sri lanka - leading from the front
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Sri Lanka Country Report 06 April 2011
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Sri Lanka – Key economic indicators
INDICATORS 2007 2008 2009 2010E 2011F 2012F
GDPNominal GDP (US$ bn) 32.3 39.6 42.2 47.6 54.5 62.7
Real GDP by production (LKR bn)
GDP 2233 2366 2449 2645 2866 3125
Agriculture 266 286 295 315 331 349
Industry 635 673 701 760 825 902
Services 1332 1407 1453 1570 1710 1874
Real GDP growth (%) 6.8 6.0 3.5 8.0 8.3 9.1
Real GDP by production (% YoY)
Agriculture 3.4 7.5 3.1 7 5.0 5.4
Industry 7.6 5.9 4.2 8.4 8.5 9.4
Services 7.1 5.6 3.3 8 8.9 9.6Real GDP (demand side) (%YoY)
Private final expenditure 20.9 28.4 0.6 18.2 19.0 20.0
Government final expenditure 21.1 30.6 19.3 26.5 18.0 19.0
Gross capital formation (ex valuables) 21.7 21.5 (2.6) 18.0 18.0 20.0
Aggregate ratios (% of real GDP)
Consumption/GDP 82.4 86.1 82.0 86.1 88.3 90.7
Private consumption/GDP 67.2 70.0 64.3 65.7 69.8 71.8
Government consumption/ GDP 15.3 16.2 17.6 25.9 18.5 18.9
Investments/GDP 28.0 27.6 24.5 24.5 26.0 26.7
Fiscal aggregates (%GDP)
Govt budget deficit 6.9 7 9.9 8 6.8 6
External sector
Exports (US$ bn) 7.7 8.1 7.1 8.3 9.4 11.1
% YoY 11.4 6.1 (12.9) 17.2 13.3 18.1
Imports (US$ bn) 11.2 14.0 10.2 13.5 16.1 18.2
% YoY 8.9 25.4 (27.1) 32.3 19.3 13.0
Trade deficit (US$ bn) (3.5) (5.9) (3.1) (5.2) (6.7) (7.1)
Services (US$ bn) 0.2 0.4 0.4 0.4 0.6 1.0
Current transfers (US$ bn) 2.3 2.7 3.0 4.1 4.5 4.5
Current account deficit (US$ bn) (1.3) (3.8) (0.2) (0.7) (1.6) (1.6)
% to GDP (4.1) (9.5) (0.5) (2.3) (3.4) (3.2)
Inflation
CPI (Avg) 15.8 22.6 3.4 5.9 7.0 7.0
Interest and exchange rates (EOP)
Reverse repo rate 12 12 9.75 8.75 9 9.25
Repo rate 10.5 10.5 7.5 7.25 7.75 8.25
Cash reserve ratio 10 7.75 7 7 8 9
LKR/USD 108.7 113.0 114.4 110.9 109.0 108.0
Source: CBSL, RCML Research
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Sri Lanka Country Report 06 April 2011
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Dear Investors,
Every nation experiences epochs of transition that define the trajectory of its veryexistence for long periods of time. Sri Lanka is at one such crossroad today, engaged in a
sweeping transition following the end of 26 years of ethnic conflict. The economy
exhibits mixed features such that it cannot be strictly defined in terms of stage of
economic development. While it compares well with industrialised economies on some
social indicators and development goals, on most other counts, it resembles a typical
low-income economy.
Yet the island nation of Sri Lanka is undoubtedly the rising star of the Asian economy.
Situated at the very heart of global shipping routes, it plays a vital role in international
trade—linking East and West. The Sri Lankan stock market (CSE) rebounded smartly from
the global financial crisis to emerge as the world’s best performing market in 2010. The
economy too is expected to move to a higher growth trajectory, beyond the inertia
provided by ‘peace-dividends’. Indeed, Sri Lanka is now classified as a frontier market—in
other words, a country that has immense untapped potential for growth, thanks to
newfound economic and political stability. The key challenge going forward would be to
bring ethnic minorities into the mainstream political and economic development process.
In this report, we capture the macroeconomic trends and growth potential of the
Sri Lankan economy along with the primary challenges ahead. We have highlighted five
key sectors—agriculture, tourism, telecom, financial services and consumer goods—that
have the highest potential from an investment point of view. We also initiate coverage
on four of the nation’s top five listed companies. And for a fuller flavour of this beautiful
island nation, we include some vignettes from our trip and a selection of views from
prominent stakeholders in the economy.
Regards,
Jay Shankar
Chief Economist, Religare Capital Markets
Jay Shankar Vallabh Kulkarni, FRM Rumit Dugar Ishank Kumar Gaurang Kakkad
(91-22) 6766 3442 (91-22) 6766 3438 (91-22) 6766 3444 (91-22) 6766 3467 (91-22) 6766 3470
[email protected] [email protected] [email protected] [email protected] [email protected]
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Sri Lanka: Expert Speak
Our objective is to transform Sri Lanka into the economic centre of the world. Using
our strategic geographical location, we will develop the country as a Naval, Aviation,
Commercial and Knowledge Hub, serving as a key link between the East and the West.
Dr Saj Mendis
Director GeneralMinistry of Economic Development
“
”
The whole world has recognised our future in knowledge-based industries. Our aggressive plans to implement state-of-the-art information infrastructure will be the
key driver in the country’s growth over the next decade.
V P K Anusha Palpita
Director General of TelecommunicationsTelecommunications Regulatory Commission of Sri Lanka
“
”
We expect strong domestic consumption and a revival in exports, as global demand
picks up, to keep up the economic momentum.
KrishanBalendra
President, Head of Corporate Finance & StrategyJohn Keells Holdings PLC
“”
Sri Lanka’s financial sector is geared up to provide the necessary support for an
accelerated pace of economic growth with financial inclusion.
Russell de Mel
Chief Executive OfficerNational Development Bank PLC
“”
We are very positive on the Sri Lankan economy. As a well diversified business group,
our growth prospects, consequent to the country’s economic performance, remains
very bright.
Pravir D Samarasinghe
Director/Chief Operating OfficerRichard Pieris and Company PLC
“
”
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The telecom sector is set to witness a period of high growth in both data and voice
services. As a leading telecom player, our initiatives will be focused on developing a
smarter telecommunication network in remote areas of the country.
Supun Weerasinghe
Group – Chief Operating OfficerDialog Axiata Plc
“
”
We see a continuation of strong domestic demand, complemented by export
demand, that is likely to spur industrialisation in the economy. This will relax to some
extent the constraints which manufacturers face because of smaller domestic size.
Malinga Arsakularatne
Chief Financial OfficerHemasHoldings PLC
“
”
The government remains committed to provide a level playing field to private banks.
We see strong economic growth and credit demand supporting our margins.
RanjithSamaranayake
Executive Director/Group Chief Financial OfficerSampath Bank PLC
“”
As banking penetration improves, specially in rural and northern parts of the country,
people are likely to gain from financial inclusion.
Rajendra Theagarajah
Managing DirectorHatton National Bank PLC
“”
As we rebuild our country, there will be a huge requirement of capital for
infrastructure development.
A N Fonseka
General Manager/Director & Chief ExecutiveDFCC Bank
“”
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Contents
Chapter Page No.
Sri Lanka Economics – Leading from the front 1
Advantage Lanka: Demographic dividends to drive growth this decade 2
GDP: Broad-based 8%+ growth over the next decade 8
Inflation: Not a threat to growth 11
Money and Banking: Navigating structural economic shifts 12
External sector: Strong recovery 14
Foreign trade: Promising exports despite challenges 17
Capital markets: On a roll 19
Agriculture & Tourism
Agriculture & Fisheries 23
Tourism 25
Sri Lanka Economics – A snapshot 27
Sri Lanka – Key economic forecasts 31
Telecom
Sector Report: Maturing voice market 33
Dialog Axiata: Growth moderating; turning more defensive – HOLD 35
Banking
Sector Report: Good times ahead 46
Commercial Bank of Ceylon: Poised for take-off 55
Hatton National Bank: Strong earnings profile to drive valuations 62
Diversified
John Keells Holdings: Diversification remains the key 70
References 82
Sri Lanka Diary 83
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Economy
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Sri Lanka Economic Outlook 06 April 2011
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Jay Shankar Vallabh Kulkarni
(91-22) 6766 3442 (91-22) 6766 3438
[email protected] [email protected]
GDP growth forecast
0
2
4
6
8
10
12
0
2
4
6
8
10
12
2007 2008 2009 2010E 2011E 2012E
Services IndustryAgriculture GDP
(% YoY) (% YoY)(% YoY) (% YoY)
Source: Govt., RCML Research
MILANKA 30-share index
Source: Bloomberg, RCML Research
USD/LKR exchange rate
0
20
4060
80
100
120
M a r - 9 1
M a r - 9 2
M a r - 9 3
M a r - 9 4
M a r - 9 5
M a r - 9 6
M a r - 9 7
M a r - 9 8
M a r - 9 9
M a r - 0 0
M a r - 0 1
M a r - 0 2
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
USDLKR
Source: Bloomberg, RCML Research
Sri Lanka Economics
Leading from the front
Sri Lanka―s economy is referred to as a ‘frontier market―. The term coined by theInternational Finance Corporation (IFC) about a decade ago refers to a countrythat is less developed but has immense untapped potential for growth, thanks tonewfound economic and political stability, and is typically characterised by alarge-enough population. The other important pull factor for investors, besidesthe opportunity to get in early on the rapid growth phase, is that these marketsare supposed to have a low correlation with the rest of the world—thus givinginvestors a ‘hedging― window.
We visited Sri Lanka to better gauge the growth dynamics and challenges ahead.During the course of our visit, we met stakeholders from the private sector,farmers, the common man as well as policymakers. This report aims at providing
a macro view of the economy, with a discussion on key sectors driving growth.We also initiate coverage on four of the top five listed companies by market cap.
The new ‘Asian Miracle―: It may not be perfect, but Sri Lanka surely capturedworld attention in 2010, with an indigenous growth model that has deliveredremarkable results. The new ‘Asian Miracle― has been among the best marketperformers across the globe.
