bank to build a strong capital base. Meanwhile, banks’ equity/ assets ratio is at 13% by the end 2QFY11. Capital adequacy of the bank is deemed strong with a core capital adequacy ratio of 10.16% and total capital adequacy ratio of 11.72% as at end 2QFY11 where the regulatory minimums are 5% and 10% respectively. The Net NPL/ Equity ratio was negative as at FY2010, owing to NDB’s excess provisions made over regulatory provisioning requirements.

DuPont Analysis

DuPont analysis is a methodology by which the ROE of a company can be broken down in to its constituent parts. ROE is a measure of how successful the management of a company has deployed the equity to generate a return for its shareholders. The ROE can be shown as a product of Earnings on assets and equity multiplier. The ratio of assets as a percentage of equity is known as equity multiplier.

With respect to NDB, the ROE for FY2010 is 15% which is derived through Earnings On assets of 2.14% and an Equity Multiplier of 7.04. However, despite an increase in Equity multiplier from 6.80 to 7.04, the ROE has declined as a result of a dip in Earnings on assets from 2.32% to 2.14%.

Accordingly, the Earnings On assets ratio have declined in FY2010. The major reason for this decline was slower phased growth in net interest income which has been unable to match with a growth in average total assets of 14%.

Net interest income/ Assets = Net interest margin * Earnings asset ratio

As mentioned above, there are two possible ways to improve the Earnings on Assets, firstly it is by improving net interest margin, and secondly it is through increasing the ratio of interest earning assets to total assets (Earnings asset ratio).

During FY2010, the net interest income as a percentage of total assets has declined to 4% from a previous level of 5%. The reason for the dip can be analyzed using two basic ratios, including Net interest income/ Earnings assets and Earnings asset ratio. However, during FY2010, the ratio of Net interest income/ Earnings assets has declined from 6% to 5% and this decline has eaten in to the positive contribution that would have otherwise realized through an increase in the Earnings asset ratio from 76% to 78%.

Risk Management

NDB bank promotes a strong risk management culture supported by a robust risk governance structure. The bank’s group risk management is assigned the responsibility to design and operate the bank’s integrated risk management process.

Credit risk

Credit risk is defined as the potential for loss arising from the failure of a counter party to perform according to its contractual arrangement with the bank. It includes failure in repayment of capital or interst in full within the agreed time period. Therefore as a measure of managing credit risk , bank is adopting a well defined credit policy which defines credit culture and specifying target markets for lending and areas to avoid. The effectiveness of this system well reflected in the Non performing loan (NPL) ratio of the bank, which was 1.58% as at 30th June 2011, against an average industry NPL ratio of 4.9% as at June 2011.

Credit portfolio and provisioning

Bank is closely monitoring the overall quality of the loan portfolio and determines the degree of supervision required for each credit. Any deteriorating credits are identified and monitored closely with periodic reports. Non -performing assets are identified at an early stage, enabling management to take action as appropriate. Currently, bank is maintaining provisions more than required enabling to absorb sudden shocks arising from the loan portfolio.

Market risk management

Market risk management ensures that the bank operates within the pre defined risk parameters. This is achieved through analytical tools such as stress tests, scenario tests, sensitivity analysis and mark to market exercises carried for products, portfolio s and balance sheet on a regular basis.

Liquidity risk

Liquidity risk is the potential for loss to an institution arising either from its inability to meet its obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses. It arises when the cushion provided by the institutions liquid assets is insufficient to meet its obligations. In NDB, a satisfactory tradeoff between liquidity and profitability is maintained by categorizing liquidity short falls in the balance sheet in to suitable time bucket placing exposure limits on each one to monitor the liquidity mismatch gaps. Also, bank has contingency funding plans to be implemented in the area of liquidity risk management in line with regulatory guidelines.

Future Outlook

Project and infrastructure finance

Project and infrastructure finance as a business unit is specializes in offering tailor made cash flow linked long term project loans to its corporate clientele. With the current economic revival of the North and East, the bank is provided with unprecedented opportunities for funding these developments, enabling the bank to expand its project financing from its current levels of 19% in the overall loan base. NDB bank entered in to a risk sharing agreement with IFC to support projects in the renewable energy sector. This risk sharing agreement benefits entrepreneurs in the renewable energy sector, while insulating the bank against possible risks which enables the bank to expand it’s presence in the renewable energy sector.

Bank is currently operating with a branch network of 51 and has future plans in expanding island wide while focusing more on establishing new branches away from the western province. These would enable the bank to expand its funding base through attracting more deposits. Similarly, from retail banking perspective, short to medium term loans would increase. Initially due to the aggressive expansions, the cost to income ratio would increase, but once the new branches reaches it’s breakeven after 2-3 years, cost to income ratio would ease back to favorable levels.

Currently, the bank is maintaining high levels of provisions, more than the regulatory requirements. This would improve the bank’s capabilities to aggressively expand its loan book without hampering profits. Similarly, high levels of available capital funds would further facilitate loan book expansions going forward.

Valuation

Share offers good value on 8.64x forecasted 2011 net profit.

For the FY2011E the profits are forecasted considering corporate tax revisions (35% to 20%) and the expected credit growth in the low interest economy. The earnings would approximate to LKR2, 622.8 mn in FY2011, LKR 3,114.5 mn in FY2012. Having hit a low of LKR117.5 in August 2010, NDB’s share price has given a 21% negative YTD return. And based on the projected net profits, NDB is currently trading at a PER of 8.64x for FY11E and 7.28x for FY12E. Referring to an analysis of a historic 52 week price movement, we derived a price movement of +/-19.19 on a mean of LKR163.40; hence the flux is approximately +/-12%. Furthermore, if it is assumed that the same upside price movement is seen pushing the price to LKR157.2 (from a current level of LKR138.00), the forward PE multiples would be 8.5X for FY11E and 7.37X for FY12E.

Furthermore when adjusting NDB’s returns to its risk (deviation of the share price), sharp ratio of the counter is at 0.27 whilst the Banking Finance and Insurance sector is at 1.46. NDB’s return volatility is much higher at 27% as opposed to the sector’s deviation of 21% over the past 52 week trading period. Hence, SAMP shows a marginal volatility in its return compared with the sector. In the light of the above information and analysis, we recommend “buy” on mid to long term.

Courtesy - Asia Wealth Management

Sri Lanka enjoying fruits of peace

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 09 Oct 2011 03:12:00 +0000

- By Dr. Palitha KOHANA

“This year marks the 10th Anniversary of the horrible terrorist attacks on the World Trade Centre in New York, an event that shook the world and was a wake-up call to all countries on the globalisation of terrorism. It sent a violent message to the entire world that terrorism has no borders, it does not respect nationality and is oblivious of religion or culture.

For us in Sri Lanka, a country that for three decades bore the brutal brunt of terrorism, 9/11 was a stark reminder that no country in the world, big or small, weak or powerful, rich or poor, is safe from the vicious brutality of terrorism. This tragedy bore a message to the world’s leaders to intensify their efforts to address the deficiencies in domestic and international mechanisms to prevent and, wherever possible, prosecute acts of terrorism.

A decade later, it is but appropriate to ask ourselves if the world has done all that it could to prevent such acts of terror. Tragically, our experience has been that senseless acts of terror have continued as we witnessed in the recent incidents in Oslo, Mumbai and Abuja.

For three decades, Sri Lanka, bled under a terror campaign conducted by a brutal terrorist group the LTTE, with their aim to carve out a mono-ethnic state with the ready support of sympathisers, mainly in Western countries who funded the terrorists, procured weapons for them and encouraged the recruitment of children.

The conflict imposed on the people of Sri Lanka, of all ethnicities and religions, untold suffering. It challenged our democracy to the core.

Sri Lanka’s decision to engage the LTTE terrorists militarily in 2006 followed their persistent refusal to return to peace negotiations and their ready embrace of terrorism. We tried three times, with the assistance of the international community, to talk to them in Geneva and in Oslo in 2006.

The military engagement was based on a well-defined distinction between the terrorists and the civilians and its ultimate goal was a humanitarian rescue operation designed to relieve approximately 300,000 civilians held against their will as a human shield and as a bargaining chip by the terrorists.

Despite the brutal onslaught of terrorism to undermine the State, the Government of Sri Lanka took determined measures to uphold human rights throughout the conflict. The Government, with the assistance of the international community fed and provided health care to the people held hostage by the terrorists.

Today, the sympathisers of the defeated LTTE are conducting a well-financed propaganda campaign designed to even scores and win through international sympathy what they lost through terror.

The people of Sri Lanka are now enjoying the fruits of peace, and unprecedented stability that the eradication of terrorism has brought. All our people are enjoying the benefits of an economic boom. Not a single terrorist bomb has exploded in the country since the defeat of the LTTE in May 2009 and not a single terrorist bullet has been fired.

Although we look to the future, we will never forget what terrorism did to our country and its people. We remain vigilant about the threat from the terrorist group’s agents and front organisations abroad who still subscribe to the destructive and racist ideology.

International linkages

Almost all acts of terror continue to have direct or indirect international linkages. No terrorist group could survive for long without support from international linkages, as was so aptly demonstrated in our own case.

The complex, multi-faceted phenomenon of terrorism, calls for coordinated and comprehensive approaches by the international community. Therefore, the issue can only be addressed through the combined efforts of the international community. Sri Lanka is a party to 13 multilateral conventions countering terrorism and the SAARC instruments.

