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“Inelastic Proxy for Consumption Growth”
Liquor Sector in Sri Lanka
March 2016
Analyst- Hiruni Perera
011 5889809
LOLC Securities Limited (An LOLC Group Company)
Contents
LOLC Securities Limited | Sector Research 2
Investment Case
Industry Dynamics
Arrack Consumption to maintain a modest growth of 1.7%
Inelastic demand for malt liquor (Beer) consumption
Inelastic demand for Arrack consumption
Liquor industry to reap benefits from expected increase in GDP
Beer consumption growth to slow with recent excise duty hike
Growth in tourism can be a key catalyst for the growth in the liquor sector
However demand growth for Beer to outpace growth for Arrack in mid-long term
Excise duty for 1% of alc. strength of Beer > Excise duty paid for 1% of alc. strength of
Arrack
We estimate 4% growth in total recorded liquor consumption for 2016
Contents contd.
LOLC Securities Limited | Sector Research 3
Industry Dynamics contd.
Excise duty on liquor to play an important role in the Gvt. Fiscal revenue
Tight regulations to govern the liquor industry in Sri Lanka
Cultural and demographic factors to influence liquor consumption
However certain countries exists in the world with prohibition of liquor
Less likelihood of a complete ban of liquor in Sri Lanka
We estimate liquor consumers to represent 25% of population
Key Players in the industry
Appendices
Budget 2016 is trending positive for big players
A gradual reduction in the illicit and illegal liquor consumption
LOLC Securities Limited | Sector Research 4
Investment Case
Investment Case
Inelastic proxy for consumption growth…….
Liquor consumption in Sri Lanka is expected to be supported from the increase in GDP per capita income due to its strong positive correlation between total liquor consumption and GDP. During the last 5 years, Sri Lanka's total liquor consumption has seen a CAGR of 6% in relation to the average real GDP growth of 7.4%. We expect increasing per capita income to improve affordability of liquor products and thereby to improve liquor consumption. Accordingly we expect total liquor consumption to record a YOY growth of 4% for 2016 and 2017 with total per capita liquor consumption to be 11.45 Litres for 2016.
Generally liquor industries have been resilient with an inelastic demand due to its importance as a social lubricant among consumers. In Sri Lanka also despite being heavily taxed liquor has been an inelastic product due to its inherited chemical ability to impact on the human state of mind.
We estimate arrack consumption for next 3 years to post a modest growth of 1.7% YOY capped by high penetration of the industry. Growth of 1.7% is estimated considering the higher penetration, expected per capita income growth , potential shift from cheaper liquor to legal products on rise of disposable income and curtailing the availability of illicit liquor through tight regulatory controls.
We also expect soft liquor consumption growth over hard liquor to slow down in 2016 due to the excise duty hike in 2015. According to the tax change in November 2015, duty of locally produced strong Beer increased by 28.5% relative to the tax hike of 15.9% for Arrack. Further in 2015, total tax hike for strong Beer is 70% compared with the excise duty hike for Arrack of 25%. Despite the absence of a negative correlation of beer consumption with excise duties, we expect recent duty hike to result in lower “kick per buck” for Beer than Arrack and accordingly malt liquor (Beer) consumption growth over hard liquor to slow down. However there is a higher potential for beer consumption to grow in mid to long term due to low penetration.
A substantial increase in tourist arrivals can be considered as a key catalyst for growth in liquor consumption of the country. Considering the current tourist arrivals growth rate and the tourist arrival target of 2.5 Mn by 2016, we expect a further increase in the liquor consumption in the country.
LOLC Securities Limited | Sector Research 5
Investment Case
Inelastic proxy for consumption growth…….
We see a gradual decline of illicit and illegal liquor in line with GDP per capita rise reflecting that people are encouraged to consume legally produce liquor with their income growth. We believe this will enable big players to gain their lost market share from illicit liquor manufacturers in years to come.
Policies introduced by the government from Budget 2016 seem to have a positive impact on big players while negatively influencing smaller spirits manufacturers. Certain policies are expected to discourage illicit production of liquor while also making illegal players to pay more taxes in the future and causing them to leave the industry if policy execution took place properly. Hence there can be an increase in legal liquor consumption in the country.
Excise duty on liquor production plays an important role in government's total fiscal revenue as it represented 27% of the total excise duty revenue and 6% of the total government revenue in 2014. Therefore despite the strong pressure and concerns raised by certain communities in the society to ban liquor, it is highly unlikely that government will impose a complete ban of liquor products due to its substantial contribution to Gvt. revenue.
Since a ban in liquor is unlikely in Sri Lanka due to high tax revenue for the Gvt. it is more likely that liquor consumption will only be controlled through tight regulations. Tight regulations imposed by the government on the liquor industry such as restrictions relating to distribution and marketing of alcoholic products make entry barriers for new players to the industry while creating an advantage for large and established players.
Sri Lanka’s cultural and demographics factors to have a greater influence on the liquor consumption. Approximately 9% of population consists of Muslims who have been prohibited from consuming alcohol . Another 70% and 13% consist of Buddhists and Hindus who are encouraged to refrain from consuming according to their religion although there are consumer among both of these communities. Further 52% of total population consists of women who consume only insignificant amount of alcohol. Accordingly we estimate 25% of total population as potential liquor consumers.
LOLC Securities Limited | Sector Research 6
LOLC Securities Limited | Sector Research 7
Industry Dynamics
Figure 1: Increase in the Food, Beverage and Tobacco expenditure in par with GDP rise
Figure 2: Total liquor consumption has shown a steady growth inline with GDP
Industry Dynamics
LOLC Securities Limited | Sector Research 8
Liquor industry to reap benefits from the expected increase in GDP…….
Sri Lanka has recorded an average real GDP growth of 7.42% during past 5 years (2010-
2014) in tandem with the turnaround of the country’s macro environment after end of civil
conflict in 2009. Along with the increase in GDP, private consumption expenditure is
expected to increase as a result of more spending on discretionary items along with the
increase in consumption of other essential goods.
Expenditure on Food, Beverage and Tobacco (nominal) has depicted a CAGR of 11.8% over
the five year period of 2010-2014 compared with the CAGR of 14.9% in GDP (nominal)
reflecting that people have proportionately increased the consumption expenditure on
Food, Beverage and Tobacco in par with their income level.
Sri Lanka's total liquor consumption has seen a CAGR of 6% during last 5 year period
(2010-2014) while looking ahead we expect that liquor consumption to record a YOY
growth of 4% for 2016 and 2017 driven by expected GDP growth of 6.5%* in the medium
term.