Reaping the dividends of peace: The Sri Lankan economy posted robust GDPgrowth of close to 8% in 2010. The higher growth trajectory has been madepossible by a cluster of factors that may, in general, be referred to as the ‘peacedividend―. Year 2010 saw a pick-up in rebuilding efforts, after the restoration of peace. There is clearly a much improved business confidence, accompanied by a
far stronger macroeconomic environment. The gradual global economic recoverytoo has aided growth significantly.
Easy monetary policy paves way for growth: A significant decline in inflation andsubsequent improvement in inflation outlook have enabled the Central Bank of SriLanka to adopt an accommodative monetary policy environment, leading to adecline in interest rates in the economy. Expansion in domestic economic activityalong with a remarkable improvement in Sri Lanka―s international trade has led tosignificant revenue buoyancy and an improvement in the fiscal situation.
Boom town?: We note that the island nation has more than its fair share of positives—booming tourism (600,000+ arrivals in 2010), a strong financial sector(stable banking system and doubling of the stock market in two consecutive years
with 60+ companies now planning to list), speedy execution on developmentgoals (poverty at 7.6%, literacy at 97% in age group 15–24 and unemployment at5.3%), booming private corporate profits (268% growth for listed players), aforward looking Budget with growth and equity both in focus, and one of the moststable political systems in the region.
Stable governance holds the key: The peace dividend that has enabled thissignificant improvement in investment climate also brings with it seriouschallenges—that of ensuring both equitable distribution of the benefits of growthamongst the people and of promoting balanced growth across regions. The currentgovernment of Mahinda Rajapaksa has successfully demonstrated its resolve toachieve these goals. We are confident that this proactive and stable governmentcan lead the economy on a sustainable path of high growth—doubling the GDP in
six years—with robust human development indicators, despite limited resourcesand frequent natural calamities. ‘Mahinda Chintana―, the government―s vision document, if implemented in earnest can ensure sustainability of growth.
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Advantage Lanka
Demographic dividends to drive growth this decade
HDI ahead of most South Asian economiesAt 0.656, Sri Lanka is the only country in South Asia to feature in the top 100 HumanDevelopment Index (HDI) rankings (91st position). The HDI evaluates the four basiccriteria for human development, namely life expectancy, literacy rate, communityparticipation and standard of living. With the return of peace post the civil war,Sri Lanka is expected to rise further in the HDI rankings.
Fig 1 - Human Development Index
0.4
0.5
0.60.7
0.8
0.9
1.0
B a n g l a d e s h
I n d i a
I n d o n e s i a
T h a i l a n d
S r i L a n k a
C h i n a
U S
Source: WDI, RCML Research
Fig 2 - Unemployment rate
0.93.6 3.7 4.3 4.7 5.1 5.8
7.8 7.9 8.1 8.1 8.4 8.7 9.310.7
18.0
23.9
0
7
14
21
28
T h a i l a n d
S K o r e a
M a l a y s i a
C h i n a
U K
J a p a n
S r i L a n k a
I t a l y
I n d o n e s i a
G e r m a n y
B r a z i l
R u s s i a
A r g e n t i n a
U S
I n d i a
S p a i n
S A f r i c a
(%)
Source: IMF, RCML Research *2009 data
Rich demographic dividends
The term demographic dividend indicates an opportunity very rarely experienced by acountry and is characterised by an increase in the proportion of working age population.At 29 years, Sri Lanka―s median age is one of the lowest amongst the developingeconomies. This augurs well for sustaining high economic growth in the long term.Sri Lanka―s demographic dividends (dependency ratio below 60) which began in 2000will continue to support growth at least until 2020.
Fig 3 - Dependency ratio
45
55
65
75
85
95
105
1 9 5 0
1 9 5 5
1 9 6 0
1 9 6 5
1 9 7 0
1 9 7 5
1 9 8 0
1 9 8 5
1 9 9 0
1 9 9 5
2 0 0 0
2 0 0 5
2 0 1 0
2 0 1 5
2 0 2 0
2 0 2 5
2 0 3 0
2 0 3 5
2 0 4 0
Sri Lanka India Indonesia World Africa Asia
Source: World Bank, RCML Research
Sri Lanka the only country in South Asia
to feature in the top 100 HDI rankings
Favourable demographics to supportgrowth until 2020
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These demographic trends imply that the country is poised to have a productive labourforce in a decade, precisely at the time when China―s working population would peak.With improving education and healthcare facilities, Sri Lanka―s large labour pool canprovide a low-cost, much-needed workforce to the world and may mean substantialemployment creation in the continent in the coming decades.
Fig 4 - Median age
15
20
25
30
35
40
45
50
1 9 5 0
1 9 5 5
1 9 6 0
1 9 6 5
1 9 7 0
1 9 7 5
1 9 8 0
1 9 8 5
1 9 9 0
1 9 9 5
2 0 0 0
2 0 0 5
2 0 1 0
2 0 1 5
2 0 2 0
2 0 2 5
2 0 3 0
2 0 3 5
2 0 4 0
2 0 4 5
2 0 5 0
Sri Lanka China India Brazil(Years)
Source: World Bank, RCML Research
Stable political environment
After a three-decade civil war that ended in 2009, Sri Lanka has entered a period of peace and political stability. The political environment appears to have solidified furtherfollowing the ruling United People―s Freedom Alliance―s (UPFA) landslide victory in therecent nationwide local authority elections. President Mahinda Rajapaksa―s attempts tocombine economic progress with equity, and human and social development, along
with efforts to address minorities― underlying grievances would go a long way towardsbolstering longer-term stability–in turn needed to bolster the investment climate.
Strategic geographic locationSri Lanka is located on an important sea route connecting Europe and the Middle Eastwith the rest of Asia. It is well connected to Southeast Asia, Europe, Australia and Africa.The government plans to develop the coastal town of Hambantota as an internationaltransport hub, with a world class port and a cargo airport.
Fig 5 - Time required to start a business
0
20
40
60
80
100
120
140
160
180
2003 2004 2005 2006 2007 2008
Sri Lanka India China Indonesia(Days)
Source: IMF, RCML Research
Median age of 29yrs among the lowest
in developing economies
Stable political environment to bolster
investment climate
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Abundant natural resources
Sri Lanka―s geography presents a rich mosaic of forests, wetlands, agricultural land, andminerals. The country has an abundance of industrial mineral resources that includeapatite, calcite, clay, dolomite, feldspar, graphite, limonite, kaolin, mica, quartz, rutile,silica sand and zircon. Graphite and mineral sands are mainly exported.
Business confidence on the riseThe country is in an early phase of social and economic growth, with the vast rebuildingexercise following the civil war increasing the potential business opportunities. Thegovernment―s foreign investment–friendly economic policy should encourage significantFDI and FII flows in the next five years. Along with the domestic consumption potential,the country can be seen as a potential export hub for the manufacturing and serviceindustries. Amongst neighbouring countries, the time required to start a business is theshortest in Sri Lanka.
Opportunities across sectors
ElectricityThe current plan for development of the electricity sector has been designed to providethe entire populace with high quality, uninterrupted power supply by 2012. Thecountry―s electricity generation capacity is estimated to increase to 4,732MW by 2016from the current 2,891MW. This translates into a significant opportunity for privateplayers in the electricity generation and transmission space.
IrrigationThe irrigation sector is expected to become a key driving force in agriculturaldevelopment over the next decade. The focus will be on water resource developmentand the improvement and modernisation of irrigation facilities. Investment in irrigation is
expected to grow multifold over the next five years to LKR 6.4bn in 2015 from LKR2.5bn currently. By 2020, the share of private investment in irrigation facilities is likelyto be at 25% from a lower single-digit share in 2011.
Fig 6 - Investment in electricity sector
0
50,000
100,000150,000
200,000
250,000
300,000
350,000
400,000
2011 2012-13 2014-20
Foreign Domestic(LKR mn)
Source: Sri Lanka Govt., RCML Research
Fig 7 - Investment in irrigation facilities
0
1000
2000
3000
4000
5000
6000
7000
2011 2013 2015 2017 2020
Public Private(LKR mn)
Source: Sri Lanka Govt., RCML Research
Telecommunications
Sri Lanka―s telecom sector has grown significantly at 40–60% over the past few years.The government plans to take necessary steps to introduce the telecom tower sharingsystem to prevent excessive proliferation of towers. The Business Process Outsourcing(BPO) and Knowledge Process Outsourcing (KPO) industries will be encouraged, in
order to ensure efficient service delivery and to create employment opportunities.
Rebuilding exercise following the civil
war offers large business opportunities
Significant opportunity for private
players in the power sector
Telecom sector has grown at 40–60%
over the past few years
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Fig 8 - Investment in telecom
0
5,000
10,000
15,000
20,000
25,000
30,000
35,00040,000
45,000
2011-13 2014-16 2017-20
(LKR mn)
Source: Sri Lanka Govt., RCML Research
Fig 9 - Telecom sector targets
Segment 2010 2015 2020
Fixed access services (mn) 3.5 6 10
Cellular mobile subscribers (mn) 16 18 20
Public pay phones (‘000) 7 12 15
Internet and e-mail (mn) 0.4 5 10
Telephone density (%)(Mobile and fixed) 93 95 98
Source: Sri Lanka Govt., RCML Research
Transportation
Roads are the main mode of transport in the country. About 90% of passengers and 98%of freight are carried by road. Key port development projects in progress includeColombo South Harbour Project (CSHP), Hambantota Port Development Project, OluvilPort Development Project and Galle Tourist Port Development Project. The completionof these projects will increase cargo handling capacity by 4.5mtpa.
Fig 10 - Investment in roads sector
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000800,000
2011-14 2015-17 2018-20
Public Private(LKR mn)
Source: Sri Lanka Govt., RCML Research
Fig 11 - Investment in aviation sector
0
50,000
100,000
150,000
200,000
250,000
300,000
2011-13 2014-16 2017-20
Public Private(LKR mn)
Source: Sri Lanka Govt., RCML Research
Healthcare
Sri Lanka has made good progress in providing universal healthcare facilities over thelast few years. Key health indicators such as life expectancy and mortality rates remainbetter than the averages for countries at comparable levels of income and are even closeto rates seen in some developed countries.
EducationHeavy investment in the education sector over the past few years has placed Sri Lankaahead of many South Asian countries in terms of educational development. The GlobalCompetitive Report (2008) positioned the country at 44 in terms of quality of the
education system out of the 131 countries surveyed.