Sri Lanka is active in the global efforts to counter the illegal movement of funds. In this regard, it is vitally important that this year we reach finality in our negotiations on the comprehensive convention on terrorism.

We note the discussions that have been taking place since GA Resolution 51/210 of 1996 and hope that these could be brought to a successful conclusion urgently. We sincerely hope that delegations can converge on a position that can achieve a consensus in a critical but yet unfulfilled area of responsibility of the world community.

We must not discount the threat posed by well-financed and organised groups and individuals directly or indirectly associated with terror groups and based thousand of miles apart. Global mechanisms must continue to be strengthened, including through awareness raising and training.

Well-meaning individuals and groups, including policy makers and media personnel, may inadvertently become pawns of the devious agendas of terrorists and facilitate the realisation of terrorist goals and influence. We appeal to all well-meaning persons to maintain vigilance, and not to create opportunities, even inadvertently, for terrorists and their sympathisers, to achieve through domestic and international mechanisms, many of which may appear to be perfectly legitimate, what they were unable to achieve through bullets, suicide bombs and the destruction of innocent lives. The encouragement of one group, in whatever form, will send a clear message to the others to adjust their tactics.

Sophisticated means

Terror groups are resorting to increasingly sophisticated means to sustain their activities, through the cultivation of linkages to international organised crime.

These linkages mean that terrorists and their front organisations profit from human trafficking and arms trafficking, money laundering, credit card fraud, and cyber-crimes. Surprisingly, some otherwise respected members of society may be part of these networks.

In Sri Lanka, even in the post-conflict phase, LTTE related networks in transit and destination countries still continue to exploit human misery. Sri Lanka continues to be negatively affected by this problem as these networks rely on disseminating a false image of the country internationally in order to sustain their activities in the host States.

Sri Lanka wishes to emphasise that the root causes of terrorism are complex and that terrorism cannot be associated with any ethnicity or religion. The threat and means of countering terrorism should not be viewed primarily in a military context.

Therefore, Sri Lanka has been taking steps which encompass the political, economic and social spheres to ensure that the seeds of terrorism will never find fertile soil in our land. Our reconstruction, rehabilitation, and reconciliation efforts are carefully calibrated and designed to ensure that terrorism will never raise its ugly head in the country.

In conclusion, my delegation wishes to remind you that our deliberations here have the potential for real and lasting impacts on counter-terrorism strategies, and thereby to end or lessen the misery and human suffering wrought by acts of terror.

The United Nations remains the primary body to spearhead the global campaign against terror.

It is encouraging to note that Member States are coordinating their counter-terrorism efforts and continuing their legal norm-setting work through the General Assembly. We endorse this approach.

The Security Council has also addressed this issue through resolutions and by establishing several subsidiary bodies.

In this regard, Sri Lanka reaffirms its commitment to the Global Counter-Terrorism Strategy that consolidates the activities of the Member States and presents a common strategic and operational framework to fight terrorism and protect the right to life.”

Dr. Palitha Kohona, who is the Permanent Representative of Sri Lanka to the United Nations made the above speech at the Sixth Committee of the United Nations General Assembly 66th Session.

Courtesy - Sunday Observer

CIMB Group Holdings Bhd to setup an Investment Bank in Sri Lanka

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 31 Jul 2011 15:08:00 +0000

Malaysia's largest banking group, CIMB Group Holdings Bhd, is set to make its first foray into South Asia and expected form an alliance with some partners in Sri Lanka to tap on the burgeoning investment banking opportunities in the island state.

In Sri Lanka, CIMB is poised to have early mover advantage as big and prominent investment banks from the West have yet to enter the market in a big way.

The initial public offering market in Sri Lanka is "boo-ming" and merger and acquisition activities have been on the rise ever since a three-decade-long civil war ended in 2009, investment bankers say.

Further sources said it will next week open a representative office in Mumbai, India, and form a working partnership with the Kotak Mahindra Group, one of the country's top banking and financial services group.

Group chief executive officer Datuk Seri Nazir Razak said recently that CIMB's strategy for the India, China and Middle East regions would be to form working partnerhips with established players there, rather than acquire equity stakes.

"We're looking at working partnerships, not equity. You'll know our proposition with regard to these three markets by year-end," he told Malaysian reporters in Beijing, China, last week.

Acquisitions would be a priority for the group only in Asean, he said, referring to the grouping of 10 Southeast Asian nations which include Malaysia, Thailand and Indonesia.

"We're always talking (to potential targets), but nothing material so far," he remarked.

In India, CIMB is expected to capture opportunities from flows between India and Asean. It is also likely to focus on areas like investment banking, asset management and private equity - segments in which the Kotak Mahindra Group is strong.

The Indian group's many businesses include a bank, Kotak Mahindra Bank Ltd, which has over 230 branches and manages assets worth US$11 billion (RM32 billion).

In China, CIMB has a presence via two representative offices in Shanghai and a 19.99 per cent stake in Bank of Yingkou Co Ltd, a mid-sized lender. It plans to convert one of the representa-tive offices into a branch.

The group is believed to be studying opportunities in the Middle East.

Market euphoria receding

noreply@blogger.com (Sri Lanka Equity Analytics) — Sat, 30 Jul 2011 07:07:00 +0000

After the phenomenal rise of the All Share Index (ASI) by 284 percent to a high of 7,797.96 on February 28 the stock investment euphoria is now gradually coming to an end with the index falling below its lowest ever during the last two years.

Investors are beginning to realize the inherent risk involved in investing in illiquid markets, a top market analyst said.

“The market had already enjoyed peace dividends and time has come for investors to adopt a more prudent approach towards the stock selection instead of chasing behind rallies and leveraging their portfolios in anticipation of higher returns, Frontier Capital Partners Ltd CEO Nishan Sumanadeera told Daily News Business yesterday.

Investors need to identify value stocks, based on fundamental analysis and Value For Money (VFM) approach involving analysis of strength and weaknesses, future growth potentials, opportunities and threats applicable to respective businesses.

Although the current market sentiments are depressed, Sri Lanka has enormous potential in terms of future growth.

Sri Lanka’s sovereign rating outlook was recently raised to positive from stable by Moody’s Investors Service and Sri Lanka received a record $236 million of Foreign Direct Investment (FDI) in the first quarter of 2011, with the tourism industry attracting most of the inflows.

Sri Lanka successfully raised $1 billion from the sale of dollar-denominated bonds in its fourth international offering at a time of world debt crisis reflecting investor confidence.

High fiscal deficit and over-dependency of external borrowings still remain a concern with Sri Lanka’s high debt to GDP ratio of over 30 percent and FDI to GDP ratio of less than 2 percent.

“Sri Lanka’s capital market represent only fraction of its national assets. The total market capitalization of the Colombo Stock Exchange (CSE) is about US $ 23 billion representing less than 50 percent of country’s GDP which is about US $ 48 billion. The private sector is likely to contribute with more than 20 percent growth in earnings and Gross Domestic Product (GDP) growth expected to be in the range of 8 percent, reflecting the future potential he said adding that Sri Lanka’s land bank of 65,000 square kilometers which can easily be valued over US$500 billion requires more than average return on assets (ROA) to spark the economy into the next level”.

Sri Lanka also has “high growth, attractive labour costs and a unique strategic geographical location that could be the opportunity for the future, especially in port activities.”

Sumanadeera pointed out that the Stock Market is in the stage of consolidation and Colombo’s investor sentiments will be no longer be influenced by IPO’s, illiquid trading or irrational market behaviours which had been a hallmark during last two years.

In future, investors are likely to be more prudent and likely to make their investment decisions based on corporate earnings and asset values. We are likely to a witness an uptrend of growth in stocks and blue chip shares during the next stage. He stressed that valuations of the stocks were likely to get attractive in the backdrop of higher quarterly earnings and market correction which had resulted in nearly 20 percent decline from its peak.

Foreign investors are also likely to re enter the market soon subject to early resolution to much worried debt crisis in US.

He said the current sentiments in the Colombo Stock Market was clearly reflected by the recently concluded IPOs such as Expolanka, Softlogic and Textured Jersey which resulted in subscriptions less than expected and initial trading prices below its initial public offer prices.

Courtesy - Daily News

http://www.dailynews.lk/2011/07/27/bus01.asp

Sri Lanka: All Share Index crashes below key 200 Day Moving Average

noreply@blogger.com (Sri Lanka Equity Analytics) — Fri, 24 Jun 2011 11:03:00 +0000

Two years after its star performance as the world’s leading stock market, the Colombo All Share Price Index crashed below its 200 Day Moving Average yesterday for the first time since it rose above it on 18, May 2009, when Sri Lankan armed forces gained victory defeating LTTE terrorists.

“It is hard to predict what would be the next movement of stocks, but technically the next support level is at 6700 points,” Head of Frontier Capital Partners Nishan Sumanadeera told Mirror Business. He said that Sri Lanka’s stock prices had been stretched in recent months. “Yesterday’s crash technically symbolizes that 200 Moving Day Average Chart has fallen back since it rose upwards on 18 May 2009.”

“Technical analysis show that it last fell when oil prices zoomed over $ 140 per barrel in 2008, on the verge of world’s second financial crisis,” Sumanadeera noted.