Note*- IMF forecasts
Source: Annual Report 2014 of Central Bank of Sri Lanka
Source: Annual Report 2014 of Central Bank of Sri Lanka and Sri Lanka Excise Department
0
2,000
4,000
6,000
8,000
10,000
12,000
0
50
100
150
200
250
2010 2011 2012 2013 2014
GD
P i
n L
KR
Bn
To
tal
Liq
ou
r C
on
sum
pti
on
in
Lit
res
Mn
Total Liqour Consumption (Litres) GDP at market prices (LKR)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
2010 2011 2012 2013 2014
Mil
lio
ns
Food Beverage and Tobbacco Total private consumption expenditure GDP
Figure 03: Strong positive correlation between GDP and liquor consumption (litres )
Figure 04: Per capita recorded alcohol consumption for SL is higher than most of the countries in the region
Source: World Health Organization, (2010)
0 0.4
3.2
2.2
0.1 0.7
0.1 0.2
2.2
6.4
0.1
1.8
4.7
0
1
2
3
4
5
6
7
In L
itre
s o
f p
ure
alc
oh
ol
Industry Dynamics
LOLC Securities Limited | Sector Research 9
Liquor industry to reap benefits from the expected increase in GDP…….
Past 6 year data for total liquor consumption has shown a strong positive correlation with
the GDP indicating that people tend to consume more liquor in line with the rise in their
income.
Sri Lanka has a higher per capita recorded alcohol consumption in the South Asian region
although it is still below the world average.
Source: Annual Report 2014 of Central Bank of Sri Lanka, Performance Reports of Sri Lanka Excise Department
Coefficient of correlation with the GDP
Total Liquor Consumption (litres)
0.79
*Excludes tourist consumption
LOLC Securities Limited | Sector Research 10
I. Arrack Consumption
Figure 05: People have continued the arrack consumption despite regular price increases
Industry Dynamics
LOLC Securities Limited | Sector Research 11
Inelastic demand for Arrack Consumption…….
Historically, Arrack has been resilient with an inelastic demand, despite regular excise duty
increase in retail prices of liquor bottles. We believe that Arrack consumption to be backed
by price inelasticity of demand resulting in manufacturers passing down incremental taxes
and inflationary pressure to customers through increasing selling prices.
As depicted in the Figure 5, Arrack consumption which represents 35% of the total
recorded liquor consumption is linear with a flat slope indicating a relatively inelastic
behavior of demand despite regular duty increases. Further positive correlation between
selling price per litre of Arrack with the Arrack consumption (in litres) indicates that
people have continued the consumption despite price increases.
Source: Sri Lank Excise Department and LOLC SEC Estimates
*Note- Prices of arrack includes the prices of estimates
60.00
65.00
70.00
75.00
80.00
85.00
90.00
600.00 700.00 800.00 900.00 1000.00 1100.00 1200.00 1300.00
Co
nsu
mp
tio
n i
n L
itre
s (M
n)
Arrack prices in LKR per litres
Arrack consumption(lr) Arrack Consumption trendline
Figure 06: Moderate positive correlation between GDP and Arrack consumption
Figure 07: Arrack consumption maintains a modest growth of 1.4%-1.7%
Source: World Health Organization and LOLC Sec Estimates
Industry Dynamics
LOLC Securities Limited | Sector Research 12
We expect arrack consumption to maintain a modest growth of 1.7%…….
In the last decade, Sri Lanka's Arrack consumption has seen a modest growth of 1.4%. This
could be largely due to the increased penetration of illicit and illegal liquor products to the
society and disproportionate growth of taxes compared with disposable income rise. There
has been a moderate positive correlation between GDP with arrack consumption pattern.
Source: Annual Report 2014 of Central Bank of Sri Lanka, Performance Report Sri Lank Excise Department
Coefficient of correlation with the Real GDP growth rate
Arrack Consumption Growth
0.41
64
72 71 75
86 82
77 72 74 75 76
-10%
-5%
0%
5%
10%
15%
20%
-
10
20
30
40
50
60
70
80
90
2005 2008 2009 2010 2011 2012 2013 2014 2015(F)
2016(F)
2017(F)
Arrack consumption (lr) YoY Growth Average
Co
nsu
mp
tio
n i
n L
itre
s M
n
We estimate recorded Arrack consumption for next 3 years to be in line with a
modest CAGR of 1.7% considering the limited growth in the hard liquor
consumption (due to high penetration;85% of recorded APC consists of Spirits in
SL*), expected per capita income growth , potential shift from cheaper liquor to legal
products on rise of disposable income and curtailing the availability of illicit liquor
through tight regulatory controls.
Accordingly, we estimate a 3.8 litres per capita Arrack consumption by 2017 and it
could reach to 4 litres by 2020.
* Source - WHO
LOLC Securities Limited | Sector Research 13
II. Malt Liquor (Beer) Consumption
Figure 08 : People have continued beer consumption despite excise duty increases
Industry Dynamics
LOLC Securities Limited | Sector Research 14
Inelastic demand for malt liquor (Beer) consumption…….
Malt liquor (Beer) consumption has shown an inelastic demand in line with the average
increase in excise duties of beer. As depicted in the Figure 08, beer consumption has been
in an upward sloping trend line indicating a relatively inelastic behavior of demand despite
the regular tax hike.
Further past 6 year data for beer consumption has not seen a negative correlation with the
increase in excise duty for Beer reflecting the inelasticity of consumption.
Source: Sri Lanka Excise Department and LOLC SEC Estimates
0
20
40
60
80
100
120
140
160
50 70 90 110 130 150 170
Bee
r C
on
sum
pti
on
in
Mil
lio
ns
Lit
res
Beer consumption Beer consumption trendline
Beer excise duty in LKR
Figure 09: Beer consumption growth to slow down in 2016 relative to 2015
Figure 10: Beer duty exceeds the duties on Arrack
Source: Excise Gazettes
Industry Dynamics
LOLC Securities Limited | Sector Research 15
Beer consumption growth to slow with recent excise duty hike…….
Sri Lanka's beer consumption has seen a rapid CAGR of 14% since 2010-2014 while there
has been a strong positive correlation of 0.88 between GDP with Beer consumption
pattern.
Source: Performance Reports of Sri Lank Excise Department and LOLC SEC Estimates
According to the recent tax changes, excise duty on locally produced strong Beer
increased by 28.5% compared with the tax hike of 15.9% for Arrack. Further in
2015, total excise duty hike for strong Beer is 70% compared with the excise duty
hike for Arrack of 25%.
Despite the absence a of negative correlation on beer consumption with increase in
excise duties, we expect recent excise tax hike on Beer to result in lower “kick per
buck” for Beer than Arrack and accordingly growth of malt liquor (Beer)
consumption over hard liquor consumption to slow down.
Accordingly, we estimate per capita beer consumption to be 6.5 litres per annum in
2016.
Type of Liquor W.E.F 25/10/2014
(LKR)
W.E.F 03/10/2015
(LKR)
W.E.F 21/11/2015
(LKR)
Arrack (LKR/Proof
Lit)
1485 1595 1850
% Change 7.4% 15.9%
Foreign Liquor-
(LKR/Proof Lit)
1700 1860 2030
% Change 9.41% 9.13%
Beer- Strength < 5%
(LKR/Lit)
150 190 160
% Change 26.6% -18.75%
Beer- Strength >5%
(LKR/Lit)
185 245 315
% Change 32.4% 28.5%
124 130
137
28%
39% 33%
0%
-7%
8% 5% 5%
-10%
0%
10%
20%
30%
40%
50%
0
20
40
60
80
100
120
140
160
2010 2011 2012 2013 2014 2015 (F) 2016 (F) 2017 (F)
Co
nsu
mp
tio
n i
n L
itre
s M
n
Malt Liqour Consumption (Litres) YOY growth
Avarage Growth
Industry Dynamics
LOLC Securities Limited | Sector Research 16
Excise duty for 1% of alc. strength of Beer > Excise duty paid for 1% of alc. strength of Arrack…….