Several key port development projects
in progress
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Fig 12 - Investment in education
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2011 2012 2013 2014 2015
Public Private(LKR mn)
Source: Sri Lanka Govt., RCML Research
Fig 13 - Investment in healthcare sector
0
5,000
10,000
15,000
20,000
25,00030,000
35,000
2011 2012 2013 2014
Public Private(LKR mn)
Source: Sri Lanka Govt., RCML Research
We believe that a combination of favourable demographics, urbanisation, a burgeoningmiddle class, and democratically-driven trade and resources policies will continue todrive growth in the marketplace, even after the dividends of peace wane. ‘MahindaChintana―, the government― vision document, if implemented in earnest can furtherensure sustainability of growth.
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Mahinda Chintana Vision 2011–16
The Socio Economic Development Strategy for the next decade based on the MahindaChintana – Vision for the Future, the President Mahinda Rajapaksa, envisages a SriLanka that:
Has an economy with a green environment and rapid development
Aspires to be a stable society with a high quality of life for all of its people havingaccess to decent living, electricity, water, schooling and health facilities
Maintains the best of Sri Lankan culture, traditions and long standing globalidentity
Aims to consolidate as an emerging market economy; integrated into the globaleconomy and is competitive internationally
Intends to have the characteristics of a middle income economy with aknowledge-based society
This vision is articulated identifying specific targets aiming at achieving the MillenniumDevelopment Goals (MDGs) ahead of time. Among the Mahinda Chintana Goals(MCGs) for 2016 are the following;
Eradication of hunger and hard-core poverty
Universalization of secondary education for all
Reducing malnutrition rate of children from a third to 12-15 percent
Increasing life expectancy from 76 to 80 years
Increasing access to clean water in urban areas from 65 to 90 percent
Raising forest coverage from 28 to 43 percent
These are to be attained through rapid economic growth and a change in the structureof the economy to a modern, environmentally friendly and well connected rural-urbaneconomy that can create better-remunerated employment opportunities:
Almost doubling of per capita GDP by 2016 to above US$ 4,470 to be attainedthrough an economic growth of over 8 percent per annum
Investment to be increased to 33-35 percent of GD P with sustained commitmentof public investment of 6-7 percent of GD P to support private investment
Exports to grow at twice the rate of real GDP
High spending tourism to grow in order to generate fourfold expansion in touristearnings and remittances inflows, based on skills, to be doubled
The share of rural employment to decline from about two-thirds to half; and
The share of urban population to increase from a quarter to a third
Source: Mahinda Chintana Vision 2011-16, Govt. of Sri Lanka
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Sri Lanka GDP
Broad-based 8%+ growth over the next decade
Peace after three decades of civil war has given a tremendous fillip to economic activityin Sri Lanka. Besides the robust 8% growth in the economy in 2010, what is important isthe broadening base of the growth process. While it―s true that there are serious regionalimbalances in growth, this is largely a product of the prolonged civil war. In fact,massive efforts are underway to rebuild the economy in the north and northeast regionsthat saw widespread destruction during the conflict. We believe the Sri Lankan economyis capable of delivering growth in excess of 8% for the next five years (8.4% in 2011E) provided the government is proactive in directing the growth process.
Rebuilding the economyThere are various options before the government to advance growth in hitherto war-tornregions including the set up of special economic zones (SEZ), export oriented zones andindustrial estates, promotion of micro, small and medium enterprises (MSME), and
provision of fiscal incentives for setting up industries. Our interaction with policymakersconvinced us that the government is actively taking these initiatives, along with buildingbasic physical infrastructure on a war-footing—roads, power plants, telecom and smallerairports, among others.
Fig 14 - GDP by production
0
2
4
6
8
10
12
0
2
4
6
8
10
12
2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E
Services Industry Agriculture GDP(% YoY) (% YoY)(% YoY) (% YoY)
Source: Sri Lanka Govt., RCML Research
Fig 15 - Sector contribution to GDP
Agriculture12%
Industry29%
Services59%
Source: Sri Lanka Govt., RCML Research
Fig 16 - Employment by sector
Services43%
Industry24%
Agriculture33%
Source: Sri Lanka Govt., RCML Research
Broadening base of growth led by
massive rebuilding efforts in war-hit
north and northeast regions
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There is also a concerted effort to push for greater integration with the Indian andPakistani markets by expanding on the current free trade agreements (FTA) anddeveloping on the proposed CEPA agreement. Understandably, a small population of 20 million is a big deterrent to setting up large-scale manufacturing plants that can reapeconomies of scale. The way out is to explore export opportunities and build robust
trade ties, especially with neighbouring economies.
Trade and tourism to witness highest growth in the post-civil war eraThe service sector is the largest component of GDP at ~60%, providing employment to43% of the population. In 2009, growth in the sector slowed to 3.3% YoY, but it pickedup in 2010 to 8.0% YoY. Telecom, transport, trading and financial services are the maincontributors to growth. Public administration and defence expenditures were dominanttill 2008–09 due to domestic hostilities and the expansion of public sector employment.
Fig 17 - Disaggregation of services sector (2002)
Banking,insuranceand realestate14%
Governmentservices
15%
Transportand
communication
19%
Wholesaleand retail
trade41%
Other11%
Source: Sri Lanka Govt., RCML Research
Fig 18 - Disaggregation of services sector (2010)
Banking,insuranceand realestate15%
Governmentservices
13%
Transportand
communication
23%
Wholesaleand retail
trade39%
Other10%
Source: Sri Lanka Govt., RCML Research
There is also a growing IT sector, especially for training and software development. Thetourism sector was hit by the volatile security situation, but is expected to revive whenthe scenic northeastern region becomes safer for visitors (600,000+ tourists in 2010).Trade and transport activity are also expected to receive a major boost whenconstruction of the biggest port on land is completed at Hambantota. The port, withrecord capacity of 20mn teus per year, will service ships travelling along one of theworld―s busiest shipping lines—the east-west shipping route.
Fig 19 - Disaggregation of industrial sector (2002)
Mining andquarrying
4%
Manufacturing
66%
Construction22%Electricity,
gas andwater8%
Source: Sri Lanka Govt., RCML Research
Fig 20 - Disaggregation of industrial sector (2010)
Mining andquarrying
8%
Manufacturing
60%
Construction24%Electricity,
gas andwater8%
Source: Sri Lanka Govt., RCML Research
Services the largest component of GDP
at ~60%, employing 43% of the
population
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Fig 21 - Disaggregation of manufacturing sector (2002)
Cottageindustry
6%
Factoryindustry
89%
Tea, rubberand coconutprocessing
5%
Source: Sri Lanka Govt., RCML Research
Fig 22 - Disaggregation of manufacturing sector (2010)
Cottageindustry
6%
Factoryindustry
91%
Tea, rubberand coconutprocessing
3%
Source: Sri Lanka Govt., RCML Research
Government incentives to boost industrial activity in the next five yearsThe industrial sector contributes 29% to GDP while employing 24% of the population.Manufacturing is the largest industrial sub-sector, accounting for 18% of GDP.Construction constitutes 7%, mining and quarrying 1.5%, and electricity, gas, and water2% of GDP. Within the manufacturing sector, food, beverage and tobacco is the largestsub-sector in terms of value addition, accounting for a 44% share. Textiles, apparel, andleather is the second-largest sector with 20% of the value addition. The third largest ischemicals, petroleum, rubber, and plastic products.
Fig 23 - Disaggregation of agricultural sector (2002)
Tea11%Paddy
14%
Coconut11%
Other foodcrops
31%
Fishing11%
Other22%
Source: Office Sri Lanka Govt., RCML Research
Fig 24 - Disaggregation of agricultural sector (2010)
Tea9%Paddy
16%
Coconut9%
Other foodcrops
32%
Fishing10%
Other24%
Source: Sri Lanka Govt., RCML Research
Cash crop–driven agriculture losing its sheenThe agriculture sector has become relatively less important to the Sri Lankan economyin recent decades. It employs 33% of the working population, but accounted for only12% of GDP in 2010; down from ~17% in 2002. Farmers cultivate cash crops like tea,rubber and coconuts from plantation agriculture, and food crops from subsistenceagriculture. Rice, the principal food crop, is cultivated extensively and is the mainsource of livelihood for over 70% of Sri Lanka―s rural population. Domestic agriculturesuch as rice and other food crop cultivation is expected to improve significantly with thereturn of peace to the eastern and northern provinces. In recent years, the contributionof the paddy industry to GDP has increased, while that of other cash cropshas contracted.
Industrial sector contributes 29% to
GDP and employ 24% of the population
Share of agriculture in GDP down from
17% in 2002 to 12% in 2010
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Inflation
Not a threat to growth
The evolving consumption trends in urban as well as rural parts of the country haveresulted in a higher cost of living. After touching 40% in mid-2008, food inflation hasremained stubbornly high over the past few years. Nonetheless, we believe the countryshould be able to achieve high growth even at elevated levels of inflation. Governmentpolicies to control inflation while balancing real growth have been successful until now.But any further increase in interest rates might pose downside risks to our 2011 GDPgrowth target of 8.4%. We expect inflation to reach 8% by the end of this year and 7%on average.
Food prices remain high but core inflation decliningInflation, as measured by the Colombo Consumers― Price Index (CCPI), computed by theDepartment of Census and Statistics, increased to 7.8% YoY in February ―11 from 6.8%in January, mainly due to the increase in prices of most varieties of vegetable, coconut,
coconut oil, red onions and rice. This was primarily owing to both crop destruction andtransport dislocations that occurred due to the flood situation that prevailed in majorfood-producing areas in 2011.
Core inflation, which measures the price movement of non-food and non-energy itemsin the basket, decelerated further to 2.9% YoY and 5.5% on an annual average basis inFebruary ―11 from 3.6% and 6% respectively in January ―10.
As far as the fuel basket is concerned, higher crude prices have prompted downstreamcompanies to increase petrol prices by LKR 5. In January, the government reduced theimport duty on petrol from LKR 15 to LKR 5. The increase in fuel price would certainlyelevate the cost of living, but so would the duty reduction; while the former woulddirectly contribute to the rise in cost of living, the latter would cause a cost surge
indirectly through reduction in tax revenue. In short, inflation is here to stay!
Low risk of demand/supply side inflationWe see no immediate signs of demand-side inflation as capacity utilisation rates remaincomfortable. The country―s risk of supply-side inflation is also not that significant—thegovernment might need to intervene with a support mechanism such as tariff reductionson imports to offset supply-side inflation if any.