He further pointed out that as per technicalities, it is a very bearish signal for share prices as the 200 Day Moving Average is considered a key support resistance indicator by Technical Analysts and Chartists with regard to long term trends and direction of share prices.

According to him, brewing debt crises in Portugal, Ireland, Italy, Greece and Spain in the Euro Zone, and the slump in US stock markets may also affect the Colombo Bourse.

Colombo’s All Share Price Index closed at 6,871.68 points, down by 56.06 points and the Milanka Price Index fell by 79.56 points to close at 6,436.90 on Thursday.,

After the end of the Civil War on 18th May 2009, Colombo stocks jumped drastically, setting new records among global emerging markets. The market capitalization of CSE reached record high on 06th October 2009 (Rs. 1 trillion). However, within last year, the market capitalization reached further to Rs.2 trillion, and return on capital rose to 96%. Yesterday’s performance reflected that year-to-date performance is just little over 3% this year.

Courtesy - Daily Mirror

http://print.dailymirror.lk/business/127-local/47964-whats-next-for-cse.html

Sri Lanka offered slot in London Stock Exchange "international board" project

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 19 Jun 2011 04:41:00 +0000

Sri Lanka's bourse could become one of the partners of London Stock Exchange's 'international board' project where foreign stock exchanges are allowed access to its market participants and liquidity, an official said.

"The international board is a concept where, you could buy any London stock in Sri Lanka," LSE's director of global development, Tony Weerasinghe told a forum in Sri Lanka Saturday on developing the country's capital markets."The same way stocks in the Milanka index (an index of liquid stocks in Colombo) will be traded in London." Weerasinghe is head of Sri Lanka based MilleniumIT, which has built LSE trading system and is now owned by the exchange.

Weerasinghe said the LSE system was the fastest in the world and it has helped the exchange win back business and have around 70 percent of the British trading volume.

In March, Weerasinghe told a forum in Madrid that LSE was in talks with at least five other exchanges to open trading windows with London and they may become operational by July or August. Weerasinghe said the international board will give a less costly way for participants in the London Stock Exchange to access Sri Lankan stocks and the company's firms will be able to access LSE liquidity at a far cheaper way compared to getting a dual listing. Weerasinghe said a recent central bank decision to allow Sri Lankans to invest up to 200,000 US dollar abroad will also give them an opportunity to also trade in stock from London.

Responding to a query from Sri Lankan regulators, Weerasinghe said firms in the international board as well as its transactions will continue to be governed by the rules of the home country. He said there was a demand for the mechanism from investors who wanted round the clock trading. He said Sri Lanka could also offer the service to investors in the South Asian region especially to Indians, who were now allowed to invest up to 300,000 dollars a year abroad. "This will give us an opportunity," he said.

He warned that other country's will seize the chance and Sri Lanka may miss the bus. Firms as far as Malaysia had raised capital in Colombo before independence from British rule when the country had a currency board or hard peg to the Sterling allowing free movement of capital and economic stability.

But a central bank was set up in 1951, which printed money to finance deficits, breaking the peg, and draconian exchange controls followed within two years. Sri Lanka also suffered high inflation and frequent balance of payments crises. Hong Kong, an Asian financial centre has an orthodox currency board. Singapore now has a modified one.

Courtesy - LBO

Sri Lanka-India ferry service relaunched

noreply@blogger.com (Sri Lanka Equity Analytics) — Thu, 16 Jun 2011 03:03:00 +0000

Passenger ferry services resumed between Sri Lanka and India recently, after a gap of 28 years, snapped due to ethnic conflict on the island. 'Scotia Prince' is a 1,044 capacity ferry with nine decks docked into Colombo harbour signalling the resumption of sea travel between the two nations, which was disrupted by insurgency. According to a report in The Press Trust Of India, the first ferry carrying around 200 passengers steamed into the port to mark an official ceremony on the occasion.

Officials said the ferry would initially operate twice a week with the journey taking about 10 hours each way. Ferry services operated between Rameswaram in India to Mannar, the northeastern town until 1983 when they came to an abrupt halt due to threats from the LTTE. 'Scotia Prince' arrived after setting off from Tuticorin.The service would be bi-weekly with the Colombo-bound vessel departing from Tuticorin on Mondays and Fridays at 6 pm and arriving in Colombo at 8 am the next day. The vessel from Colombo to Tuticorin will sail on Wednesdays and Sundays at the same timings. The VOC Port was given a facelift with provision of various facilities, including passenger terminal, immigration and customs counters, waiting hall, VIP lounge, CCTV and baggage screening facilities. The vessel 'Scotia Prince,' operated by Flemingo Liners, has eight decks with the capacity to accommodate 1,040 passengers and can cruise at a speed of about 19 knots. It has 332 passenger cabins, including 11 first class, and two suites, 98 crew cabins, spacious dining room, cafe, show lounge, bar, casino, gift shop and hospital. Twentyfour trailers of 15 m length and 53 buses or 200 cars can be accommodated in the vessel.

“This is the first time that the two destinations are linked by a passenger ferry service. We aim to boost trade and tourism through this service,” Rohitha Abeygunawardena , Deputy Minister, Ports said. Sri Lankan officials said the 100 kilo free baggage allowance would be a fillip to Indian textile merchants to do business in Colombo.

Mergers and acquisitions have become order of the day

noreply@blogger.com (Sri Lanka Equity Analytics) — Wed, 15 Jun 2011 06:54:00 +0000

Investment Banking is a quite a new area to Sri Lankan businesses. Top Investment Banker, Nishan Sumanadeera had facilitated the top 'Deals', the biggest investments made by listed companies during last three years. In 2009, he facilitated the C.W. Mackie sale for Lankem Group worth over Rs.1.4 billion, in 2010 Confifi Hotel Group sale for LOLC and Browns group worth Rs.2.5 billion and this year Softlogic Holdings' proposed acquisition of Asian Alliance Insurance worth over Rs.3.3 billion surpassing all big numbers of major acquisitions that took place in 2011. In an interview with Mirror Business, Sumanadeera said, Sri Lanka is not for Sale, but businesses will change hands at least one more time during the next decade, paving way for many opportunities. Excerpts:

Q: As an investment banker, explain how the Sri Lankan investment banking industry evolved in the last two decades?
Investment banking has evolved from being just an impressive word spoken in corporate boardrooms into real life, everyday solutions practiced and adopted by investment bankers and investors collectively to add shareholder value via capital market activities.
With the introduction of the Companies Act in 2007, legislation in Sri Lanka added more flexibility and diversity, which has undoubtedly helped investment bankers to innovate new solutions within the existing legal framework of the country. This was a welcome change, and I must say was the turning point of the industry.
With these changes together with capital market boom, current day Investment Bankers have the opportunity to provide a variety of services, which was far-fledged and unimaginable two decades ago.
Q: What are future Investment Banking opportunities?
Unprecedented. As an investment banker, you live in your own imagination; this is the essence of success. It is hard to find textbook investment banking solutions to complex real life opportunities. Every investment banking solution needs to be tailor-made and requires out of the box thinking. Imagination has no boundaries. It is only when the last tree has died and the last river has dried and the last fish been caught that the investment banker will run out of solutions.
Sri Lanka is not for sale but businesses will change hands at least one more time during the next decade paving way for many opportunities.
Decades ago, investment banking solutions revolved around resurrecting sick companies via restructuring, but today Merger and Acquisition (M&A) activities have become order of the day. I would see many opportunities in this area. Further, Sri Lanka needs capital to rebuild and grow in this post-conflict period. The capital available in Sri Lanka's corporate sector is limited and it is here that Investment Bankers can play a major and catalytic role in promoting foreign direct and portfolio investment. Sri Lanka's corporates must engage Investment Bankers with international reach in order to access foreign capital. For example, John Keells Holdings would not have been able to build South Asia Gateway Terminals if it did not access international capital markets via investment bankers in 1994. SAGT now contributes nearly 40% of JKH's earnings.
Therefore, the role that Investment Bankers can play in developing Sri Lanka is immense.
Q: What are the future growth prospects, investment opportunities in Sri Lanka
Every emerging economy opens varying investment opportunities to investors. It is difficult to adopt one universally acceptable method to identify these opportunities. Opportunities are unique to each country, economy and market.
Sri Lanka is fortunate to be located in a strategic place on the world map. This is one of our biggest competitive advantages. Sri Lanka can easily emerge as the worlds next Transshipment/airline Hub, Financial Hub or the Tourism and Shopping Hub.
Q: What are the risks associated in investing in Sri Lanka?
Emerging Sri Lanka vouches for economic, regulatory and political stability, the hallmark of any good investment destination. No place on earth is risk-free, likewise no investment. Each country has its inherent risks factors, currently geopolitics affecting Sri Lanka should be an important factor in your watch list.
Private investment and Investment Banking needs policy consistency, coherence and transparency in order to flourish. Therefore the government should look to build on these areas which will in turn help build confidence in Sri Lanka's capital markets.
Q: What are the best investment sectors in the CSE?
In an emerging market, as Jim Rogers said, you need to own a bank, brewery and a newspaper. The Banking sector will always remain, as a proxy to any emerging economy whilst beverages and media would have more than proportionate growth.
Sri Lanka is historically known to be a travel destination; hence the leisure and travel sector would always remain in the top drawer. There will be new lines of tourism; many people will come to Sri Lanka for their medical and higher education needs paving way for new opportunities. These new opportunities coupled with ageing Sri Lankan population will help health and education sectors to have a phenomenal growth. The infrastructure development, which is considered as the most, promising opportunity by emerging market investors, also should remain in your shopping list.
Q: How do you cope through CSE’s ups and downs?
It is generally easy to deal with matured investors because they understand the risk involved in capital market activities. It is retail investors that require frequent advise.
As a seasoned investor you generally invest funds in different asset classes with varying risk return combination. Investment in the stock market is an art not a science.
Q: In your observation, what factors are considered by mature companies when buying assets in certain sectors?
There are many factors considered by investors prior to engaging in an M&A deal. Some of these opportunities can be considered once in a lifetime, a dynamic businessman would not want to miss. It is their vision, dynamism, business acumen that drives them towards these opportunities. Mature companies and investors do not place too much significance on past financial performance, more weightage would be given for business synergies. Historical financial information cannot be considered a yardstick of the future growth potential as it has been proved wrong many times. Most of these mergers and acquisitions have happen depending on investment objective, appetite and style of the respective investor.
Q: What are the new investment banking deals you are working on?
There is considerable interest shown by some foreign and local corporates to utilize capital market activities to increase shareholder value to their businesses. Many deals are in the pipeline, and some of these are likely to unfold soon.
We are also looking to buy companies in key growth sectors as outlined previously.
Q: Which of your recent ‘Mergers’ excite your imagination most?
No transaction has yet reached my desired levels of satisfaction and excitement. Facilitation of reverse takeover of Kapila Heavy Equipment PLC (KAPI) by MTD Capital Bhd, excited me most.
Q: In an increasingly competitive environment, how do you source your deals?
It is the trust, respect and confidence; I have earned over the years as an investment banker helps me to secure mandates.
Q: How does your legal & financial background help you function as an Investment Banker?
To do an M&A deal, you need to have a lawyer, accountant and stockbroker. Each of these professionals looks after different aspect of the transaction. Having all 3 qualifications helps me understand and respect the viewpoints of the others while it gives me the competitive advantage in the industry.
Source - Daily Mirror
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Sri Lanka's Commonwealth Games bid: Infrastructure to cost Rs. 265 billion