6.67 7.37
8.93 9.81
10.68
12.74
15.64
17.74
19.44
23.51
30.17
5.96 6.69 6.76
8.24 8.24
11.03
13.31
15.15
17.65
22.06
33.46
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Arrack duty paid for 1% Alcohol strength Beer duty paid for 1% Alcohol strength
Exc
ise
Du
ty i
n L
KR
Recent excise tax hike in end of 2015 to result in lower “kick per buck” for Beer over Arrack
Source: LOLC SEC Estimates and Excise gazettes
Figure 11: Sri Lanka’s beer consumption penetration is low compared with the South East Asia and the world
Industry Dynamics
LOLC Securities Limited | Sector Research 17
However demand growth for Beer to outpace growth for Arrack in mid-long term
Despite short term slowdown in beer consumption due to increase in excise duty, we
expect beer consumption to grow in mid to long term given the facts that its growing
popularity among the young population as a life style product, low alcohol content and low
health effects of beer compared to hard liquor, easy access and due to greater affordability.
When compared with the average figures of South and East Asia and the world Sri Lanka is
still consuming more % of spirits compared with Beer based on the recorded consumption.
Sri Lanka’s beer consumption is much lower at 13% compared to the region and the world
average indicating that in the long term there is enough potential for beer consumption
growth in the country.
.
Beer Wine Spirits Other
Sri Lanka 13% 0% 85% 2%
Bangladesh 0% 0% 0% 0%
Bhutan 100% 0% 0% 0%
Maldives 29% 29% 41% 0%
Nepal 48% 1% 51% 0%
India 7% 0% 93% 0%
Democratic People's
Republic of Korea
5% 0% 95% 0%
Indonesia 85% 0% 15% 0%
Myanmar 83% 6% 12% 0%
Thailand 27% 0% 73% 0%
Timor- Leste 9% 76% 15% 0%
South & East Asia Avg 40% 15% 42% 0%
World Avg. 35% 8% 50% 7%
Source: World Health Organization
Note: Recorded APC consumption by type of alcoholic beverage (beer, wine, spirits, other), 2010 (as a % of recorded alcohol per capita consumption
LOLC Securities Limited | Sector Research 18
III. Total Liquor Consumption
Source: LOLC SEC Estimates and Sri Lank Excise Department,
Industry Dynamics
LOLC Securities Limited | Sector Research 19
We estimate 4% growth in total recorded liquor consumption for 2016 …….
142
165
201
234 226
209 220
229 237
0%
16%
22%
16%
-3%
-8%
5% 4%
4%
-10%
-5%
0%
5%
10%
15%
20%
25%
0
50
100
150
200
250
2009 2010 2011 2012 2013 2014 2015 (F) 2016 (F) 2017 (F)
Mil
lio
ns
Lit
res
Arrack consumption Beer consumption Other types of liqour consumption Total liqour consumption Total liqour consumption growth
We expect a 4% growth in the total liquor consumption for the year of 2016 despite 5% growth estimate for 2015. Growth of 5% for 2015 was
arrived due to rise in excessive income of people driven by the increase in the public sector pay and reduction of prices of essential goods through
the interim budget in January 2015. However we expect growth to limit to 4% in 2016 in par with the tightening macro-economic conditions.
Figure 12: Tourist Arrivals to SL has increased at CAGR of 26% 2009-2015
Figure 13: Estimated percentage of liquor consumption attributed to foreigners has increased with the growth in tourist arrivals.
Source: LOLC SEC Estimates , SLTDA, Sri Lank Excise Department,
Industry Dynamics
LOLC Securities Limited | Sector Research 20
Growth in tourism can be a key catalyst for the liquor sector…….
A substantial increase in tourist arrivals can be considered as a key catalyst for growth in
the liquor consumption in the country. From 2009 to 2015 tourist arrivals to Sri Lanka has
increased from 447,890 to 1,798,380 depicting a CAGR of 26%. In line with tourist arrivals
growth and tourist arrival target of 2.5 Mn by 2016 we expect a further increase in the
liquor consumption in the country.
Source: SLTDA
-20%
-10%
0%
10%
20%
30%
40%
50%
0
500
1,000
1,500
2,000
2,500
3,000
2008 2009 2010 2011 2012 2013 2014 2015 2016(F)
Th
ou
san
ds
Tourist Arrivals YOY Growth
We estimate that total liquor consumption attributed to foreigners to Sri Lanka to be
approximately 5.1 Million Litres of liquor contributing 2.48% to the total liquor
consumption in 2014 which can be increased up to 6% by 2020.
1.08% 1.35%
1.46% 1.46%
1.89%
2.48%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
0
50
100
150
200
250
2009 2010 2011 2012 2013 2014
Liq
ou
r C
on
sum
pti
on
Lit
res
Mn
Total liqour consumption
Consumption attributed to tourists as a % total liqour consumption
Figure 14: Detections conducted by the excise dept. relating to liquor has shown a declining trend with the increase in GDP per capita
Industry Dynamics
LOLC Securities Limited | Sector Research 21
We see a gradual reduction in the illicit and illegal liquor consumption …….
Past data reveals that total number of offences relating to the liquor industry has shown a
declining trend over the five year period despite slight increase in 2013. Further it has shown a
negative correlation with GDP per capita reflecting that illicit and illegal consumption decreases
with the increase in income as people are encouraged to consume legally produced liquor.
We believe this will enable big players to gain their lost market share over illicit and illegal
liquor manufacturers thus benefitting the licit and legal liquor industry in Sri Lanka.
Further Sri Lanka’s recorded alcohol (licit) consumption is 59% which is considered to be
relatively higher than the several neighboring countries and the average of the South – East Asia
although it is still below the World Average. (Source-WHO)
Note -In Sri Lanka illicit liquor mainly goes by name “kassippu” and includes liquor products that are not produced
within the legal framework and therefore will not be properly reflected in the records.
Source: Handbook of Drug Abuse Information in Sri Lanka 2015 of National Dangerous & Drugs Control Board
2,500
2,700
2,900
3,100
3,300
3,500
3,700
3,900
15000
20000
25000
30000
35000
40000
2010 2011 2012 2013 2014
GD
P P
er C
apit
a (U
SD)
No
of
Off
ence
s
Total Number of offences GDP Per capita
Industry Dynamics
LOLC Securities Limited | Sector Research 22
Budget 2016 is trending positive for big players …….
Minimum excise duty of LKR 250 Mn per month
• Proposal of minimum excise duty of LKR 250 Mn per month (LKR 3 Bn per year) upon effective implementation, will result in illegal players to pay more taxes and thereby preventing them to price liquor products way below the market rate.