Fig 25 - Inflation trends in Sri Lanka
(5)05
101520253035
404550
M a y - 0 5
A u g - 0 5
N o v - 0 5
F e b - 0 6
M a y - 0 6
A u g - 0 6
N o v - 0 6
F e b - 0 7
M a y - 0 7
A u g - 0 7
N o v - 0 7
F e b - 0 8
M a y - 0 8
A u g - 0 8
N o v - 0 8
F e b - 0 9
M a y - 0 9
A u g - 0 9
N o v - 0 9
F e b - 1 0
M a y - 1 0
A u g - 1 0
N o v - 1 0
F e b - 1 1
Consumer Price Index Food Inflation(% YoY)
Source: CBSL, RCML Research
We expect inflation to reach 8% by theyear-end
Comfortable utilisation rates lower risk
of demand-side inflation
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Sri Lanka Economic Outlook 06 April 2011
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Money and Banking
Navigating structural economic shifts
Central Bank of Sri Lanka (CBSL) is responsible for planning and execution of monetarypolicy in the country. The vast structural changes now taking place in the economycould result in significant fluctuations in financial flows and changes in financial habitsof people as well as shifts in the velocity of money and money multiplier. In our view,CBSL monetary policy action going forward will be aimed at curbing recent appreciationin the Sri Lankan rupee (LKR), containing demand-side pressures and taming inflation.
Policy rate hikes expected
In its January policy meet, CBSL cut the repo and reverse repo rates by 25bps and 50bpsrespectively, while maintaining the status quo during its February meet. Inflationaccelerated at the end of last year even as the economic upswing is set to stay strong.Despite this backdrop, CBSL anticipates that food price pressures will ease in comingmonths. However, with the MENA unrest, crude remaining above US$ 110/bbl and the
Japanese calamity, we believe inflation is unlikely to fall significantly in 2011.Accordingly, we expect the repo rate to eventually move up by 50bps in 2011.
Pick up in credit growthCBSL has enforced an interest rate ceiling of 14% on home loans and 24% p.a. on creditcard advances. The banks reduced lending rates by an average of 2% during 2010 inaddition to a 2.7% cut in 2009. This led to a late pickup in credit to ~20% in Q42010.We expect credit to the private sector to expand at ~16% in 2011, while the broadmoney and reserve money grows at ~15%.
CBSL monetary policy outlookIn our view, CBSL monetary policy action will be aimed at the following:
Curbing recent appreciation in the rupee: Sri Lanka still runs large external deficitsand, in contrast to the rest of Asia, is liberalising the capital account side of itsbalance of payments to attract more inflows.
Containing demand-side pressures: CBSL remains keen to foster rapid growth andbelieves that productivity improvements and increased investment in infrastructureprojects will, for some time to come, allay capacity constraints and contain anydemand-side pressures.
Taming inflation: Consumer price inflation has accelerated to 6.9% at the end of 2010. Food inflation has been a major cause of concern and the reduced importduties may help subdue inflation in the medium term.
Fig 26 - Monetary policy rates
6
7
8
9
10
11
12
A
u g - 0 3
F e b - 0 4
A
u g - 0 4
F e b - 0 5
A
u g - 0 5
J a n - 0 6
J u l - 0 6
J a n - 0 7
J u l - 0 7
J a n - 0 8
J u l - 0 8
J a n - 0 9
J u l - 0 9
J a n - 1 0
J u l - 1 0
J a n - 1 1
Statutory reserve ratio Repo Reverse repo(%)
Source: CBSL, RCML Research
Repo rate to eventually move up by
50bps in 2011
CBSL looking to curb recent rupee
appreciation and tame inflation
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Fig 27 - Call rate
0
5
10
15
20
25
30
35
40
45
J u l - 0 3
D e c - 0 3
J u n - 0 4
D e c - 0 4
J u n - 0 5
D e c - 0 5
J u n - 0 6
D e c - 0 6
J u n - 0 7
D e c - 0 7
J u n - 0 8
D e c - 0 8
J u n - 0 9
D e c - 0 9
J u n - 1 0
D e c - 1 0
(%)
Source: CBSL, RCML Research
Fig 28 - Interest rates on government securities
(%) Dec-08 Dec-09 Dec-10 Jan-11 Feb-11
1 Month T-bill 17.1 7.8 7.3 7.1 6.9
3 Month T-bill 17.9 7.9 7.3 7.1 7.1
6 Month T-bill 18.6 8.7 7.4 7.2 7.1
1 Year Bond 19.4 9.4 7.5 7.4 7.3
5 Year Bond 19.2 11.5 9.2 8.9 8.9
10 Year Bond 16.6 11.3 9.7 9.3 9.3
Source: Bloomberg, RCML Research
Improved investor confidence, high
liquidity and low inflation expectations
led to downward shift in yield curve
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14
External sector
Strong recovery
The island economy has a large diaspora living across the world—most of them left thecountry during the civil war. This explains the high remittances that the economyreceives. In 2009, remittances accounted for ~27% of all foreign exchange earnings,followed by textiles and garments at 26% and tea at 10%. To encourage remittances, thepayment of a bonus on interest earned on NRFC and RFC deposits was introduced lastyear. Further, the Parliament approved an amendment to the Inland Revenue Act toprovide tax concessions on foreign income and profits earned through providingservices to non-residents. We expect remittances to increase further from the currentlevel of 8% of GDP in the coming years.
Fig 29 - Net foreign investment in Sri Lanka
(0.4)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
(0.2)
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.41.6
2003 2004 2005 2006 2007 2008 2009
Direct investment Long term investmentPortfolio Investment Private investmentFinacial account balance (R)
(US$bn) (US$bn)
Source: Sri Lanka Govt., RCML Research
Exchange rate largely stable
The exchange rate of the Lankan Rupee (LKR) is determined by the market on a free-floatbasis. Over the last few months, the LKR has remained largely stable because of subdued FII (portfolio investment) activity. CBSL is determined to maintain internationalreserves at a comfortable level of ~5–6 months of imports. We expect the exchange rateto remain largely stable with a tendency to gently appreciate in the next few months.
Fig 30 - USD/LKR exchange rate
0
20
40
60
80
100
120
M a r - 9 1
M a r - 9 2
M a r - 9 3
M a r - 9 4
M a r - 9 5
M a r - 9 6
M a r - 9 7
M a r - 9 8
M a r - 9 9
M a r - 0 0
M a r - 0 1
M a r - 0 2
M a r - 0 3
M a r - 0 4
M a r - 0 5
M a r - 0 6
M a r - 0 7
M a r - 0 8
M a r - 0 9
M a r - 1 0
M a r - 1 1
USDLKR
Source: Bloomberg, RCML Research
Fig 31 - Foreign investment in stock markets
(10)
(5)
0
5
10
O c t - 0 6
M a r - 0 7
A u g - 0 7
J a n - 0 8
J u n - 0 8
N o v - 0 8
A p r - 0 9
S e p - 0 9
F e b - 1 0
J u l - 1 0
D e c - 1 0
(LKRbn)
Source: Sri Lanka Govt., RCML Research
Exodus during civil war now a source of
high remittances
Subdued FII activity has kept exchange
rate largely stable
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Fig 35 - Sector-wise foreign exchange earnings
Sector2008
(LKR mn)% share Sector
2009(LKR mn)
% share
Textiles & Garments 376,024 26.5 Private Foreign Remittances 382,818 26.6
Private Foreign Remittances 316,091 22.3 Textiles & Garments 376,146 26.2
Tea 137,600 9.7 Tea 136,171 9.5
Transportation services 108,430 7.6 Transportation Services 99,391 6.9
Rubber based products 58,671 4.1 Rubber based product 44,163 3.1
Tourism 37,094 2.6 Tourism 37,506 2.6
Minor Agriculture products 31,069 2.2 Computer & IT services 28,161 2
Petroleum products 27,551 1.9 Minor Agriculture Products 27,616 1.9
Computer & IT services 24,917 1.8 Petroleum Products 15,484 1.1
Others 302,118 21.3 Others 289,122 20.1
TOTAL 1,419,565 100 1,436,578 100
Source: Central Bank of Sri Lanka
Fig 36 - Debt as a percentage of GDP (%)
0
40
80
120
160
200
R u s s i a
C h i n a
S K o r e a
I n d o n e s i a
S A f r i c a
T h a i l a n d
A r g e n t i n a
M a l a y s i a
I n d i a U
S
B r a z i l
S p a i n
G e r m a n y
U K
S r i L a n k a
I t a l y
J a p a n
Source: Bloomberg, RCML Research
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Foreign trade
Promising exports despite challenges
Sri Lanka qualified for the GSP facility (general preferential scheme for sustainabledevelopment) for the period 2006–10, on account of compliance with internationalobligations on human rights, labour rights, good governance and environmental policy asper the GSP Regulation. The scheme provided access to 7,200 Sri Lankan products atzero duty into the European Union. Even though economic recovery in most developedmarkets like the US and EU has been sluggish, leading to lower consumption demand, SriLanka―s exports have increased over the last few months. Benevolent macroeconomicpolicies and progressive industry initiatives have aided growth. However, we believepolicymakers must encourage exports towards higher-growth regions/economies. Further,Sri Lanka must diversify its exports beyond garments and tea.
Diversification of export destinations key to growthPolicymakers in Sri Lanka must encourage and improve trade ties with economies that
are expected to exhibit faster growth on a sustainable basis. Currently, 59% of SriLankan exports have the US and Europe as destinations. Just 1% goes to China which islikely to remain the fastest growing economy in the next decade. Similarly, only 4% of total exports reach India, which is growing at 8–9%, and is likely to be among the topthree fastest growing large economies. Indeed, compared to other Asian countries whichdirect 35–40% of total exports to fellow Asian countries, Sri Lanka exports less than10%, even though Asia is likely to be the growth engine of the decade.
Fig 37 - Sri Lanka―s foreign trade
0
2
4
6
8
10
12
14
16
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
Exports Imports
(US$ bn)
Source: Sri Lanka Govt., RCML Research
Exports up a record 34% YoY in Dec ―10; imports up 31%Both exports and imports recorded their highest ever values in December ―10. Earningsfrom exports increased by 34% YoY to US$ 968mn. This is the highest monthly increasesince October ―04, reflecting substantial growth in some of the relatively newercategories of exports, such as boats, bicycles, electrical equipment, rubber products,petroleum products, food, beverages and tobacco.