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 29 May 2011 06:59:00 +0000

While the most recent document pertaining to Sri Lanka's bid to host the Commonwealth Games in 2018 in Hambantota envisages a lavish yet sustainable spectacle, kicking off with an opening event on Wednesday, May 16, 2018, and continuing on to its closing on Sunday, May 27, 2018, there is an important question that some in Sri Lanka are asking. How much and for what?

Cost
Well, in the most simple terms, the answer to the main part of the above question is: Rs. 265 billion (at 2011 prices), according to Sri Lanka's bid document presented to the organisers of the Games in Kuala Lumpur of which a copy was obtained by the Business Times.

The bids, by Sri Lanka (Hambantota) and Australia (Gold Coast) were presented on May 11 during the Commonwealth Games Federation (CGF) executive committee meeting in Kuala Lumpur. The vote on the venue of the 21st edition of the Games will take place at the federation's general assembly in St. Kitts & Nevis on 11-11-11 (November 11, 2011). The 20th Commonwealth Games are being held in Glasgow, Scotland in 2014.

The expenditure will include the building of eight new sporting venues in Hambantota. All of which are expected to be ready in time for the proposed 2016 South Asian Games (SAG), where seven of these, at a total cost of Rs. 100 billion, will be first used (the cycling not being an event at SAG 2016 and so the velodrome not being needed). In addition, all new venues will be funded and, as such, ultimately owned by the Government of Sri Lanka. The sole exception being the proposed Commonwealth Games Village which will be co-funded and, so, co-owned by the state-controlled Sri Lanka Insurance and the private sector Environmental Resource Investments.

Further identified, Rs. 75 billion will go towards operating and capital expenditures specific to running the Commonwealth Games 2018 such as retaining staff, medical, security, catering, transport, ICT, ceremonies, other events, promotion, etc. Although, it has been stated that a third of these operating expenditures are slated to be recouped via local sponsorships (25%), ticket sales (1%) and broadcast rights (7%).

Other planned expenditures showcased in the bid document include Rs. 40 billion committed by the private sector for increasing hotel room numbers and related facilities, within travelling distance of Hambantota, to adequate levels. And Rs. 60 billion spent on a university in the area (as well as a business and IT park) which features prominently in the games' vision.

Also to be kept in mind, there will be even more infrastructure expenditures for the Hambantota district amounting to Rs. 265 billion for the development of an airport and a seaport, roads and railways and utilities and healthcare, all of which are slated to happen irrespective of the success of this one bid.

At the same time, there also exists a plan to commission a 132 kV grid sub-station at Suriyawewa to meet the 25 MW of electricity which will be needed. Further, a 2014 slated upgrade for the only venue already built, Hambantota's new International Cricket Stadium which was recently used for the first time during the 2011 ICC world Cup, which will double its capacity to 60,000 spectators, planned for use in the opening and closing ceremonies of the Sri Lanka-hosted Commonwealth Games 2018.

Meanwhile, it is also stated that sponsors have already been selected in a number of areas: Sri Lanka Telecom/Mobitel for telecommunications, Sri Lanka Insurance Corporation for insurance, Sampath Bank for retail banking, Ceylon Electricity Board for utilities, Premium American for drinking water, Browns Group for pharmaceuticals, automotive and household, LOLC for finance, Shermans for logistics, and John Keells for hotels. However, ultimately, there will be 35 local sponsors (five first tier, 10 second tier and 20 third tier) who will contribute approximately Rs. 18 billion in income to the games.

Grand vision

However, being prepared to pay top dollar does ensure that the second part of the question posed at the beginning of the article, the what, encompasses a sufficiently grand vision of things to come, and not only for Hambantota but also for the whole country. From the large-scale investments in infrastructure, hotels and what looks likely to be top-notch sporting facilities in Hambantota, to investments trickling down into healthcare, skills building, education, transportation and logistics, etc., especially for nearby communities, to even a new terminal at Bandaranaike International Airport, there is no doubt that no matter the cost to local taxpayers, there will be significant upgrades to the entire infrastructure of Sri Lanka.

Leading off with a promise of having all the venues ready in time for Sri Lanka's hosting of the South Asian Games in 2016, possibly a way to score points following the delays associated with the New Delhi Commonwealth Games in 2010, and playing up the fact that all venues would be "legacy" oriented and, as such, allow for the creation of a modern sporting city, the bid document also suggests a Sri Lanka-hosted 2018 Commonwealth Games will be sustainable, inclusive, secure, etc.

Further, and possibly to again tie into allegations regarding waste, fraud and ticket abuse in New Delhi in 2010 and the ICC World Cup 2011, there is a guarantee that a Sri Lanka-hosted 2018 Commonwealth Games will encompass a highly compact concept with minimum wastage - all but three venues will be integrated into the so-called "Commonwealth Games Park." Also, "a fair and equitable ticketing strategy focused on delivering full venues" via very affordable tickets and only public transport options intended to make the venues highly accessible to Hambantota's 1.2 million populace (as of 2018). Additionally, despite soon to be introduced new visa rules which will do away with visa on arrival, "gratis" visa on arrival will be provided for those travelling to Sri Lanka with a valid event ticket. And to cap all this off, a suggestion that awarding Sri Lanka the 2018 games will be a "great opportunity to market the games to new hosts." Meaning Commonwealth island nations who may otherwise not bid because they feel they can not compete against the likes of Australia, Canada, etc. Indicating that "improved transport infrastructure means that there is a population of three million within one hour and a further six million within 2.5 hours of the games park", the bid document also noted that this event will help to "develop the city of Ruhuna (city centre of the Greater Hambantota area) as a major transportation hub for South Asia, based upon the international Seaport, international Airport, new southern railway and southern highway - with possible connection to the proposed Asian highway."

Suggesting that a further legacy plan is forthcoming in June 2011, the bid document noted that prior to 2018 there would be a "comprehensive volunteer programme focusing on the district and building upon the volunteer programmes to be developed for both the South Asian Beach Games in 2011 and the 2016 South Asian Games in Hambantota." There would also be "sporting programmes including revisions to the school curriculum to include new Commonwealth sports and provide more opportunities for pupils to progress in their selected sports and sports development programmes. These programmes include coach/teacher development and sports facility developments across Sri Lanka's nine provinces."

Additionally highlighted as per the bid document, the introduction of educational programmes to "promote learning about the games, the Commonwealth nations and geopolitical issues. Activities such as inter-school debating, art and essay competitions will be used to promote educational awareness and raise the profile of the Commonwealth and what it means. The target age groups for these activities are 11 to 14 years, supported by practical games-time experiences such as young reporters and photographers programmes."

Also introduced; "An international exchange programme involving young people from other Commonwealth countries. This will be designed to foster goodwill, promote understanding of different cultures and lifestyles and help endorse the CGF's values of humanity, equality and destiny."

Besides formal education the bid document also promises a number of activities, the most high-profile of which is the 2018 Commonwealth Games opening ceremony, an event where: "Celebratory elements of the main annual festivals in Sri Lanka will be blended with distinct traditional music and dance from each of Sri Lanka's nine provinces... There will be a 'festival feel' including fireworks; grand, elegant costumes; richly decorated elephants on parade; traditional drummers and cultural dances, including fire dances, whip-dances and Sri Lanka's unique Wes dance."