• Due to the proposed proposal being legally challenged this may not come to effect in short term. However due to the current Gvt’s aggressive revenue collection we believe this policy to be gradually effective, eventually industry concentrating with big players.
Single annual license fee of LKR 50 Mn
• Proposal to impose a flat annual license fee of LKR 150 Mn for liquor manufacturers irrespective of volume could adversely affect the small companies who do not have a strong scale of production volumes.
• However, this fee has been brought down to LKR 50 Mn per annum (Sources-Excise Ordinance Notification No. 983).
• This new fee will be more affordable for medium size and big firms while small manufacturers will have to find ways to absorb this incremental cost.
Fool proof sticker
• Proposal to make every tax paid liquor bottled to be labeled with a fool proof sticker enable the visual identification for the excise officers in identifying the tax paid bottles.
• The decision is favorable to large players while unregulated liquor will be curtailed down with a proper execution .
Annual manufacturing license fee of LKR 150 Mn for each distillery
• Government proposed to increase the annual license fee for each distillery owned by the manufacturer to LKR 150 Mn.
• Subsequently it has been reduced to LKR 100 Mn (Sources- Excise Notification No.983)
• However this is not effective yet and as per Excise Department and “Daily Mirror on 26.12.2015” and few other publications indicated that the government is to withdraw this decision due to the plea made by liquor producers based on possible collapse of many liquor manufactures if this implemented.
Industry Dynamics
LOLC Securities Limited | Sector Research 23
Budget 2016 is trending positive for big players …….
Income tax rate to be reduced from 40% to 37.5%
• With the introduction of 30% corporate tax rate and 25% of surtax for liquor industry the total effective income tax will be 37.5% which is a drop of 2.5% from the existing rate of 40% enabling the players in the industry to have a positive impact on their bottom line. However with the recent tax adjustment done to the budget 2016 corporate tax rate applicable to liquor industry will remain at 40% FY 2016 while 37.5% will be applicable from 2017 onwards.
Increased custom and excise duties on imported foreign liquor, beer and imported ethanol
• Government’s proposal to increase the total tax burden (mainly on custom import duty) of imported foreign liquor from LKR 1850/ ltr to LKR 2500/ ltr will make the foreign liquor further costly while shifting the consumers to country made foreign liquor produced by big local producers.
• However on the negative side liquor manufacturing companies will have to incur an additional cost due to increased import duties on ethanol from 300/ltr to 400/ltr.
Figure 15: Liquor revenue to be the second largest contributor to the excise duty revenue
Figure 16:Significant growth in the excise duty revenue from liquor Production
Industry Dynamics
LOLC Securities Limited | Sector Research 24
Excise duty on liquor to play an important role in the Gvt. Fiscal revenue…….
Government continues to have a strong interest on excise duty revenue on liquor as it is
the second largest contributor to the total excise tax revenue after excise tax on motor
vehicles. During the 6 year period spanning from 2008 to 2014 liquor sector excise duty
contribution has been hovering around 27%-29% while also representing approximately
6% of the total government revenue.
Tax revenue from liquor which was LKR 23.9 Bn in 2007 has increased to LKR 69.1 Bn in
2014 with a CAGR of 16% during the ten year period. Due to the regular excise duty
increases with regard to liquor it has resulted difficulties for manufacturers to increase
prices on a regularly basis due to the competition within the industry. Higher taxes help
the government to bridge the fiscal account as well as regulate the industry by curtailing
the growth.
Source: Annual Report 2014, Ministry of finance and planning Sri Lanka
Source: Annual Report 2014, Ministry of Finance Sri Lanka
27% 29% 28% 27% 27% 26% 27%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2008 2009 2010 2011 2012 2013 2014
Liqour Cigarettes/Tobacco Motor Vehicles Petroleum Products Other
23.9 27.3 28.1
37.7
55.8 59.9
66 69.1
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013 2014
LK
R B
n
Figure 17: DIST pays the highest excise duty revenue on liquor among the key players in the industry.
Industry Dynamics
LOLC Securities Limited | Sector Research 25
Less likelihood of a complete ban of liquor in Sri Lanka…….
Being the highest contributor to the total excise duty on liquor, DIST contributed 50% with
LKR 35 Bn paid for the year ending 2014. LION, IDSL and ROCKLAND contributed 21%,
11% and 6% respectively while remaining contribution came from other players.
Source: Performance Report 2014, Sri Lank Excise Department
-
5
10
15
20
25
30
35
40
Distilleries +Periceyl
Lion BreweryLtd.+ Millers
Brewery
InternationalDist.
Rockland Asia PacificBrewery
(Lanka) Ltd.
W.M Mendis Others
Bil
lio
ns
Revenue generated from excise duty on liquor can be considered as a key contributor
to the government revenue. Therefore it is unlikely that government will impose a
complete ban of liquor despite the pressure from various communities in the society
given the fact that government will lose its tax revenue on such a scenario.
Figure 18: Countries and the regions that have presently banned alcohol have a Muslim majority.
Industry Dynamics
LOLC Securities Limited | Sector Research 26
However certain countries exist in the world with prohibition of liquor…….
However there are countries in the world that have prohibited liquor consumption while
most of them have a Muslim majority.
Afghanistan, Bangladesh, Brunei, some states of India (Gujarat, Kerala Manipur, Mizoram,
Nagaland and the union territory of Lakshadweep), Iran, Libya, Mauritania, Pakistan,
Emirate of Sharjah in UAE, Saudi Arabia, Sudan, Kuwait, Yemen have banned liquor due to
the pressure from the religious beliefs although some of the above countries allow
foreigners to drink with a license whereas others have a zero tolerance policy.
Despite existence of certain countries which have banned liquor Sri Lanka is
unlikely to implement such a policy due to its importance to the country in terms of
tax revenue and relatively low rejection of liquor products by the society. Therefore
it is more likely that liquor consumption will only be controlled through tight
regulations.
Sources- http://www.swifty.com/lifestyle/5322/13-countries-with-booze-bans#page=5, https://www.cia.gov/library/publications/the-world-factbook/geos/af.html, http://www.pewforum.org/2011/01/27/table-muslim-population-by-country/
Country % of Muslim population
Afghanistan 99.8%
Bangladesh, 90.4%
Brunei 51.9%
India (Gujrat, Kerala, Manipur, Mizoram, Nagaland and in the territory of Lakshadweep)
14.6% of the total Indian population
Iran 99.70%
Libya 96.6%
Mauritania 99.2%
Pakistan 96.40%
Emirate of Sharjah in UAE 76% of total population in UAE
Saudi Arabia 97.10%
Sudan 71.4%
Kuwait 86.4%
Yemen 99.0%
Figure 19: Key restrictions imposed on liquor industry in SL.
Industry Dynamics
LOLC Securities Limited | Sector Research 27
Tight regulations to govern the liquor industry in Sri Lanka…….
Liquor industry is considered as one of the most tightly regulated industry in Sri Lanka.