Imports have been strong over the last couple of years in this consumption-ledeconomy. Demand for investment goods has been high, reflecting a rapid recovery of the economy post-war as well as extensive future expansion prospects. Tax/dutyreductions have supported increased demand for consumer goods. In December ―10,imports rose by 31% to US$ 1.43bn mainly due to higher imports of intermediate goods,
led by higher expenditure incurred on petroleum products. As a result, the trade deficitexpanded to US$ 5.2bn in 2010 compared to US$ 3.1bn in 2009.
Strong exports despite withdrawal of the GSP scheme and sluggish global
recovery
Less than 10% of Sri Lanka―s exports are
to Asia despite the region―s rapid
growth
Exports and imports hit peak levels in
December ―10
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Sri Lanka Economic Outlook 06 April 2011
19
Capital markets
On a roll
The Sri Lankan markets rebounded in 2010 on peace dividends, outpacing the rest of the world to grow at a record ~80%. The Colombo Stock Exchange (CSE), the country―sprimary bourse, is one of the most modern exchanges in South Asia, providing a fullyautomated trading platform. The CSE has 235 listed companies with a combined marketcapitalisation of US$ 22.5bn. The Colombo All Share Index (ASI) and Milanka PriceIndex (MPI) are the two principal stock indices of the CSE.
Fig 41 - MILANKA Index performance over the years
Source: Bloomberg, RCML Research
The MPI is composed of a select group of 25 stocks, a list which is reviewed eachquarter, as opposed to the API, which includes all of the ~235 stocks on the exchange.The consumer staples sector leads the pack with a weightage of ~30% in the index,followed by industrials (26%) and financials (25%). Over the last one year, consumerstaples and materials have been the outperformers with returns of 127% and 146%respectively; followed by financials in the ~90% range.
Fig 42 - MPI sector-wise performance
(% change) 1M 3M 6M 1YR
Consumer Staples (4) 18 22 127
Consumer Discretionary (6) (8) (7) (22)
Financials 1 (3) (8) 88
Energy 0 (2) (4) (3)
Materials 6 11 20 146
Industrials 2 2 (6) 62
Telecom (6) (10) (18) 51
Utilities 3 0 (20) 75
Total (1) 4 (0) 74
Source: Bloomberg, RCML Research
CSE the primary bourse with 235 listed
companies and market cap of
US$ 22.5bn
Stock markets up 80% in 2010 with
outperformance from consumer staples
and materials
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Fig 43 - MPI sector weightings
Consumer Staples30%
ConsumerDiscretionary
3%
Financials25%
Energy3%
Materials3%
Industrials26%
Telecom9%
Utilities1%
Source: Bloomberg, RCML Research
Foreign investment freely permittedForeign investment in the stock market is freely permitted except in the case of a fewcompanies where certain restrictions are imposed. Investment in shares in Sri Lanka andrepatriation of proceeds take place through Share Investment External Rupee Accounts(SIERA) opened with licenced commercial banks. Income from investments such asinterest, dividends and profit realised from such investments are not subject to exchangecontrol regulations by the Sri Lankan government.
Fig 44 - Foreign investment in stock markets
(10)
(5)
0
5
10
O c t - 0 6
D e c - 0 6
F e b - 0 7
A p r - 0 7
J u n - 0 7
A u g - 0 7
O c t - 0 7
D e c - 0 7
F e b - 0 8
A p r - 0 8
J u n - 0 8
A u g - 0 8
O c t - 0 8
D e c - 0 8
F e b - 0 9
A p r - 0 9
J u n - 0 9
A u g - 0 9
O c t - 0 9
D e c - 0 9
F e b - 1 0
A p r - 1 0
J u n - 1 0
A u g - 1 0
O c t - 1 0
D e c - 1 0
(LKR bn)
Source: Bloomberg, RCML Research
Fig 45 - MILANKA index – Price to earnings ratio
0
10
20
30
40
50
60
M a
y - 0 6
J u l - 0 6
S e
p - 0 6
N o
v - 0 6
J a
n - 0 7
M a
r - 0 7
M a
y - 0 7
J u l - 0 7
S e
p - 0 7
N o
v - 0 7
J a
n - 0 8
M a
r - 0 8
M a
y - 0 8
J u l - 0 8
S e
p - 0 8
N o
v - 0 8
J a
n - 0 9
M a
r - 0 9
M a
y - 0 9
J u l - 0 9
S e
p - 0 9
N o
v - 0 9
J a
n - 1 0
M a
r - 1 0
M a
y - 1 0
J u l - 1 0
S e
p - 1 0
N o
v - 1 0
J a
n - 1 1
M a
r - 1 1
Source: Bloomberg, RCML Research
Foreign investment in the stock market
largely unrestricted
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Fig 46 - Market performance of MPI constituents
CompanyBloombergticker
SectorMarket cap
(LKR mn)Index
wt.Trailing
P/EReturn %
3M avg.turnover
(LKR mn)
John Keells Holdings JKH SL Equity Industrials 186,468 17.5 31.8 4.0 (0.4) 59.8 95.8
Hatton National Bank HNB SL Equity Financials 124,173 11.7 15.2 (2.3) (4.5) 100.8 37.3
Bukit Darah BUKI SL Equity Consumer Staples 122,329 11.5 42.3 (10.2) 42.8 282.3 26.3
Commercial Bank of Ceylon COMB SL Equity Financials 95,651 9.0 17.8 2.4 0.0 84.9 2.1
Dialog Axiata DIAL SL Equity Telecom 86,324 8.1 17.7 (6.2) (10.2) 51.4 15.8
Ceylon Tobacco Co CTC SL Equity Consumer Staples 67,680 6.4 13.2 0.3 (1.0) 44.7 2.1
Distilleries Co of Sri Lanka DIST SL Equity Consumer Staples 56,970 5.4 25.6 3.8 8.3 60.9 41.5
Cargills Ceylon CARG SL Equity Consumer Staples 50,445 4.7 69.2 (4.1) 14.8 212.8 12.3
DFCC Bank DFCC SL Equity Financials 48,315 4.5 17.7 1.2 (9.3) 98.8 9.8
Hayleys HAYL SL Equity Industrials 29,250 2.7 16.2 0.2 14.5 68.6 36.3
Richard Pieris & Co RICH SL Equity Industrials 26,540 2.5 43.1 (2.8) 12.3 258.6 68.2
Environmental Resources Investment GREG SL Equity Cons. Discretionary 24,285 2.3 27.9 (6.7) (5.3) (33.1) 34.9
Chevron Lubricants Lanka LLUB SL Equity Energy 19,644 1.8 12.8 (0.3) (2.0) (5.6) 6.4
Colombo Dockyards DOCK SL Equity Industrials 17,931 1.7 8.2 (3.0) (6.4) (5.5) 11.4
Nations Trust Bank NTB SL Equity Financials 17,711 1.7 14.5 (2.9) (11.8) 124.2 10.6
Ceylinco Insurance Co CINS SL Equity Financials 14,600 1.4 28.1 26.3 78.0 216.0 52.6
Tokyo Cement Co Lanka TKYO SL Equity Materials 13,345 1.3 48.4 14.6 12.5 160.2 9.7
Overseas Realty Ceylon OSEA SL Equity Financials 12,568 1.2 17.4 (2.6) (9.1) (1.2) 2.7
CIC Holdings CIC SL Equity Materials 11,657 1.1 25.2 (3.0) 9.4 131.7 20.6
Seylan Bank SEYB SL Equity Financials 9,880 0.9 15.4 (2.9) (21.2) 60.8 9.3
Lanka IOC LIOC SL Equity Energy 9,745 0.9 N/A 1.7 (0.5) 3.1 2.1
Vallibel Power Erathna VPEL SL Equity Utilities 7,172 0.7 16.4 3.2 0.0 74.5 4.9
Ceylon Hotels Corp CHOT SL Equity Cons. Discretionary 5,498 0.5 N/A (7.5) (14.9) 20.8 1.1
Kelani Tyres TYRE SL Equity Cons. Discretionary 4,317 0.4 20 3.3 (10.5) 66.5 26.3
Touchwood Investments TWOD SL Equity Consumer Staples 1,753 0.2 3.6 0.8 (15.2) 27.8 7.2
Source: Bloomberg, RCML Research * Arranged in decreasing order of index weight
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Agriculture & Tourism
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Agriculture & Fisheries
Strong government support
The agriculture sector in Sri Lanka plays a vital role in the country―s economicdevelopment. At present, agriculture contributes ~13% to the country―s GDP andemploys ~33% of its workforce. Of the total cultivable land (2.9mn ha), paddy occupies40% while coconut, tea and rubber together account for 39%. Other crops include fieldcrops, horticulture and export crops. The government has recently formulated a newdevelopment vision highlighting the importance of agriculture to overall growth.
Fig 47 - Distribution of cultivated land used for agriculture
Tea12%
Rubber7%
Coconut20%
Paddy40%
Others21%
Source: Mahinda Chintana, RCML Research
Agri policy aims to relieve bottlenecks and raise output
At present, the agricultural sector faces a number of constraints including lowproductivity, slow technological innovation, inadequate credit flows, poor access tointernational markets and inadequate use of quality seeds and planting material. Toaddress these issues, the government―s agricultural policy aims at realising multiple goalsincluding:
Achieving food security
Ensuring higher and sustainable income for farmers
Ensuring remunerative prices for agricultural produce
Providing uninterrupted access to competitive markets both in Sri Lanka and abroad
Encouraging farm mechanisation
Expanding cultivation acreage
Reducing wastage in transit
Ensuring environmental conservation
Introducing efficient farm management techniques, and
Using high yielding seeds and improved water management.
Paddy cultivation the main source of
livelihood for 70% of Sri Lanka―s rural
population
Government―s agricultural policy aims
at easing productivity, technology and
credit constraints
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These measures are aimed at raising agricultural output significantly during the nextdecade, while maintaining its contribution to GDP at a satisfactory level. Accordingly,government support is expected in all major steps in the production cycle; fromcultivation to marketing in both domestic and international markets. We expect theagriculture sector to grow at an average of 7% over the next decade.