Venues
Encompassing two clusters, the Games Park cluster (hosting all sports except for shooting, triathlon and cycling) and the Tissamaharama cluster, the primary focus of the Sri Lanka hosted 2018 Commonwealth Games will be the 38-hectare Games Park cluster (also boasting eight hectares of adjacent green space), which will be "designed around two main axes designated as boulevards. These boulevards provide pedestrian-only access to the venues and open plazas surrounding them. They provide a central thoroughfare and hub of activity for spectators. The boulevards will be lined with entertainment, concessions and design elements such as water features, to generate a festival atmosphere for the 125,000 spectators expected to visit the games park on an average day."

Additionally; "This atmosphere will be facilitated by a Live Site, with entertainment and big screens in the open plazas creating an exciting buzz for athletes and spectators alike." Overall, the park will comprise 8,140 beds in total for athletes and officials and post games will be retrofit into accommodations for business and IT parks and the planned sport university, with some structures converted into schools, retail space, etc. However, their first use will be during the 2018 Commonwealth Games. Aside from the Mahinda Rajapaksa International Cricket Stadium, which will be upgraded to the tune of Rs. 4.5 billion by 2014 to double seating capacity, the following will be newly built to hold events:

Athletics Stadium - Rs. 15.2 billion
A new purpose-built Athletics Stadium, with a capacity of 40,000, will be developed by 2014 and used in 2016 for the South Asian Games (2016 SAG). During the 2018 games, it will stage both Athletics and Rugby 7s.

Hockey Stadium - Rs. 2.3 billion
The hockey Stadium will provide a purpose-built venue for Hockey during the games. Developed by 2014, two new full size synthetic hockey pitches will be built in accordance with international requirements, the main pitch will have a spectator capacity of 5,000, with 2,000 temporary seats for the secondary pitch.

International Aquatics Centre - Rs. 4.5 billion
An International Aquatics Centre comprising two 50m ten-lane swimming pools and a 33m x 25m diving pool. The project is due to commence in 2012 and will be completed by 2014 in readiness for the 2016 SAG. Spectator capacities for the Swimming and Diving pools will be 5,000 and 2,500, respectively.

Exhibition Centre - Rs. 4.7 billion
The new Exhibition Centre will host three sports during the games - Badminton, Weightlifting and Netball (preliminaries). Each sport will be housed in a separate hall, with a 2,500 spectator capacity.

Multi-Sport Complex - Rs. 14 billion
A new Multi-Sport Complex will accommodate five sports during the games, each with a capacity for 2,500 spectators: Squash (six singles and four doubles courts, including a flexible show court for singles or doubles); Table-tennis (two show courts and a further eight match courts); Wrestling (area); Boxing(ring), and Lawn Bowls (five natural turf competition greens, four for competition and one main)

Main arena - Rs. 10.6 billion
The Main Arena, designed as a flexible, multi-purpose facility, will stage Gymnastics (artistic and rhythmic) as well as Netball (finals). Construction of the 5,000 capacity venue will start in 2012 and be completed by 2014.

Velodrome - Rs. 3.8 billion
Only built if Hambantota is selected to host the games, this new, and permanent, Velodrome will be built within the games park and will be the only velodrome in Sri Lanka, to be completed by early 2017.

Ranminithenna Shooting Range -Rs. 1.4 billion

The Ranminithenna Shooting Range will be the only permanent venue located outside of the games park, approximately 35km away in Tissamaharama. It is also noteworthy that, according to the Sri Lanka Tourism Development Agency (SLTDA), there will be 13,400 visitor rooms in total in the Southern Province by 2016. Further, the bid document also shows commitments for 6,079 hotel rooms (encompassing two, three, four and five stars) within 50 km of the games. This is inclusive of 1,400 rooms within 1 km of the game park. Meanwhile, the bid documents estimates that, as of 2018, the minimum room rate would be Rs. 12,500 for a two-star room and the maximum, Rs. 57,500 for a five-star room.

Tickets
Considering the bid document's headline pledge to make the games inclusive and accessible to as many Sri Lankans and international visitors as possible, tickets can be considered as playing a big part in the overall strategy for the games. As such, it is noted that the "services of an experienced ticketing service and solution provider at an early stage, to handle all ticketing operations and ensure a robust programme is put in place."

It has also been stated that tickets prices will be "categorised into four tiers, with 55% of tickets in the lower priced tiers. Prices will also be differentiated between qualification sessions and finals sessions where medals will be awarded. 61% of total available tickets will be priced at Rs. 550 or less and 83% of total available tickets at Rs. 1,100 or less. In addition to this, there will be many free or non-ticketed events for spectators to enjoy, including Triathlon, Marathon and the Cycling road and time trial. Prices for the Opening and Closing Ceremonies will range from Rs. 2,200 to Rs. 13,275 per ticket. Prime events such as Athletics, Aquatics, Rugby 7's and Badminton will range from Rs. 225 to Rs. 2,750 and all other events will range from Rs. 90 to Rs. 1,600."

Additionally, "during the period of the games, valid tickets will provide all day access to the games park as well as the respective sport session. A Live Site within the games park and a number of games related activity centres, shops and food areas will provide entertainment throughout the day. Ticket and information booths within the games park will be strategically located to promote 'match day' ticket sales as well as providing information on upcoming events, medal sessions and results." Free public transport within the district of Hambantota will also be provided on production of an event ticket for that day.

Further, a rider in the bid document states that "apart from international cricket matches, tickets for sport events have traditionally been offered free of charge. Hosting the games will be the biggest celebration of sport that Sri Lanka has ever seen. As such, tickets for the many people wishing to be part of the games and make Sri Lankan history will be priced recognising both this unique opportunity and the price sensitivity evident in the market. The fair and affordable ticket pricing structure for the games has been developed in line with ICC Cricket World Cup ticket prices, as well as prices for other local leisure activities such as film and theatre tickets."

According to the bid document, 1.1 million tickets will be sold for the 251 sports sessions, and this will earn a projected income of around Rs. 870 million. As such, the "percentage sell-out rate (based on saleable tickets) is based upon a conservative estimate of 85% sold for ceremonies and 70% sold for sport competition sessions. However, given this will be the first event of this nature to be held in Sri Lanka and considering the detailed communication programmes to cultivate interest over four key communication stages, it is expected that sell-out rates for both ceremonies and competition sessions will far exceed these percentages."

By Jagdish Hathiramani - The Sunday Times

(The entire bid document is available on the official website, www.Hambantota2018.com).

Sri Lanka expects upward revision in sovereign ratings

noreply@blogger.com (Sri Lanka Equity Analytics) — Thu, 26 May 2011 10:39:00 +0000

Sri Lanka expects an upward revision in sovereign ratings with favourable recommendations from officials from three major rating agencies who are expected to visit the island before the end of this month to review the current country rating.

They will hold meetings with Central Bank (CB) officials, politicians, financial experts, diplomats, foreign lending agencies, etc and report their findings to the rating committee, a senior CB official said.

CB Deputy Governor Dharma Dheerasinghe, who is also the head of the country’s high level Sovereign Rating Committee, told the Business Times that teams of analysts from Standard & Poor (S&P), Fitch and Moody would be visiting the island separately to prepare individual reports to review the ratings which will be forwarded to their top level committees to make the final decision.“The committee meetings will be held in London and New York in July and we are also visiting them to present our case,” he said.

The committee made up of top CB, Finance Ministry and private sector representatives had been appointed to develop a strategy to push Sri Lanka's sovereign rating to investment grade. It is charged with devising a strategy of taking Sri Lanka’s current speculative B+ (Fitch) and B (S&P) rating to an investment grade 'BBB-' or higher over the next four years. Dr. Dheerasinghe noted that "S&P may raise the ratings on Sri Lanka on evidence of more comprehensive fiscal or structural economic reforms”.

At the moment the country’s rating is B+ and “we hope that it will be upgraded by these committees based on the reports of these analysts,” he said adding that they expect an upgrade in the sovereign rating to minimum grade of BBB –or higher.

However an economic expert who wished to be anonymous told the Business Times that S&P may lower the rating if Sri Lanka deviates substantially from the IMF program’s framework, or if expectations on the recovery in growth prospects and revenue improvements disappoint."With inflation pressures mounting in Asia, Sri Lanka is ranked among countries that have lower risks of social unrest because of popular governments, higher growth and lower unemployment mitigating such risks caused by rising prices,” he revealed.

Last year Sri Lanka received a B1 sovereign rating from Moody’s with a stable outlook and officials are confident there would be an upgrade given the government’s improved fiscal performance for 2010, with the deficit reaching 7.9% of GDP, slightly lower than the 8 % target. S&P had given Sri Lanka a long term foreign currency rating of B+ and a long term local currency rating of BB-, both upward revisions from 2009. Fitch has affirmed Sri Lanka’s long term local and foreign currency issuer default rate at B+, revising the outlook from stable to positive.

Courtesy - Sunday Times

Sri Lanka: Softlogic to raise $36 mn via biggest IPO in 6 yrs

noreply@blogger.com (Sri Lanka Equity Analytics) — Tue, 24 May 2011 11:09:00 +0000

Sri Lankan conglomerate Softlogic plans to raise 4 billion rupees ($36.4 million) through an initial public offering in June, the biggest in the island nation in six years.