Basically manufacturing and sale of liquor in Sri Lanka come under the supervision of the
Excise Department and any related operations will have to be statutory and for these
purposes different types of licenses are issued by the Excise Department to engage with
such operations.
Among these regulations one of the main concern is the complete prohibition relating to
advertising and promotion of liquor products. National Authority on Tobacco & Alcoholic
(NATA) Act prohibits advertising and promoting alcoholic brands through any form of
media which has naturally created an entry barrier for new comers by preventing them to
promote their products. However we see this as an opportunity for big established players
operating in the industry to stay resilient amidst hefty competition since peers cannot
promote their brands or products.
Source: Sri Lank Excise Department, NATA Act No 27 of 2006
Liquor manufactures to prohibit from selling products directly to
the end consumers.
Total ban of the public advertising ,free distribution and sponsorship of alcohol related products as a means of promotions. (However free distribution of malt liquor products in some events can be seen in Sri Lanka)
Prohibition of the sale of alcohol products to persons under 21 years of age.
Prohibition on installation of vending machines for dispensing alcohol products.
Sale of liquor are prohibited on all fess moon (Poya) days, holidays marked for religious occasions, temperance days and any other days declared by the authorities.
Males under 21 years and females are prohibited from possessing liquor in any public place while the relevant limit of possession for arrack and toddy for males and females over 21 years in private places are restricted to 7.500 ltrs. and 1.500 ltrs. respectively.
Industry Dynamics
LOLC Securities Limited | Sector Research 28
Regulations govern the liquor industry…….
Sri Lanka India Malaysia Indonesia Myanmar Thailand Singapore
Excise taxes on Beer , Wine and Spirits Yes Yes Yes Yes Yes Yes Yes
National legal minimum age for off-premise
sales of alcoholic beverages 21 Subnational 18 21 18 20 18
National legal minimum age for on-premise
sales of alcoholic beverages 21 Subnational 18 No 18 20 18
National maximum legal blood alcohol
concentration (BAC)when driving a vehicle
in % 0.08 0.03 0.08
Zero
Tolerance 0.07 0.05 0.08
Legally binding regulations on alcohol
advertising / product placement Yes Yes Yes
Yes
Yes
Yes
No
Legally binding regulations on alcohol
sponsorship Yes Yes No
Yes
Yes
Yes
No
Legally required health warning labels on
alcohol advertisements/ containers No Yes No Yes
No
Yes
No
Source: WHO
Figure 20: Population of Sri Lanka by religion
Figure 21: Majority of the population consists of women who consume insignificant amount of liquor
Industry Dynamics
LOLC Securities Limited | Sector Research 29
Cultural and demographic factors to influence the liquor consumption…….
Sri Lanka’s cultural and demographics factors are believed to have a great influence on the
liquor consumption while consumption patterns are expected to vary based on the religion,
age and gender etc.
Out of total population of 20 million, 9.7% consists of Muslims who have been prohibited
from consuming alcohol according to the religion. Another 70.1% and 12.6% consist of
Buddhists and Hindus who are encouraged to refrain from consuming liquor according to
their religion although there are liquor consumers among both of these communities.
Further 52% of total population consists of women who consume only insignificant
amount of liquor as liquor is perceived as a male specific drink by the society.
Source: Source: Economic and social statistics of Sri Lanka 2015 (Central Bank of Sri Lanka)
70.1%
12.6%
9.7%
7.6%
Buddhist Hindu Islam Christian
48%
52%
Male Female
Figure 22: Alcohol consumers are expected to represent 25% of the population
Figure 23: Trincomalee has shown the highest alcohol usage by population
Industry Dynamics
LOLC Securities Limited | Sector Research 30
We estimate liquor consumers to represent 25% of the population…….
Due to the impact stemming from the cultural influences, Sri Lanka’s liquor consumers are
estimated to be 25% of total population indicating a target market of 5.2 million after
adjusting for male children below 15 years of age, 98% of the total women population,
Islamic male population above 15 years of age and male population who abstain from
consuming liquor.
As depicted in the Figure 24, Trincomalee has recorded the highest alcohol usage by
population while Colombo being the second.
Source: State of the Sri Lankan Alcohol Industry and analysis of Governing policies, Institute of Policy Studies of Sri Lanka.
42.80
33.3
40.1
29
38 33.8 31.6 30
38.5 43.5
29.3
05
101520253035404550
(%)
Source: LOLC SEC Estimates, Economic and Social Statistics of Sri Lanka 2015
Total Population (As at 2014) 20.77 Mn
Male children below 15 Years 2.64 Mn
Total female population who abstain from liquor (98%)
10.51 Mn
Islamic male population above 15 years age
0.63 Mn
Male who abstain from liquor out of the remaining population (25%)
1.74Mn
Potential liquor consumers 5.25 Mn
Source: LOLC SEC Estimates, Economic and Social Statistics of Sri Lanka 2015
25%
75%
Consumers Non consumers
LOLC Securities Limited | Sector Research 31
Key players of the industry
Figure 24: Revenue from Beverage Sector continues to dominate the Group revenue .
Figure 25: Strong balance sheet and low gearing to allow for investments
Key players of the industry
LOLC Securities Limited | Sector Research 32
Our Key Focus of the Sector- Distilleries Company of Sri Lanka –DCSL (DIST)
DIST is the market leader in the hard liquor industry with 67% volume market share
of domestic hard liquor market while also maintaining a diversified portfolio of other
business operations including plantation, telecommunication, insurance and other
financial services, power generation, logistics, textiles, business process outsourcing
(BPO) services ,media and tourism. DIST’s Beverage segment continues to be the
major contributor to the group’s revenue and profit while registering 85% and 86%
FY15 respectively.
DIST’s diversified business have been restructured under Melstacorp Limited
enabling Distilleries company to focus more on the beverage segment with Melstacorp
to provide greater focus on diversified businesses and its strategic investments.
Investment Consideration
We expect DIST being the leading Arrack producer of the country to benefit from the
expected GDP per capita rise and the inelastic consumption growth of Arrack.
We expect DIST’s current market share of 67% to increase up to historical averages
of 70% by FY 18 in line with the regulatory measures introduced from the budget 2016
and proved business acumen of the Owner/ Chairman’s contribution to the group.
Source: DIST Annual report (2015)
Source: Bloomberg
0%
5%
10%
15%
20%
25%
30%
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2010 2011 2012 2013 2014 2015
LK
R M
n
Cash and cash equivalents Total Assets Gearing
Gearings ratio is below 25% and declining
85%
5% 5% 5%
84%
5%
6% 5%
Beverage Sector Plantations sector
Telecommunication sector Diversified sector
2015
2014
Figure 26 : Valuation of DIST
Figure 27: Forecasted Financials
Key players of the industry
LOLC Securities Limited | Sector Research 33
Our Key Focus of the Sector- Distilleries Company of Sri Lanka-DCSL (DIST)
“ DCSL Arrack” a strong brand name which is expected to continue its strong
foothold in local houses while standing above the competition.