Fig 48 - Target investment in agricultural sector
0
10,000
20,000
30,000
40,000
50,000
60,000
2011 2013 2015 2017 2020
Public Private(LKR mn)
Source: Mahinda Chintana, RCML Research
Fig 49 - Target investment in fisheries sector
0
10,000
20,000
30,000
40,000
50,000
60,000
2011 2013 2015 2017 2020
Public Private(LKR mn)
Source: Mahinda Chintana, RCML Research
Large potential in fisheries industry
Sri Lanka―s strategic location (coastline stretching across 1,340km) offers large untappedpotential in the fisheries sector. This sector contributes ~1.2% to GDP and employs over650,000 people directly and indirectly. The fisheries sector has delivered a mutedperformance over the past few decades owing to low levels of modern technology, post-harvest losses and the unavailability of real time weather data. Now, however, thegovernment―s Fisheries Development Policy 2007–16 aims at exploiting the country―sfisheries and aquatic resources in a sustainable manner and encourages private sectorinvestment, while conserving the coastal environment. The government envisagesinvestment of ~LKR 50bn in the fisheries sector by 2020. We expect the sector to growat 10% YoY over the next decade.
Agri sector expected to grow at an
average of 7% over the next decade
Government envisages investment of
~LKR 50bn in the fisheries sector by
2020
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Tourism
Flourishing post-war
The last couple of years witnessed a dramatic transformation in Sri Lanka―s tourismindustry, a direct consequence of the return of peace to the island nation. In 2010, keytourism source countries such as the US, Japan, UK and other European countriesrelaxed their advisories for tourism travel to Sri Lanka. The US$ 300mn industry is nowforecast to grow at ~20% CAGR to US$ 1bn by 2015.
Fig 50 - Monthly tourist arrivals
0
10,000
20,000
30,000
40,00050,000
60,000
70,000
80,000
90,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 2010 2011
Source: Dept of tourism, RCML Research
Fig 51 - Tourist arrivals by country of residence
0
5000
10000
15000
20000
25000
30000
35000
North
America
Western
Europe
Eastern
Europe
Middle East East Asia South Asia Australasia
2010 2011
Source: Dept of tourism, RCML Research
Government thrust on tourismThe government is targeting US$ 1bn in annual tourism receipts by 2015. In order toachieve this, it has launched a series of marketing promotions over the past 12 monthsaimed at attracting foreign tourists. Steps are also being taken to improve tourisminfrastructure. A Malaysian company is to develop a US$ 100mn high-speed railwaytrack from Colombo―s Kollupitiya to the Bandaranaike International Airport.
Sharp rebound in Sri Lanka―s tourism industry post-war
Government targeting US$ 1bn in
annual tourism receipts by 2015
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Further, many hotel chains have announced expansion or renovation plans. InSeptember ―10, the Taj Hotels & Resorts announced its plan to expand operations in SriLanka. The Hong Kong-based Shangri-La chain of hotels is also looking to enter themarket. With peace taking root in the country, we believe the stage is set for severalyears of strong growth in tourism arrivals and revenues. We expect tourist arrivals to
grow at ~25% annually to 2mn by 2015.
Fig 52 - Tourist receipts
0
50
100
150
200
250
300
350
400
450
2001 2002 2003 2004 2005 2006 2007 2008 2009
Tourist receipts(US$ mn)
Source: Dept of tourism, RCML Research
Fig 53 - Employment in tourism sector
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Managerial Scientific &Professional
Technical Clerical Alliedand Supervisory
Manual & Operative
2007 2008 2009 2010
Source: Dept of tourism, RCML Research
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Sri Lanka Economics: A snapshot
Fig 54 - Current account balance
(12)
(10)
(8)
(6)
(4)
(2)
0
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 55 - Current account balance
(5)
0
5
10
15
20
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
Fig 56 - Foreign direct investment, net
0.0
0.5
1.0
1.5
2.0
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 57 - Foreign direct investment, net
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
Fig 58 - GDP per capita (current US$)
0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008 2009
(US$)
Source: WEO, RCML Research
Fig 59 - GDP per capita (current US$)
0
10,000
20,000
30,000
40,000
50,000
IndonesiaMalaysia India UnitedStates
ArgentinaSri Lanka
(US$)
Source: WEO, RCML Research
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Fig 60 - Gross domestic savings
02468
101214
161820
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 61 - Gross domestic savings
0
5
10
15
20
2530
35
40
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
Fig 62 - Highest marginal corporate tax rate
31
32
33
34
35
36
2004 2005 2006 2007 2008 2009
(%)
Source: WEO, RCML Research
Fig 63 - Highest marginal corporate tax rate
05
1015202530354045
Indonesia Malaysia India UnitedStates Argentina Sri Lanka
(%)
Source: WEO, RCML Research
Fig 64 - Market capitalisation
0
5
10
15
20
25
30
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 65 - Market capitalisation
0
20
40
60
80
100
120
140
160
Indonesia Ma laysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
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Fig 66 - Military expenditure
0
1
2
3
4
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 67 - Military expenditure
0
1
2
3
4
5
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
Fig 68 - Mobile cellular subscriptions
0
20
40
60
80
100
2004 2005 2006 2007 2008 2009
(per 100 people)
Source: WEO, RCML Research
Fig 69 - Mobile cellular subscriptions
0
20
40
60
80
100
120
140
Indonesia Ma laysia India UnitedStates Argentina Sri Lanka
(per 100 people)
Source: WEO, RCML Research
Fig 70 - Remittances
6
7
8
9
2004 2005 2006 2007 2008 2009
(% of GDP)
Source: WEO, RCML Research
Fig 71 - Remittances
0
2
4
6
8
10
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(% of GDP)
Source: WEO, RCML Research
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Fig 72 - Life expectancy at birth
50
55
60
65
70
75
80
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(years)
Source: WEO, RCML Research
Fig 73 - Birth rate
0
5
10
15
20
25
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(per 1000)
Source: WEO, RCML Research
Fig 74 - Age dependency ratio
40
45
50
55
60
Indonesia Malaysia India UnitedStates Argentina Sri Lanka
(%)
Source: WEO, RCML Research
Fig 75 - Rural population
0102030405060708090
Indonesia Malaysia India UnitedStates Argentina Sri Lanka
(% oftotalpopulation)
Source: WEO, RCML Research
Fig 76 - Ease of doing business index
0
20
40
60
80100
120
140
160
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
(1= mostbusiness friendly)
Source: WEO, RCML Research
Fig 77 - Total reserves in months of imports
0
2
4
6
8
10
12
Indonesia Malaysia India UnitedStates
Argentina Sri Lanka
( in months)
Source: WEO, RCML Research
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Sri Lanka Economic Outlook 06 April 2011
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Sri Lanka – Key economic indicators
INDICATORS 2007 2008 2009 2010E 2011F 2012F
GDPNominal GDP (US$ bn) 32.3 39.6 42.2 47.6 54.5 62.7
Real GDP by production (LKR bn)
GDP 2233 2366 2449 2645 2866 3125
Agriculture 266 286 295 315 331 349
Industry 635 673 701 760 825 902
Services 1332 1407 1453 1570 1710 1874
Real GDP growth (%) 6.8 6.0 3.5 8.0 8.3 9.1
Real GDP by production (% YoY)
Agriculture 3.4 7.5 3.1 7 5.0 5.4
Industry 7.6 5.9 4.2 8.4 8.5 9.4
Services 7.1 5.6 3.3 8 8.9 9.6
Real GDP (demand side) (%YoY)
Private final expenditure 20.9 28.4 0.6 18.2 19.0 20.0
Government final expenditure 21.1 30.6 19.3 26.5 18.0 19.0
Gross capital formation (ex valuables) 21.7 21.5 -2.6 18.0 18.0 20.0
Aggregate ratios (% of real GDP)
Consumption/GDP 82.4 86.1 82.0 86.1 88.3 90.7
Private consumption/GDP 67.2 70.0 64.3 65.7 69.8 71.8
Government consumption/ GDP 15.3 16.2 17.6 25.9 18.5 18.9
Investments/GDP 28.0 27.6 24.5 24.5 26.0 26.7
Fiscal aggregates (%GDP)
Govt budget deficit 6.9 7 9.9 8 6.8 6
External sector
Exports (US$ bn) 7.7 8.1 7.1 8.3 9.4 11.1
%YoY 11.4 6.1 (12.9) 17.2 13.3 18.1
Imports (US$ bn) 11.2 14.0 10.2 13.5 16.1 18.2
%YoY 8.9 25.4 (27.1) 32.3 19.3 13.0
Trade deficit (US$ bn) (3.5) (5.9) (3.1) (5.2) (6.7) (7.1)
Services (US$ bn) 0.2 0.4 0.4 0.4 0.6 1.0
Current transfers (US$ bn) 2.3 2.7 3.0 4.1 4.5 4.5
Current account deficit (US$ bn) (1.3) (3.8) (0.2) (0.7) (1.6) (1.6)
% to GDP (4.1) (9.5) (0.5) (2.3) (3.4) (3.2)
Inflation
CPI (Avg) 15.8 22.6 3.4 5.9 7.0 7.0
Interest and exchange rates (EOP)
Reverse repo rate 12 12 9.75 8.75 9 9.25
Repo rate 10.5 10.5 7.5 7.25 7.75 8.25
Cash reserve ratio 10 7.75 7 7 8 9
LKR/USD 108.7 113.0 114.4 110.9 109.0 108.0
Source: CBSL, RCML Research
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Sri Lanka Economic Outlook 06 April 2011
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Telecom
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Telecom Sector Report 06 April 2011
33
Rumit Dugar Udit Garg
(91-22) 6766 3444 (91-22) 6766 3445
[email protected] [email protected]
Rapid growth in telecom services in recent years,
leading to 80% market penetration
Incremental growth to come from data services as
voice segment reaches saturation point
Telecom
Maturing voice market
The telecom sector in Sri Lanka has seen rapid growth over the past few years,leading to 80% market penetration. The overall Sri Lankan wireless revenuesare at 2% of GDP. The telecom space is a 5-player market with an addressablepopulation of 22mn. Dialog Axiata is the incumbent market leader with ~41%subscriber market share and 55% revenue share.
Regulatory regime supportive: Following Bharti Airtel―s entry into Sri Lanka, thecompetitive intensity in the country―s telecom sector increased, triggering a fiercetariff war. The regulatory body then intervened and brought in tariff floors in orderto protect the existing players. We believe the telecom industry in Sri Lanka willincrementally start to enjoy a favourable regulatory regime with the telecomauthority positively disposed towards industry health.