The information technology-led diversified firm is selling 137.9 million shares or 17 percent of the company, which is the exclusive distributor for Nokia handsets and Dell computers in Sri Lanka.

"In terms of IPO, we are raising 4 billion rupees and it has been approved by Colombo Stock Exchange and shares will be priced at 29 rupees each," Ashok Pathirage, the chairman and managing director of Softlogic, told Reuters in an interview on Monday.

The IPO, the biggest in the $50 billion economy since top mobile firm operator Dialog Axiata listed in July 2005, will help to retire some short-term debt and expand the firm.

"Most of the (IPO) money will be used for retiring short-term debts. We have already done some financing pending the IPO. We have purchased hotels and a stake in Asiri Hospital. So we will pay all that with the IPO funding."

Softlogic also has operations in healthcare, retail, automobile, leisure and financial sectors with expansion plans for almost all sectors on the cards.

The firm is also the sole distributor for some of the world renowned brands such as Panasonic, Samsung, Levis, and Nike in Sri Lanka, while managing Asiri Hospital , one of the top private healthcare providers in the country.

"The reason for the IPO is we have debts and we are expanding. We see there is so much of potential in Sri Lanka in most of those sectors what we are representing," Pathirage said.

"So obviously we need capitalize on that. We don't want to make this company 10 times bigger in 10 years. We want to make it 10 times bigger in four years."

Analysts said the IPO will be a big success.

"With further mobile penetration and a booming IT sector, Softlogic will have more and more opportunities and its diversified nature will attract investors easily," said Harsha Fernando, the CEO at SC Securities based in Colombo.

AMBITIOUS TARGETS

The diversified holding firm with 30 companies recorded a more-than six-fold net profit growth of 950 million rupees in 2010/11 financial year ended on March 31.

"This year we expect net profit of 1.8 billion rupees. Since the company has a forward price-to-earning ratio of 12 times, we are giving (the IPO) at a discounted rate."

The company expects to expand its retail business four-fold by next year, aiming for 300 stores island-wide.

"So we feel in two years time our retail business alone would give us a topline of $200 million," Pathirage said, adding that he expects the revenue to be around 23 billion rupees this year.

Softlogic also aims to sell over 1 million Nokia handsets in Sri Lankan markets this year compared with 800,000 last year while pursuing an aggressive investment strategy in the island nation's post-war tourism sector.

"We will manage around 400 rooms in two five-star hotels in next three years," he said.

Pathirage owns 50 percent of the company while three other investors have 28 percent. The rest was sold at a private placement in late 2009.

In the IPO, the firm expects to allocate 40 percent of the shares for retail investors, 30 percent to foreign and institutional investors, 20 percent to the company staff of around 5,000 and the rest to unit trust funds.

Courtesy - Reuters

Sri Lanka woos Saudi investors

noreply@blogger.com (Sri Lanka Equity Analytics) — Wed, 18 May 2011 06:49:00 +0000

A visiting Sri Lankan cabinet minister on Tuesday urged Saudi businessmen to invest in upcoming projects in the island state, which would yield attractive gains.

Rishad Bathiudeen, Sri Lankan, minister of industry and commerce, who met Riyadh Gov. Prince Salman in Riyadh on Tuesday told Arab News that the end of the ethnic conflict had paved the way for several business opportunities in the country. He added that the promising areas of investment include tourism, garments industry, cultivation of fruits and vegetables, and gem and jewelry.

The minister said that there was a remarkable growth in the number of tourists visiting Sri Lanka after peace was restored following the country's victory over terror.

Data from the tourist promotion office showed that Sri Lanka's tourism arrivals rose 43.5 percent in March 2011 to 75,130, with steep increases seen from South Asia and several European generating markets. March arrivals were the highest for a single month since December 2010, when 84,000 visitors came to the island. Last year, Sri Lanka's tourist arrivals rose 46 percent to 654,476 after the 30-year war ended.

"We also can cultivate agricultural crops for Saudi Arabia," Bathiudeen said, adding that items manufactured in Sri Lanka could find a ready market in all SAARC countries under the existing Free Trade Agreement.

Bathiudeen, who also held talks with Water and Electricity Minister Abdullah Al-Hussayen, said that his government was interested in exchanging experience with the Kingdom in desalination and water management programs.

The minister will also call on his counterpart, Commerce and Industry Minister Abdullah Zainal Alireza during his Jeddah visit on Thursday. He is also slated to meet senior officials of the Organization of the Islamic Conference and the Islamic Development Bank during his stay in the Western Province.

Sri Lanka declares, “We’re open for IT business”

noreply@blogger.com (Sri Lanka Equity Analytics) — Wed, 18 May 2011 06:44:00 +0000

The Sri Lankan Government has announced comprehensive support to aggressively grow the IT industry, by providing highly favorable investment opportunities for Australian companies. Already booming at a brisk 23% p.a., not even the GFC could slow down the local Sri Lankan IT/ICT industry, with foreign investment attracted to the combination of “South Asian affordability - Western quality standards.”

International Financial and Banking analysts agree that Sri Lankan technology firms are primed for significant investment growth. HSBC has raised their credit rating to BB-/Stable, A.T. Kearney’s Global Services Location index places Sri Lanka into their top 25 destinations, and the Royal Bank of Scotland has applauded policy making which keeps inflation in check.

Overall the economy grew by 8%, with inflation being minimized by the central bank, allowing the reverse rate to remain at just 7.5%. Corporate tax rates are being lowered from 35% to 28%. In this favorable economic environment, companies such as Microsoft, Motorola, SAS, Nokia and The Body Shop have created significant ties with the country, including investment, and the purchase of major services (IT Outsourcing and Business Process Outsourcing.)

The Government is allowing Total Foreign Ownership, with no restrictions on repatriation earnings, and the rights of foreign investment is guaranteed by the constitution. Coupled with an advanced educational program, the Sri Lankan workforce is highly educated, English literate and renowned for a strong work ethic.

David Lester, Director of the London Stock Exchange (Information Services) was one of the early entrants. “Partnering with a Sri Lankan based company has been refreshingly straightforward. Our presence in Colombo provides us with an important footprint in Asia.”

“The Government has seen how resilient our IT/ICT companies are, and how attractive their services have become to US Fortune 500, Canadian and UK companies. That’s why we have set course for the IT/ICT industry to generate US $1Billion in export revenue to employ more than 100,000 people within 5 years, and ensure that the ITO/BPO industry becomes a top revenue earner within 10 years. We are excited to extend a warm invitation to Australian companies to realize the significant opportunities that exist here, including generous tax holidays,” says Reshan Dewapura, CEO of The Information Communication Technology Agency of Sri Lanka.

The industry has created international confidence, given that it has thrived in the face of extraordinary conditions, not least of which the New Year Tsunami. “Our local business leaders have done very well, to build robust and internationally competitive businesses,” say Fayaz Hudah, Program Head at ICTA.

Expolanka IPO adds new conglomerate to Sri Lanka bourse

noreply@blogger.com (Sri Lanka Equity Analytics) — Fri, 13 May 2011 07:55:00 +0000

ExpoLanka Holdings Ltd’s initial public offering next week will give investors discounted exposure to Sri Lanka’s post-war growth story, balanced with regionally diversified operations, the family-owned conglomerate’s chief executive said on Friday. At 2.4 billion rupees ($21.9 million), ExpoLanka’s debut will be the biggest IPO so far in 2011 on the Colombo Stock Exchange, which has for three years running been Asia’s best-performing bourse.

So far this year it leads Asian peers with a 10.3 percent return, after last year’s 96 percent. The bourse began to turn around in early 2009, when it became clear the government would defeat a 25-year separatist insurgency that ended in May 2009.

ExpoLanka is among Sri Lanka’s biggest conglomerates, which are traditionally seen as the safest counters on the bourse.
“I have a Sri Lankan company which is international to some degree. Our risk is mitigated by the business we do in the region,” group Chief Executive Officer Hanif Yusoof told Reuters in an interview. The 33-year-old company has interests spanning 11 countries in Asia, the Middle East and Africa, including India, Pakistan, Kenya, South Africa, Indonesia, Vietnam, Madagascar and the United Arab Emirates.

It derives 71 percent of profit from transportation businesses, including logistics, travel, shipping and representation agency agreements for 13 airlines. It focuses in particular on servicing Sri Lanka’s garment industry. It also has interests in agricultural import and export, manufacturing of paper and bioextracts and has strategic investments in tertiary education and business process outsourcing, both now government prioritised sectors ExpoLanka has long been involved in.

Although operating in different businesses, conglomerates John Keells Holdings, Hayleys Plc and Aitken Spence are among the favourite picks on the CSE.
“When you look at the whole thing for investment in Sri Lanka, multiples are far too high for foreign investors to come to the market,” Yusoof told Reuters.
Keells has a 12-month forward price-to-earnings ratio of 19.3, Hayleys 20.8 and Aitken Spence 20.4, based on Reuters and Thomson Reuters StarMine data. The overall bourse has a 14.3 percent P-E ratio.

ExpoLanka is offering 172 million shares at 14 rupees each, based on a P-E of 14-15 against forecasted 2011 profit of 1.8 billion rupees. It earned 1.3 billion rupees before interest and taxes against revenue of 23.7 billion rupees in the financial year ended March, 2010.

The company plans to use 1 billion rupees of the funds raised for working capital, 908 million to restructure debt and 500 million to expand existing warehousing capacity, Yusoof said.
“I want to go to emerging markets and I don’t want to go to matured countries. Today, I want to be a strong regional player. Emerging markets have been my strength,” Yusoof said.