We believe that Budget 2016 to trend positive for DIST while making the industry
more concentrated with few larger players as a result of reduction in illicit and illegal
liquor consumption upon effective implementation of budget proposals.
DIST has been able to generate strong free cash flow balances and gearing has
continued to be below 25% over the last three years which will open up further
avenues for raising debt to venture into new projects.
DIST is also is one of the largest cap counters in the Colombo Stock Exchange (CSE)
with the market capitalization of LKR 61,830 Mn (USD 430 Mn) and it is the only listed
player operating in the hard liquor manufacturing sector.“
Valuation
We assumed a cost of equity of 14.34% which is a 6% premium on 3 year treasury bond
rate (GOSL), taking into consideration the equity market risk. Accordingly, we have
valued the counter using SOTP approach and derived the value of a share at LKR 291.30.
Source: LOLC SEC Estimates
Source: Bloomberg
BUY
LOLC SEC Valuation LKR 291.30
12M Tgt Price( excl. dividend) LKR 264.80
Share Price LKR 206.10
Upside/ (Downside) 41%
Risk Level Medium
LKR Bn 12M Trail
2016 ( F)
2017 (F)
2018 (F)
Revenue 30.8 31.8 33.8 35.3
Net Profit 6.9 5.5 7.9 8.4
S/H’s equity 64.8 69.5 76.2 83.4
Total Assets 91.9 97.9 105.2 112.8
ROA (%) 7 6 8 7
ROE( %) 11 8 11 11
Key players of the industry
LOLC Securities Limited | Sector Research 34
Our Key Focus of the Sector- Distilleries Company of Sri Lanka- DCSL (DIST)
Type of liquor Brands
Arrack
Domestically
manufactured foreign
Liquor
Imported foreign liquor
Source : DCSL Group website
Key players of the industry
LOLC Securities Limited | Sector Research 35
ID Lanka Ltd (International Distilleries Ltd)
Type of liquor Brands
Local Brands
International Portfolio
IDL Lanka Limited commenced its operations in 1980 as a result Gilbeys of London’s decision to establish operations in Sri Lanka as Gilbeys
Lanka Limited. With the acquisition of controlling stake by East India Holdings (Pvt) Ltd the company was renamed as ID Lanka Limited in
2004. The company was renamed as International Distillers Limited (IDL) in January 2014 as a part of its rebranding initiatives.
Source : IDL website
Key players of the industry
LOLC Securities Limited | Sector Research 36
W. M Mendis & Company Ltd
Type of liquor Brands
Local Brands
W. M Mendis & Company Ltd was established in 1960 by Mr. E. M Mendis who is an expert in the preparation of local liquors. The company’s
ultra-modern distillery is located in Southwest coast which is surrounded by Coconut plantations, from which the company obtains its main raw
materials- the sap of coconut flowers.
The bottling factory situated in Northern outskirts of Colombo, consists of 5 fully automatic bottling lines manufactured in Germany while the
company produces 27 types of liquor products which includes pure coconut arrack, old arracks, blended arracks and foreign liquors.
Source : State of the Sri Lankan alcohol industry and analysis of Governing Policies of IPS and Google
Key players of the industry
LOLC Securities Limited | Sector Research 37
Type of liquor Brands
Imported Wines and
Spirits
Rockland Distilleries (Pvt) Ltd
Rockland Distilleries began on a family estate in 1924. A pioneering venture, set up to produce high quality Arrack for the first time in
Ceylon's history. For nearly a Century, Rockland Distilleries remains a privately owned family business, maintaining its position as one of
the most advanced distilleries in the country.
Source : Rockland Distilleries website
Figure 28: LION’s profit grew at a CAGR of 12% during past 5 years
Figure 29: LION is trading at a premium to market multiples
Key players of the industry
LOLC Securities Limited | Sector Research 38
Lion Brewery Ceylon PLC (LION)
Lion Brewery was incorporated in 1996 as a joint venture between Ceylon Brewery
(Ceylon Beverage Holdings PLC) and the global brewing giant Carlsberg.
LION is the market leader for malt liquor/Beer in Sri Lanka mainly known for its 3
Lion brands and Carlsberg and Carlsberg Special Brew. Following the acquisition of
trademarks, brands and the shareholding in it’s entirely of Millers Brewery Limited by
LION, two of miller’s brands Sando Stout and Sando Power Strong were re-introduced
to the market with a minor packaging overhaul during the year under review. Other
three brands Three Coins larger, Irish Dark and Grand Blonde will be introduced.
LION is also the sole authorized importer and distributor of the Diageo & Moet
Hennessey of brands which includes iconic brands such as Johnny Walker, J&B,
Smirnoff, Tanqueray, Ciroc, Bailey’s & Guinness.
Considering low per capita soft alcohol consumption is low in Sri Lanka compared
with the peer countries such as Malaysia, Thailand and Singapore we see a growth
potential in the malt liquor (Beer) segment which will be essentially backed by
increasing per capita GDP and the tourist arrival growth.
Source: Bloomberg
PE PBV Div Yield (%)
Market 13.00 1.40 2.84
Beverage Sector
16.19 28.90 2.88
LION 26.95 4.40 0.80
Source: Bloomberg
832
1,220
1,046
1,343 1,330
1,476
0
5
10
15
20
25
30
0
200
400
600
800
1,000
1,200
1,400
1,600
2011 2012 2013 2014 2015 Last 12M
%
Net
In
com
e (L
KR
Mn
)
Net Income ROE
Figure 30: BREW’s profit grew at a CAGR of 10% during past 5 years
Figure 31: BREW is trading at a premium to the market multiples
Key players of the industry
LOLC Securities Limited | Sector Research 39
Ceylon Beverage Holdings PLC (BREW)
Ceylon Beverage Holdings which was previously known as the Ceylon Brewery is the
parent company of LION while Carson Cumberbatch PLC is the parent company of
BREW and Bukit Darah PLC is the ultimate parent and controlling entity of BREW.
BREW through LION manufactures, imports and distribute alcoholic brands while the
marketing of the portfolios is carried out by Luxury Brands Pvt Ltd.
Further, BREW operates three retail outlets via its subsidiary , Retail Spaces Pvt Ltd.
while these outlets are located in Negambo, Aluthgama and Moratuwa. These outlets
are outsources with income being generated in the form of a royalty.
Group’s restaurants are operated in the names of “Machang”, “O!” and “8.8” while the
restaurant chain is owned by BREW’s subsidiary Pubs N’ Places Pvt Ltd.
Source: Bloomberg
Source: Bloomberg
PE PBV Div Yield (%)
Market 13.00 1.40 2.84
Beverage Sector
16.19 28.90 2.88
BREW 15.96 2.73 1.38
449
666
520 528
659
764
0
5
10
15
20
25
30
0
100
200
300
400
500
600
700
800
900
2011 2012 2013 2014 2015 Last 12M
%
Net
In
com
e L
KR
(M
n)
Net Income ROE
LOLC Securities Limited | Sector Research 40
Appendices
Appendix 01
LOLC Securities Limited | Sector Research 41
History of the liquor industry in Sri Lanka.