Data services to lead the way: With the wireless market largely penetrated,subscriber growth has started to wane and, as such, growth in voice services willstart to weaken. In our view, data services will be the growth driver goingforward as broadband penetration remains low. The government has given out3G spectrum to three players, viz. Dialog, Mobitel and more recently to Bharti.This apart, with rising PC penetration, broadband usage will also rise and drivedata consumption further. In all, we see revenue growth moderating for thesector given a maturing voice segment. Incremental growth should largely bedriven by (1) some elasticity induced by lower effective tariffs, and (2) growthfrom higher data consumption due to 3G.
Fig 1 - Key telecom metrics in Sri Lanka
Total Population (mn) 22
Wireless revenues as % of GDP 2%
Fixed Line
Total number of Fixed Phones 3,548,921
Teledensity (Fixed Phones per 100 inhabitants) 17
Teledensity (Fixed) in Colombo District 39
Wireless
Number of Cellular Mobile Subscribers 16,305,417
Mobile Subscription per 100 people 79
Internet and Broadband
Internet & Email Subscribers (Fixed) – June 2010 260,000*
Mobile Internet Broadband Subscribers – June 2010 120,000*
Source: Telecommunications regulatory commission of Sri Lanka * Provisional
Fig 2 - Sri Lanka: Wireless spectrum allocation
(MHz) 2G spectrum (Paired bands) 3G spectrum
900MHz 1800MHz Paired Unpaired
Dialog 7.5 15 10 5
Mobitel 7.5 7.5 10 5
Tigo (Etisalat) 7.5 6 0 0
Hutch 7.5 7.5 0 0
Airtel 5 7.5 10 0
Source: Telecommunications regulatory commission of Sri Lanka
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Telecom Sector Update 06 April 2011
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Fig 78 - Sri Lanka: Wireless market snapshot (as of Q4CY10)
Source: Company,* Net adds and subscribe numbers are as of Q3CY10
387 640 850 612 754
6,716
3,8403,100
1,641 1,317
Net adds'000
Subscribers '000
6%
20%
38%
60% 134%
Dialog Mobitel Tigo Airtel Hutch
Ownership Axiata–83.3%
Others–16.7%
Sri Lanka Telecom
100.0%
Etisalat
100.0%
Bharti Airtel
100.0%
Hutchison
Telecommunications
100.0%
Market position #1 #2 #3 #4 #5
Sim Market share (%) 41 23 19 9 8
Revenue share (%) 55 31 13 n.a 1
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Fig 86 - Direct cost changes with effect from July 2010
Current Previous Comments
Telecom Dev charge(US$/min)
0.015 0.038All operators have to pay a TDC levy to thegovernment for international minutes terminated;Cost is shown under Levies (direct costs)
Incoming access
local charge(US$/min)
0.055 0.052
Incoming Local Access Charge (ILAC), which is
paid to the operator on whose network theinternational call is terminated, was increased
Internationalinterconnect fee(US$/min)
0.500* 0.016International interconnect fee was reduced fromUS$ 0.0155 to LKR 0.50 per minute
Source: Telecommunications regulatory commission of Sri Lanka,* Amount in LKR
Fig 87 - Changes to Indirect tax structure proposed in the budget
Old structure New structure Comments
Telecom Levy 20.0%The government introduced atelecommunications levy of 20%, removingmost of the old taxes
Current Cess 0.03% The current cess and investment cess (1%) was
replaced by a flat 2% licence fee which will becharged on gross revenue, which the operatorsdecided to pass onto customers.
License fee 2.0%
VAT 12.0%The telecom sector is now exempt from payingVAT
Other Indirect taxes 15.0%
Effective 31.3% 22.4%
IDD levy LKR 2.0A new levy of LKR 2/min has been imposed onoutgoing IDD calls
Source: Company, Sri Lanka budget
Peaking capex intensity and higher CFO leading to FCF generation
We estimate that Dialog will generate ~LKR 9bn–10bn of FCF in 2011 and 2012 as itbenefits from higher cash from operations, largely due to EBITDA margin improvementsover the past two years and a lower capital intensity of 15 –20% of sales compared to25%+ over the past few years. The high FCF generation should help improve leverageratios and enable the company to pay dividends going forward.
Fig 88 - Dialog free cash flows
(LKR mn) 2009 2010 2011E 2012E
CFO 6,956 14,717 16,768 18,087
Capex 6,443 6,790 8,000 8,000
FCF 513.0 513.0 7,927.8 8,767.9
Capex / Sales 18% 16% 18% 17%
Debt 31,964 25,505 22,721 19,009
Net Debt/Equity 0.7 0.5 0.4 0.2
Net Debt/EBITDA 3.2 1.3 0.9 0.6
Source: Company, RCML Research. Note: Calculations above are derived from the reported balance sheet.
High FCF should help improve leverage
ratios and allow for dividend payouts
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Valuation
Initiate with HOLDWe initiate coverage on Dialog with a HOLD rating and a DCF-derived December ―11price target of LKR 12.5, offering an upside of 18% from current levels. Our target priceimplies a 2011E/2012E EV/EBITDA of 6.8x/6.0x and P/E of 15x/13x. With Dialog likely
to start generating stable FCF going forward, we believe DCF is an appropriate valuationmethodology for the company.
As Dialog begins to produce significant cash flows amid a moderating growthenvironment, we believe the stock will turn increasingly defensive in nature andinvestors would increasingly look at dividend yields going forward. The companyannounced a dividend of LKR0.20 for 2010, implying a payout of 34% post preferreddividend payout. According to our discussions with the management, dividends arederived based on free cash flows for the year and deleveraging for the year. We modelfor a 40% payout from FCF which implies a dividend yield of 4% for 2011 based on ourcurrent target price.
Fig 89 - Dialog DCF valuation
Key assumptions WACC assumptions
10 year Revenue CAGR (FY10-20E) 7% Cost of equity = 15.8%
10 year EBITDA CAGR (FY10-20E) 13% Risk free rate = 9.8%
10 year NOPAT CAGR (FY10-20E) 13% Beta = 1.00
EBITDA margin (FY10; FY20) 37% , 39% Equity risk premium = 6.0%
NOPAT margin (FY10; FY20) 13% , 26% Cost of debt = 10.0%
ROIC (FY10; FY20) 10% , 16% Tax = 28.0%
Terminal assumptions Debt/capital = 20.0%
Terminal Revenue growth Rate % 3% Equity/capital = 80.0%
Terminal EBITDA Margin 39% WACC = 14.1%
Terminal NOPAT Margin 26% DCF output (LKR mn)
Terminal ROIC 50% Current EV 115,602
Long Term Capex / Sales 10% Net debt 20,072
Terminal value as % of EV 37% Current Equity value 95,531
Implied 2021E exit FCF multiple (x) 9.0 Current equity value/share 11.7
Implied 2021E exit EBITDA multiple (x) 6.2 Dec -11 equity value/share 12.5
Source: Company
Our DCF target price of LKR 12.5
implies a 2011E/2012E EV/EBITDA of
6.8x/6.0x
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Fig 90 - Asia valuations
Asian Valuation Comps Bloomberg Ticker Currency Price Market cap EV/EBITDA P/E2yr
EBITDA
In LC (US$ mn) 2011 2012 2011 2012 CAGR
Developed Wireless
Hong Kong
SmarTone Telecom Holding Ltd 315 HK Equity HKD 12.58 $1,660 6.6 x 5.4 x 22.7 x 18.6 x 7%
Korea
LG Uplus Corp 032640 KS Equity KRW 6240 $2,961 2.1 x 1.9 x 9.5 x 7.6 x -5%
SK Telecom Co Ltd 017670 KS Equity KRW 165000 $12,282 3.4 x 3.3 x 7.9 x 7.1 x 6%
Singapore
StarHub Ltd STH SP Equity SGD 2.77 $3,769 8.0 x 7.5 x 15.4 x 14.4 x 8%
Taiwan
Far EasTone Telecomm Co Ltd 4904 TT Equity TWD 44 $4,904 6.5 x 6.3 x 15.8 x 14.7 x 2%
Taiwan Mobile Co Ltd 3045 TT Equity TWD 70 $9,122 10.3 x 10.1 x 14.7 x 14.0 x 2%
Developed Wireless Average $5,783 6.2 x 5.8 x 14.3 x 12.7 x
Asia Emerging Wireless
China
China Unicom Hong Kong Ltd 762 HK Equity HKD 14 $41,467 5.1 x 4.4 x 40.4 x 23.3 x 11%
China Mobile Ltd 941 HK Equity HKD 74 $191,028 4.0 x 3.9 x 10.2 x 10.0 x 4%
India
Bharti Airtel Ltd BHARTI IB Equity INR 362 $31,065 9.9 x 7.3 x 21.7 x 16.4 x 26%
Idea Cellular Ltd IDEA IB Equity INR 70 $5,214 9.3 x 6.8 x 26.8 x 24.6 x 22%
Indonesia
Indosat Tbk PT ISAT IJ Equity IDR 5200 $3,267 4.8 x 4.4 x 20.7 x 14.5 x 10%
XL Axiata Tbk PT EXCL IJ Equity IDR 5800 $5,705 5.8 x 5.3 x 12.7 x 10.8 x 13%
MalaysiaDiGi.Com Bhd DIGI MK Equity MYR 29 $7,402 8.9 x 8.4 x 17.5 x 16.4 x 5%
Philippines
Globe Telecom Inc GLO PM Equity PHP 837 $2,564 4.6 x 4.5 x 12.0 x 11.8 x 1%
Thailand
Advanced Info Service PCL ADVANC TB Equity THB 87 $8,525 5.3 x 5.2 x 11.8 x 11.1 x 2%
Total Access Communication PCL DTAC TB Equity THB 48 $3,760 4.4 x 4.6 x 11.6 x 12.4 x -2%
Sri Lanka
Dialog Axiata PLC DIAL SL Equity LKR 10.6 $782 5.9 x 5.2 x 12.9 x 10.7 x 11%
Asia Emerging Wireless average $18,026 6.4 x 5.5 x 15.7 x 13.4 x
Source: Bloomberg, RCML Research
Key risks
Tariff floors being continuously revised downwards
In our view, margins could come under pressure if tariff floors are steadily reviseddownwards as high competition in the sector means that operators will immediatelymove to the lowest tariff permissible, thus impacting growth. As such, with growth in thesector beginning to wane, any operating leverage would be difficult to achieve andmargin improvements would have to be supported by network upgrades and tighteroperational efficiencies.