ExpoLanka’s growth has mirrored significant economic events in Sri Lanka’s history, having started as a fresh produce exporter in 1978, the year the government liberalised the economy and encouraged and “Export or Perish” mentality.

Yusoof said the availability of new land in the former war zone in the north and east will provide a growth opportunity for ExpoLanka’s agricultural exports. “I just cannot cope with the orders I have,” Yusoof said.

Courtesy- Reuters

Sri Lanka - Power and energy sector development

noreply@blogger.com (Sri Lanka Equity Analytics) — Tue, 19 Apr 2011 10:17:00 +0000

Power and Energy was a sector that found no development in the not too distant history of Sri Lanka. Although there were blueprints for launching several projects, the previous rulers of this country kept these blueprints in abeyance due to political expediency as for them votes at elections was more important than development of this country.

Norochcholai, Upper Kotmale, Kerawalapitiya, Sampur can be cited as some of the projects kept in abeyance. Due to these poor policies the consumers were forced to pay more for power consumption.

Norochcholai coal power project. File photo

The Mahinda Chinthana clearly addressing this problem states, political and other interferences have created immense problems in our energy sector.

"I want to relieve our poor and the country's economy of the impact of increasing energy prices in the World Market and at improving the energy supply to match the demand within the country". He further said, "The energy security of the country and energy conservation will be treated as high priority objectives". In keeping with this promise six major power generation projects were launched.

Kerawalapitiya thermal power project

This project implemented at a cost of Rs 36,823 million generates 300 mw. The project was completed in March 2010.

Upper Kotmale hydropower project

This project being implemented at a cost of Rs 37,269 million would generate 150 mw. Rs 28,721 for this project is provided by the Japan International Cooperation Agency (JICA). Civil construction work of the project is nearing completion with the icon of this massive project, the 13 km long 5.8m width tunnel which runs cutting through the Talawakele-Niyamgamdora mountain range completed and construction of Dams is nearing completion.

About 395 families displaced by this have already been settled in houses they never dreamed of possessing with all facilities. This project is expected to be commissioned next year.

Norochcholai coal power project

Being another project abandoned for political expediency is being implemented successfully at a cost of Rs 155,000 million with assistance from China Exim Bank.

The project will generate 900 mw. All families displaced by the project have been settled in comfortable abodes without disrupting their employment avenues. Agreements have been made with Indonesia to supply coal for this project.

The Phase 1 of the Project is scheduled to be commissioned in December this year.

Kerawalapitiya gas power project

Lights for all

* Kegalle District - 86 projects
* Uva Province - 63 projects
* Ratnapura District - 247 projects
* Kalutara District - 260 projects
* Southern Province - 87 projects
* Western Province - 185 projects
* Northwestern Province - 84 projects
* Additional 600 rural electrification schemes

This project is being implemented at a cost of Rs 71,000 million. The project will utilize steam generated from the Kerawalapitiya Thermal Power Project to convert it to electricity.

Trincomalee coal power project

This 500 mw coal power project is to cost Rs 60,000 million with Indian assistance. Upon completion of the project by 2017 it is expected that the project could even supply electricity to certain areas in India.

Broadlands hydropower project

The CEB owned 35 mw hydropower project over the Kelani river located in the Central and Sabaragamuwa provinces and scheduled to be completed in 2014.

The engineering estimate for the project was US $ 102 million but the Chinese contractor has undertaken to complete the project for US $ 82 million thereby making a saving for Sri Lanka to the tune of US $ 20 million.

In addition to the aforementioned major power projects several other power generation projects have been implemented to increase the power supply capacity of the country.

These include:

*Rehabilitation of 40 mw Ukuwela Power Station with assistance amounting to Rs 1,573 million from Japan Bank of International Cooperation.

*Rehabilitation of 50 mw Wimalasurendra Power Station

* Rehabilitation of the 100 mw new Laxapana Power Station costing Rs 6,663 million with part finance from Investment Bank of France.

*Rehabilitation of 50 mw old Laxapana Power Station coating Rs 4,059 million partly financed by the Bank of Australia Creditanstait AG.

* Trincomalee Integrated Infrastructure Project, costing 2.45 million Euros partly financed by French Development Agency (AFD). * The Colombo City Electricity Distribution Development Project scheduled to be completed by end of this year. It costs Rs 10,642 million.

Improvement to transmission lines

Several projects are currently underway in the field of construction rehabilitation and improvement of transmission lines.

These include construction of 22KV transmission line from Kerawalapitiya to Kotugoda at a cost of Rs 4,399 million with Japanese assistance.

Vavuniya-Kilinochchi transmission line project costing Rs 3,645 million partly financed by Japan, Kilinochchi-Chunnakam transmission line project costing Rs 3,672 million partly financed by the Asian Development Bank. The Electricity Board has also launched Clean Energy and Access Improvement Projects, under which modernisation of system control units and construction - augmentation of grid stations will be carried out in Panadura, Veyangoda, Matara, Kurunegala, Habarana, Horana, Pallekele, Maho and Naula. These projects partly financed by the Asian Development Bank will cost Rs 7,419 million.

Four other projects that are being implemented to strengthen the transmission lines partly financed by the Asian Development Bank and costing Rs 22.97 million are 36 km 132 kv transmission line from Matara to Galle, 42 km, 132 kv transmission line from Puttalam to Maho, 17 km 132 kv transmission line from Ukuwela to Pallekele and 132 kv transmission line from Ukuwela to Habarana and the transmission line to Naula.

Grid substations are also being constructed at Balangoda, Seethawaka, Nuwara Eliya, Ukuwela, Badulla and Mahiyangana at a cost of Rs 2,562 million partly financed by the Asian Development Bank.

Steps have also being taken to improve power supply in the Eastern Province with construction of Grid substation in Ampara and Valachchenai and construction of transmission lines from Habarana to Valachchenai with assistance from Asian Development Bank at a cost of Rs 2,677 million.

Steps have also been taken to construct a new system control centre for managing the electricity transmission - generation system in Sri Lanka.

Rural electrification schemes

President Mahinda Rajapaksa in Mahinda Chinthana. Future Vision under the theme 'An end to blackouts, electricity for everybody, every day' states that 'only another 500,000 families remain to be supplied with electricity in the country.

The necessary steps will be taken to provide 100 percent of the households with continuous electricity by the end of 2012'. To achieve this objective, many electricity supply schemes are being implemented throughout the country.

The government has paid much attention to improve electricity supplies in the rural areas after 2006 by implementing numerous rural electrification schemes. The projects already implemented and being implemented in this regard are as follows.

*Over 218 rural electrification schemes implemented at a cost of 32 million US Dollars with Swedish assistance with each scheme providing electricity supplies to 80-100 households.

*Over 1,000 rural electrification schemes costing US $ 106.5 million totally financed by Iran and to be completed in the year 2012. Each of these schemes also would provide electricity supply to 80-100 households.

*Over 550 new rural electrification schemes costing US $ 57.9 million in the North Central Province (NCP). A total number of 110,000 domestic connections and 10,000 connections for small business/ industries will be provided under this project.

*Over 268 schemes costing US $ 60 million totally financed by Chinese Exim Bank in Trincomalee and Batticaloa Districts.

*Over 100 schemes costing US $ 25 million totally financed by Asian Development Bank in Ampara District

*Over 500 schemes costing US $ 40 million, 85 percent financed by Chinese Exim Bank and balance by the Government in Badulla and Moneragala Districts under Uva Udanaya project.

*Over 400 schemes costing US $ 40 million, 85 percent financed by Chinese Exim Bank 15 percent by the Government in Jaffna, Vavuniya, Mannar, Mullaitivu and Killinochchi Districts under Uthuru Vasanthaya project.

*Over 600 schemes costing Rs 4,823 million totally funded by the Government for all districts except Southern, Northern, Eastern, Uva and North Central provinces under accelerated rural electrification program.

*Over 600 schemes costing Rs 5,000 million totally funded by the Government in Hambantota, Galle and Matara districts under Lighting Sri Lanka Southern Project.

*Over 400 schemes costing Rs 1,500 million totally financed by the Government in Kalutara, Colombo, Gampaha, Ratnapura, Kegalle, Kandy, Matara, Puttalam, Kurunegala districts under Lighting Sri Lanka Ratnapura, Kegalle Central Province, Western Province, North Western Province Projects. Electrification of North

As it had been done in no other country, within one year liberating the people of the Northern Province from the clutches of terrorists, ending 30 years of war. The government is implementing 400 electricity supply projects at a cost of US $ 5,527.33. From this amount Exim Bank of China has agreed to provide US $ 4,698.23 as assistance. In addition to this restoration of power lines from Kerawalapitiya to Kotugoda at a cost of Rs 4,399 million, from Vavuniya to Kilinochchi at a cost of Rs 3,645 million partly financed by Japan as assistance and Kilinochchi to Chunnakam at a cost of Partly financed by the Asian Development Bank are being carried out.

Electrification of East

Around 368 Electricity supply projects are being implemented in the Trincomalee and Batticaloa districts at a cost of US $ 80 million. The Asian Development Bank is providing funds to the tune of US$ 20 million for this project.