Earliest literature documents with reference to liquor date to the legend of Lord Buddha, where the Enlightened One quelled an intoxicated elephant, which was sent to attack him.
Stories relating to Ceylon Toddy go back to the days of King Dutugemunu, (161-137BC) where the Mahavamsa shows that the King and his army relaxed and drank toddy on the way to Anuradhapura through the coastal areas.
Toddy tapping, the first step in the process of fermenting, was an activity described as a traditional vocation in the folklore of the country.
The Portuguese invasion in 1505 influenced the drinking habit among the Sri Lankans and the Dutch continued the propagation of alcohol.
British introduced the first Excise Ordinance in the form of the Toddy Act of 1912 and granted licenses to open taverns around the island.
Toddy tapping in Kalutara was initiated in 1870s, where it was said that Governor Sir William Henry Gregory (1873-1877) developed this industry.
Distilleries Company of Ceylon was established after the developments of toddy tapping. However toddy industry was only limited to the people of the upper class by the British rulers.
Expansion of tea plantations in colonial life led to privately owned imported foreign liquor outlets to be established in main cities.
In 1913 the Excise Department was constituted to manufacture liquor to the local market.
State Distilleries Corporation was formed in 1974, taking over the distilling and bottling activities from the Excise Dept. which continued to function as the monitoring industry.
In 1992, 60% of the issued capital of the State Distilleries Corporation was sold at the CSE.
Source: State of the Sri Lankan Alcohol Industry and analysis of Governing policies of Institute
of Policy Studies of Sri Lanka.
Appendix 02
LOLC Securities Limited | Sector Research 42
Overview of liquor industry in Sri Lanka…
Type of
Liquor
Key Producers Quantity wise
production in proof
litres (2014)
Type of Liquor Key Producers Quantity wise
production in proof
litres (2014)
Hard Liquor Malt / Soft Liquor
Special
Arrack
DCSL
IDL
Periceyl
Hingurana Distilleries
Ltd.
23,983,779.807
2,678,332.139
1,481,577.776
647,056.870
Beer (Alcohol % below
5%)
Lion Brewery
Millers Brewery
Asia Pacific Brewer
11,697,122.730
525,616.770
472,148.940
Coconut and
Processed
Arrack
DCSL
Rockland
IDL
W.M Mendis
2,912,885.476
1,897,378.950
619,480.436
505,052.564
Beer (Alcohol % above
5%)
Lion Brewery
Asia Pacific Brewery
Millers Brewery
91,389,532.945
16,500,480.960
3,935,835.890
Molasses
Arrack
IDL
W. M Mendis
Rockland
Nippon Expo
920,640.626
667,957.379
163,960.846
136,640.065
Wine
Lanka Wine (Pvt) Ltd
4,493.137
Country
made
foreign
liquor
IDL
Rockland
Periceyl
W.M. Mendis
1,691,527.294
1,316,243.708
940,204.444
249,353.841
Toddy Production Manori Lanka,
Wayamba Super
Singha Bottled Toddy
Manufactory
1,369,165.000
1,163,580.000
1,051,420.000
Source: Performance Report 2014, Sri Lank Excise Department
Figure 32: Production of special arrack continues to dominate the other hard liquor
Figure 33: Market Share of molasses Arrack (2014)
Appendix 02
LOLC Securities Limited | Sector Research 43
Overview of the liquor industry in Sri Lanka….
Arrack
Founded in the 5th Century A.D in Sri Lanka, Coconut arrack is a unique product obtained
by tapping the coconut palm. Among all the types we believe that Special Arrack is more
preferred among the hard liquor users as it has shown the highest consumption over the
other hard liquor types.
According to the data of Excise department, out of the 24 licensed liquor manufactures in
Sri Lanka 13 players manufacture Molasses Arrack, 12 produce coconut and processed
arrack while 17 players produce special arrack.
Source: Performance Report 2014, Sri Lank Excise Department
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014Special Arrack Molasses Arrack
Coconut and Processed Arrack Country made foreing liqour
Source: Performance Reports of Sri Lanka Excise Department
43%
31%
8%
6% 5%
7%
International Distilleries Ltd W.M Mendis & Company Ltd Rockland Distilleries Ltd
Nippon Expo Company Ltd Periceyl Company (Pvt) Ltd Others
Figure 34: Market share of Coconut and Processed arrack (2014)
Figure 35: Market Share of Special Arrack (2014)
Appendix 02
LOLC Securities Limited | Sector Research 44
Overview of the liquor industry in Sri Lanka….
Arrack
Being the dominant player in the Sri Lankan alcohol industry, DCSL holds 77% market
share in the Special Arrack, 47% of the market share in the Coconut and Processed arrack
segment and 5% market share of Molasses arrack (Periceyl Company (Pvt) Ltd) in terms
of the volume while other players share the rest.
Arrack Manufacturing Process
Source: Performance Report 2014, Sri Lank Excise Department
Source: Performance Report 2014, Sri Lanka Excise Department
47%
30%
10% 8%
4% 1%
Distilleries Company of Sri Lanka Ltd Rockland Distilleries Ltd.
International Distilleries Ltd W.M Mendis & Co. Ltd
Acme Lanka Ltd. Other
77%
8%
5% 2% 2% 6%
Distilleries Company of Sri Lanka Ltd International Distilleries Ltd.
Periceyl Company (Pvt) Ltd Hingurana Distilleries Ltd.Samanabadda
Acme Lanka Company Ltd Other
Step 1
•Tapping or extracting coconut sap or Toddy from the unopned flower of coconut tree and collected in eathernware pots.
Step 2
•It undergoes rapid fermentation process due to the natural variety of wild yields and bacteria.
Step 3
• After a minute of filtration process it is poured into large wooden casks made out of halmilla wood.
Step 4 •Wooden casks are then generally transported to factories for distillation.
Step 5 •Distillation process begins and completed within 24 hours.
Step 6
•Spirits of different age groups are selected with different flavours and blended to manufacture arrack.
Source: State of the Sri Lankan Alcohol Industry and analysis of Governing policies of Institute of Policy Studies of Sri Lanka.
Figure 36: Market share of Country made foreign liquor (2014)
Figure 37: Market Share of Malt Liquor (2014)
Appendix 02
LOLC Securities Limited | Sector Research 45
Overview of the liquor industry in Sri Lanka.…….
Country made foreign liquor
There are 7 players in Sri Lanka which import spirits and blend locally according to the
international standards while the country made foreign liquor segment is dominated by
IDL with a market share of 39%, Rockland with a market share of 30% and DCSL’s fully
owned subsidiary Perceyl (Pvt) Ltd with a market share of 22% while other manufactures
shares the rest.
Malt Liquor
There are two categories of malt liquor production namely Beer production with alcohol %
below 5% and more than 5%. Alcohol content above 5% accounted for 90% of the total
malt liquor production in 2014. There had been three malt liquor manufacturers in the Sri
Lanka namely Lion Brewery, Asia Pacific Brewery and Millers Brewery Ltd. With the
acquisition of the trademarks and the entire shareholdings of the Millers Brewery by the
Lion Brewery, Lion Brewery’s market share increased up to 86% of the malt liquor
industry.