Another project related to supply of electricity in the East is the Trincomalee integrated Infrastructure Development Project, costing 2.45 million Euros partly financed by French Development Agency (AFD). Under this project construction of a new 16 km power line from Trincomalee Grid substation to Kinniya and the Gantry at Kinniya and rehabilitation of 33 kv power line from Kinniya to Muttur and rehabilitation of 10 km power line from Trincomalee Grid Substation to the 6th mile post to Trincomalee Nilaweli Road is in progress and rehabilitation of 11 km power line from Triyal to Pulmodai has been completed. Construction of Power Stations at Ampara and Valachchenai, fixing power lines from Habarana to Valachchenai at a cost of Rs 2,677 million with assistance from the Asian Development Bank. In addition to this several power generating units using straw have been established throughout the Eastern Province.

Electricity to all by 2012

President Mahinda Rajapaksa in Mahinda Chinthana - Future Vision under the caption 'An end to blackouts, electricity for everybody, every day' states that "only another 500,000 families remain to be supplied with electricity in the country. I will take the necessary steps to provide 100 percent of the households with continuous electricity by the end of 2012".

To achieve this objective many electricity supply schemes are being implemented throughout the country, including 86 projects in the Kegalle district, 63 projects in the Uva province under the 'Uva Udanaya' programme, 247 projects in the Ratnapura district, 260 projects in the Kalutara district, 87 projects in the Southern Province, 185 projects in the Western Province, 84 projects in the North Western Province. In addition to this 600 rural electrification schemes are also being implemented.

Other sources of power generation

It is estimated with the rapid development that Sri Lanka is undergoing would double the current demand for electricity by 2020.

In order to meet this growing demand Sri Lanka has already taken several measures to tap energy sources other than the currently used diesel, thermal, hydro and coal power generations. Wind power is one of the new sources being tapped and windmills to generate power have been established in various locations in Hambantota and Puttalam.

Another source of power is the geothermal power. Surveys have revealed that Sri Lanka has around 12 underground hot springs from Hambantota to Kilinochchi which could generate power.

Power generation through biogas is another sources being explored. Engineering Faculty of the University of Ruhuna and the German Engineers are carrying out studies on the possibility of establishing biogas power generating units in Sri Lanka.

Another source is to go nuclear. Sri Lanka’s intention to use nuclear technology for producing power has already been communicated to the International Atomic Energy Agency and negotiations are being held with several countries in this regard. Most probably Russia will be the country that would assist us in setting up a nuclear power plant.

Development in energy sector

The government took several measures to conserve energy and minimize our dependence on imported energy sources, and to explore the possibility of getting cheap oil. Following a request made by President Mahinda Rajapaksa during his visit to Iran, the government of Iran supply us oil on 90-day interest free loan basis. This measure is very much advantageous to Sri Lanka and help save a considerable amount of foreign exchange. Iran has also signed an agreement to establish a second oil refinery unit at Sapugaskanda and when it comes into operation Sri Lanka could make a large saving on oil imports. Also, there are plans to establish oil-refining facilities in the new Magampura Port at Hambantota.

Oil exploration

Indian Company Cairn Ltd is to commence oil exploration activities in the block that have been assigned them in January next year.

Cairn will implement exploration activities in three stages and it is expected to finalize exploration activities in eight years. Surveys carried out have identified 12 potential oil blocks in Sri Lanka in the Kaveri, Mannar basins and off the coast of Hambantota and several international oil exploration companies have expressed interest in undertaking oil exploration in these blocks, and the proposals are now being evaluated.

Courtesy: Media Centre for National Development

Sri Lanka reveals Greater Colombo development plan

noreply@blogger.com (Sri Lanka Equity Analytics) — Sun, 03 Apr 2011 05:34:00 +0000

About 70,000 families identified as shanty or slum dwellers in the city of Colombo would be relocated within the next two years in high-rise community housing units that are to be developed for them within the city, Defence Secretary Gotabaya Rajapaksa said.

Mr. Rajapaksa revealed this and several other development plans that are underway in Colombo, while addressing the American Chamber of Commerce last Monday on “Development Plans for the City of Colombo.”He said a major problem facing the city was the presence of shanties or slum dwellings –home to some 70,000 families amounting to over half the population of the metropolis. “Uplifting the quality of life of this section of the population is one of the Government’s major concerns,” he said.

Land for new community housing complexes have already been identified within Colombo and discussions with a number of interested companies have commenced,” he said. The Defence Secretary said such a programme would be costly, with each unit or apartment costing approximately rupees two million. But, he said it would possible to raise the needed funds through allocating the freed land for development activities.

Mr. Rajapaksa added while Colombo was the largest city in the country and contributed to over 50% of the national GDP, compared to other Asian cities, Colombo had much more room to grow. “The economic density of Colombo is approximately only US$ 15 million per square kilometre.

“In comparison, the economic density of Ho Chi Minh City is US$ 73 million; Bangkok is US$ 88 million and Singapore is US$ 269 million. “This indicates the growth Colombo should aim for, especially in the current context,” he said.

He added, after many decades with the country at peace, it was finally possible to realize its true potential. Colombo he said had a great role to play in unlocking this potential. However before this rejuvenation could succeed, there were many problems that needed to be addressed, one of which was the prevention of floods. The Secretary Defence said it was to face this problem; unauthorized structures which blocked the drainage systems were being removed.

He added “It is not only low-income segments of society who have erected unauthorized structures on reservation land, but industrialists, the middle-class and high-income segments as well. All these structures are being demolished and would greatly improve the efficiency of the drainage system,” he said. He said the Sri Lanka Navy, the Sri Lanka Land Reclamation Board and the Development Corporation had been engaged in dredging and developing the canal system in the city. “Medium term plans are being prepared to improve the entire drainage system in the metro Colombo region.
“Under a project funded by the World Bank, the Beira Lake and other vital water retention areas are to be completely dredged, de-silted and fully rehabilitated alongside significant improvements to the existing canal network”, he added.
The rehabilitation of old and the creation of new lakes in the greater metropolitan region, improvements to existing drainage channels, gates and pumping houses will be carried out as part of this endeavour.

The Secretary said relocation of government buildings to Sri Jayewardenepura was being implemented in parallel with the community-housing programme.

“Shifting these offices to the administrative capital is a necessary step in rationalising land use in Colombo. As a first step towards speeding up relocation, the offices of the Defence Ministry, Chief of Defence Staff and the headquarters of the armed services are being moved out of Colombo while the land released from the relocation is being allocated for development activities. This will effectively fund the relocation process while also generating vital economic activity within the city” he said.

“The Shangri La group has agreed to construct a luxury hotel and residential complex on 10 acres of land that was allocated to the Army near Galle Face. A Chinese company, CATIC, has undertaken to establish a skyline hotel on an adjacent block of land. These agreements have already generated a large influx of funds, which has been allocated for the combined Defence Headquarters Complex currently being constructed at Battaramulla. Another project being expedited is the second phase of the Sethsiripaya complex.

This high-rise building, once completed, will house many of the remaining Government offices in Colombo. A thirty-storey building will be constructed as the third stage of Sethsiripaya to accommodate the rest. The Secretary said improvements to the Colombo Fort area were also underway. “The area around Fort is the oldest part of the city and has several historic landmarks and buildings. Unfortunately, due to its organic growth through the years, the full potential of this area has not been realised. That is why the Government is putting in place several measures to develop this historic part of the city.” Instead of being a restricted high security area, the Fort will be opened up for businesses, restaurants, museums and other public facilities. Work is in progress to make this a shaded, pedestrian only area that will restore the historic city centre to its original beauty.

He said historic buildings like the Dutch Hospital and the Cargills building are being redeveloped to cater to modern day business requirements. “While the exteriors of the buildings will retain their character, an internal clean up and redevelopment will enable high-end businesses to be set up inside. “

Efforts are underway to develop the Independence Square area and other parts of the city as pedestrian friendly, scenic locales. This will do a great deal to uplift the character of the city as a green, clean, urban environment. While urban regeneration is the common theme of all the projects mentioned so far, the Government also intends to further develop Colombo by creating new city space.

Along with the Colombo South Harbour Development project, plans are in place to create a new city on land reclaimed from the sea. This project will see the creation of a brand new city area nearly 400 acres in extent. He added in terms of road development, a lot of work was being done to improve the infrastructure within the city limits. Examples of these include the upgrading of Galle Road, the completion of the Marine Drive, and the expansion of the one-way system. The introduction of bus lanes, the creation of more dedicated parking spaces, better facilities for pedestrian crossings including disabled crossings and overhead bridges, and stricter enforcement of road rules will help improve road discipline. The Defence Secretary said that Colombo could not be considered in isolation, but the Dehiwala-Mt. Lavinia, Kotte and Kolonnawa municipalities should all function collectively.

Development at a glance

Provision of alternate dwellings for aprox. 70,000 families living in city slums within city.
Freeing land for development via clearance of unauthorized structures and shifting govt. offices out of Colombo.
Restoration and redevelopment of historic buildings.
Creation of pedestrian-friendly locales.
Changing the character of city into a green urban environment.
Reclaiming 400 acres of land from the sea and creating of a new city on the reclaimed land.
Upgrading of the Galle Road, the Marine Drive and expansion of the one-way system.
Introducing dedicated parking spaces, disabled crossings and strict enforcement of road rules
Introduction of an alternative transport system via development of waterways and a ferry service

Courtesy : The Sunday Times