Source: Performance Report 2014, Sri Lank Excise Department
Source: Performance Report 2014, Sri Lanka Excise Department
39%
30%
22%
6% 3% 0%
International Distilleries Ltd. Rockland Distilleries (Pvt) Ltd
Periceyl Company (Pvt) Ltd W.M. Mendis & Co. Ltd
Hingurana Distilleries Co. Ltd. Dompe Others
83%
14%
3%
Lion Brewery Ltd. Asia Pacific Brewery (Lanka) Ltd Millers Brewery Ltd.
Appendix 03
LOLC Securities Limited | Sector Research 46
PEST and SWOT analysis of the liquor Industry….
P Political
E Economical
S T Technological
Political stance of imposing heavy
excise duties on liquor products
Regulating the industry through
granting license by Department of
Excise Duties.
Limitations on the marketing of liquor
products.
Increasing GDP per capita income
(growth) could generate more
consumption.
Tourist arrival growth might also
result in increased demand for liquor.
Potential price increase in liquor
products due to inflation and taxes.
Religious and cultural pressure on
liquor consumption.
Alcohol drinking is considered a
gendered activity (females refrain
from drinking due to cultural factors).
Technology may help in upgrading the
manufacturing of liquor.
Social
S Strengths
W Weaknesses
O Opportunities
T Threats
• Consumer’s desire for liquor products.
• Addiction ability of liquor products.
• Island wide distribution network of liquor
products.
• Industry being one of the key income
generator for the government.
Possible health implications and the
negative perception towards liquor
products by certain communities.
Increase in per capita income which is
expected to increase the demand for
liquor products.
Increase in tourist arrivals to the
country.
Inelastic consumption irrespective of
taxes.
Religious and cultural influence.
Government rules and regulations
including higher tax burden.
Intense rivalry within the industry.
Restrictions on advertising and
sponsoring events.
Illicit consumption of liquor
Appendix 04
LOLC Securities Limited | Sector Research 47
24 Licensed liquor manufactures in Sri Lanka (2014)
V & A (Pvt.) Ltd - Padukka Randenigala Distilleries Ltd-Kaduwela
Acme Lanka Company Ltd- Hanwella Rockland Distilleries Ltd-Colombo 05
Asia Pacific Brewery (Lanka) Ltd-Mawathagama Sri Lanka Distilleries Ltd-Wadduwa (only till March 2014)
Classic Distilleries (Private) Ltd- Malabe. Scotland Distilleries Company Ltd-Badulla
Distilleries Company of Sri Lanka Ltd-Colombo 10 Thikkam Distilleries-Point Pedro
Hingurana Distilleries (Pvt) Co-Thittapattara Uva Glen Company (Pvt) Ltd-Moragahahena
International Distillers Ltd-Kaduwela Valikamam Distilleries-Manipai
Lion Brewery Ltd-Biyagama W.M Mendis & Company Ltd-Ragama
Manori Lanka Company (Pvt) Ltd-Gampola Varani Distilleries Ltd-Warani
Millers Brewery (Pvt) Ltd-Meegoda (only till May 2014) Wayamba Distilleries (Pvt.) Ltd-Kurunegala
Nippon Expo Company Ltd-Dompe Synergy Hotel & Holdings (Pvt.) Ltd-Payagala
Periceyl Company (Pvt) Ltd-Colombo 5
Randiya Marketing Services (Pvt) Ltd-Dankotuwa
Source: Performance Report 2014, Sri Lank Excise Department
Disclaimer
LOLC Securities Limited | Sector Research 48
Social
LOLC Securities Limited is a company incorporated in Sri Lanka and licensed by the Securities and Exchange Commission of Sri Lanka to operate as a
stockbroker/stock dealer in Sri Lanka. LOLC Securities Limited is a trading member of Colombo Stock Exchange. This research is based on information from
sources that LOLC Securities Limited believes to be reliable. Whilst reasonable care has been taken to ensure accuracy of the information presented in the
research, LOLC Securities Limited does not give a guarantee on the accuracy of the information presented in the paper nor will take the responsibility on
investment decisions taken based on the information provided by the research and hence LOLC Securities Limited nor its employees accepts any liability
whatsoever for any loss arising from investments decisions taken using the information provided in this paper. The reader also should note this paper does not
give recommendations to any particular category of investors and investor should consult investment advisors for further clarifications regarding risks
involved in investing in equity market. Investing in securities has inherent risks with no guaranteed return and price may be subjected to significant
volatilities. No part of this report should be considered as a solicitation to buy or sell any security or product or to engage in or refrain from engaging in any
transaction. LOLC Securities Limited or its employees may or may not hold positions in the securities discussed in the research and the information provided
in the research should not be construed as a buy or sell instruction for any securities mentioned in the research, Unless otherwise specifically mentioned. This
research is intended for general use for clients of LOLC Securities Limited and must not be copied in whole or in part or distributed to any third party for
commercial use without permission from LOLC Securities Limited. If the reader is not the intended recipient please inform LOLC Securities Limited
immediately by return email to [email protected]. LOLC Securities Limited’s other staff including sales people, traders and other professionals may
provide oral or written market commentaries or trading strategies to our clients which reflect opinions which are contrary to the opinions expressed in this
research which may be influenced by different circumstances.
Glossary
LOLC Securities Limited | Sector Research 49
Social
Liquor
Spirits of Wine, Spirit, Wine, Toddy, Beer and all liquid consisting or containing alcohol also any substance, which the Minister may by notification declare to be liquor for the purposes of Excise Ordinance (Excise Department).
Alcohol Product
A beverage containing a volume of 1% or more of alcohol (National Authority on Tobacco and Alcohol Act No 27 of 2006).
Zero- Tolerance
The policy of applying laws or penalties to even minor infringements of a code in order to reinforce its overall importance.
CAGR
Cumulative Annualized Growth Rate.
W.E.F
With Effect From.
APC
Alcohol Per Capita.
YOY
Year on Year
Proof litre (Arrack)
= Bulk Litre*Alcohol By Volume/0.571
Contact Us
LOLC Securities Limited | Sector Research 50
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Shehan Bartholomeuz Head of Research 011 5889835 / 077 7699148 [email protected]
Gayan Rajakaruna Senior research Analyst 011 5889837 / 0774469070 [email protected]
Hiruni Perera Associate Research Analyst 011 5889809 / 077 4805784 [email protected]
Head Office No. 481, T B Jayah Mawatha, Colombo 10, Sri Lanka. Sri Lanka Tel: +94 11 5889889 Fax: +94 11 2662883
Kurunegala Branch No 06, 1st Floor, Union Assurance Building, Rajapilla Mawatha Kurunegala, Sri Lanka Tel: +94 377 201221 Fax: +94 372 225511
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Matara Branch 1st floor, E.H. Cooray Towers, No 24, Anagarika Dharmapala Mw. Matara, Sri Lanka Tel: +94 414 936079