Lower tariff floors would result in
further price wars
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Regulatory risksThe regulator in Sri Lanka controls the industry structure and tariffs and hence can alterthe sector―s competitive landscape. Besides this, the sector faces significant costs in theform of taxes and levies imposed by the government. Although the government issupportive of the industry and it enjoys various tax benefits, including lower effectivecorporate tax rates, lower indirect taxes on telecom services and tax exemptions on
telecom equipment, any unfavourable changes in tax structure could have some impacton the sector.
Company profile
Dialog was incorporated in 1993 and went public in May ―05. The company―s shares arelisted on the Colombo stock exchange. Dialog offers a wide range of telecommunicationservices including cellular telephony, fixed landline, broadband, and television services,amongst others. It is the largest mobile phone service provider in Sri Lanka with ~55%market share by revenue.
Fig 91 - Revenue split by divisions
CellularOperations, 6
8%Global, 23%
FixedTelephony, 4
%
Transmissionand Infra, 1%
Entertainmentand
Media, 4%
Source: Company , *As per Q4CY10
Fig 92 - Segmental profit split
85% 80% 71% 67%
67% 57% 56% 59%
-51% -36% -26% -26%
-100%
-50%
0%
50%
100%
150%
200%
1QCY10 2QCY10 3QCY10 4QCY10
Others Global Cellu lar Operat ions
Source: Company
Fig 93 - Shareholding pattern
Axiata Group
BHD
83%
Dialog Telecom
Emp. ESOS
2%
Others
15%
Source: Bloomberg
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Board of directors, auditor and key managementThe company has a small board of six directors, including three independent members.The three non-independent members are representatives from the Axiata group. Theauditors are PricewaterhouseCoopers.
Fig 94 - Composition of board of directors
Director Type Designation Profile
Mr. Datuk AzzatKamaluddin
Non-independent Chairman
Mr. Kamaluddin is an Independent Non-Executive Director of Axiata Group Bhd.He is a lawyer by profession and graduated from the University of Cambridge, UK,with degrees in Law and International Law. At present, he is director of severalpublic listed and private limited companies.
Dr. Shridhir SariputtaHansa Wijayasuriya
Non-independent Group CEO
Dr. Wijayasuriya joined the company in 1994 as a member of the foundingmanagement team, and has functioned in the capacity of Chief Executive of DialogAxiata since 1997. He is also the Group Chief Operating Officer of Axiata GroupBhd. Dr. Wijayasuriya holds a degree in Electrical and Electronic Engineering fromthe University of Cambridge, UK; a PhD in Digital Mobile Communications fromthe University of Bristol, UK; and an MBA from the University of Warwick, UK.
Mr. Azwan KhanOsman Khan
Non-independentGroup CSO
(Axiata group
Bhd.)
Mr. Khan is the Group Chief Strategy Officer of Axiata Group Bhd. He is anengineering graduate (First-Class Honours) from the Imperial College, University of London, with a broad mix of telecommunications and non-telecommunications
experience across a range of companies. Mr. Khan is also an active board memberin several companies.
Mr. Moksevi RasinghPrelis
IndependentMr. Prelis has 27 years of experience in the banking sector, of which 21 years werein the capacity of CEO/Director of the DFCC Bank and the Nations Trust Bank.
Mr. Mohamed VazirMuhsin
Independent
Mr. Muhsin―s experience includes working as a Strategic Management Consultantand Director on international corporate and foundation boards. Prior to hisretirement as the Vice President & Chief Information Officer at the World Bank,Mr. Muhsin was responsible for aligning information technology with theorganisation―s business strategy.
Mr. JayanthaDhanapala
Independent
Mr. Dhanapala was a career diplomat in the Sri Lanka Foreign Service and theUnited Nations. He was Ambassador of Sri Lanka and Permanent Representative tothe UN in Geneva (1984–87), Ambassador of Sri Lanka to the US (1995–97) andUN Under-Secretary-General (1998–2003).
Source: Company
Fig 95 - Key management
Name Designation Profile
Dr. Shridhir SariputtaHansa Wijayasuriya
Director / Group Chief Executive
Dr. Wijayasuriya joined the company in 1994 as a member of the foundingmanagement team, and has functioned in the capacity of Chief Executive of DialogAxiata since 1997. He is also the Group Chief Operating Officer of Axiata GroupBhd. Dr. Wijayasuriya holds a degree in Electrical and Electronic Engineering fromthe University of Cambridge, UK; a PhD in Digital Mobile Communications fromthe University of Bristol, UK; and an MBA from the University of Warwick, UK.
Mr. Upali GajanaikeChief Executive Officer – DialogTele-Infrastructures
Mr. Gajanaike is the CEO of Dialog Tele-infrastructures. He has over 15 years of experience in telecommunications and has been with the company since itsinception. Mr. Gajanaike holds a degree in Electronic and TelecommunicationsEngineering from University of Moratuwa and an MBA from the University of Colombo.
Mr. Supun Weerasinghe Group Chief Operating Officer
Mr. Weerasinghe holds a Bachelor of Science degree in Accountancy and FinancialManagement from the University of Sri Jayewardenepura, Sri Lanka and an MBA(Distinction) from the University of Western Sydney, Australia. He is an AssociateMember of the Chartered Institute of Management Accountants, UK.
Ms. Sandra De Zoysa Group Chief Customer OfficerMs. De Zoysa is the Group―s Chief Customer Officer; she has over 20 years of experience in customer service management and is a certified analyst, auditor andcustomer service manager of the Asia Pacific consumer service consortium.
Mr. Nushad Perera Group Chief Marketing Officer
Mr. Perera has over 10 years of work experience with Dialog and more than 25years of marketing and sales experience in the ICT and marketing communicationindustry. He holds an MBA (Marketing) from the University of Leicester, as well as aDiploma in Marketing Communication from Charted Institute Of Marketing (CIM).
Mr. Pradeep De Almeida Group Chief Technology Officer
Mr. De Almeida graduated with a BSc. in Electronic and TelecommunicationEngineering and is a member of the Institution of Engineers, Sri Lanka. He has over
10 years of experience and has also gained international exposure at overseassubsidiaries and business ventures of Telekom Malaysia in India and Africa.
Source: Company
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Consolidated financials
Profit and Loss statement Balance sheet
Y/E Dec (LKR mn) CY09 CY10 CY11E CY12ERevenues 36,250 41,423 45,171 48,068
Growth (%) - 14.3 9.0 6.4
EBITDA 8,319 15,085 17,260 18,746
Growth (%) - 81.3 14.4 8.6
Depreciation & amortisation 18,351 9,754 9,930 10,056
EBIT (10,032) 5,331 7,331 8,690
Growth (%) - (153.1) 37.5 18.5
Interest (1,747) 125 47 175
Other income - - - -
EBT (11,779) 5,455 7,378 8,865
Income taxes 428 490 664 798
Effective tax rate (%) (3.6) 9.0 9.0 9.0
Extraordinary items - - - -
Min into / inc from associates - - - -
Reported net income (12,207) 4,965 6,714 8,067
Adjustments - - - -
Adjusted net income (12,207) 4,965 6,714 8,067
Growth (%) NA 35.2 20.2
Shares outstanding (mn) 8,143.8 8,143.8 8,143.8 8,143.8
FDEPS (LKR) (adj) (1.5) 0.61 0.82 0.99
Growth (%) - NA 35.2 20.2
DPS (LKR) - 0.2 0.4 0.5
Y/E Dec (LKR mn) CY09 CY10 CY11E CY12ECash and cash eq 5,295 5,434 6,464 7,583
Accounts receivable 9,646 9,629 10,382 10,991
Inventories 211 271 292 310
Other current assets 0 0 0 0
Investments 29 31 31 31
Gross fixed assets 0 0 0 0
Net fixed assets 55,979 53,014 51,085 49,029
CWIP 0 0 0 0
Intangible assets 3,847 3,757 3,757 3,757
Deferred tax assets, net - - - -
Other assets - - - -
Total assets 75,007 72,136 72,011 71,700
Accounts payable - - - -
Other current liabilities 12,668 12,094 13,041 13,805
Provisions 2 14 14 14
Debt funds 31,964 25,505 22,721 19,009
Other liabilities 2,264 2,909 2,909 2,909
Equity capital 31,806 30,556 29,306 28,056
Reserves & surplus (3,697) 1,057 4,020 7,907
Shareholder's funds 28,109 31,613 33,326 35,963
Total liabilities 75,007 72,136 72,011 71,700
BVPS (LKR) 3.5 3.9 4.1 4.4
Cash flow statement Financial ratios Y/E Dec (LKR mn) CY09 CY10 CY11E CY12E
Net income + Depreciation 6,148 15,292 17,308 18,921
Non-cash adjustments 659 42 (711) (972)
Changes in working capital 149 (617) 172 139
Cash flow from operations 6,956 14,717 16,768 18,087
Capital expenditure (6,443) (6,790) (8,000) (8,000)
Change in investments 65 88 0 0
Other investing cash flow (948) 125 47 175
Cash flow from investing (7,326) (6,577) (7,953) (7,825)
Issue of equity (1,071) 461 (1,250) (1,250)
Issue/repay debt (8,630) (6,459) (2,784) (3,713)
Dividends paid 0 (2,004) (3,751) (4,180)
Other financing cash flow 0 0 0 0
Change in cash & cash eq (10,071) 139 1,030 1,120
Closing cash & cash eq (4,776) 5,434 6,464 7,583
Y/E Dec CY09 CY10 CY11E CY12E
Profitability & Return ratios (%)
EBITDA margin 22.9 36.4 38.2 39.0
EBIT margin (27.7) 12.9 16.2 18.1
Net profit margin (33.7) 12.0 14.9 16.8
ROE (43.4) 16.6 20.7 23.3
ROCE (18.9) 8.9 12.5 15.1
Working Capital & Liquidity ratios
Receivables (days) 97 85 84 83
Inventory (days) 2 2 2 2
Payables (days) 128 107 105 105
Current ratio (x) 1.2 1.3 1.3 1.4
Quick ratio (x) 1.2 1.2 1.3 1.3
Turnover & Leverage ratios (x)
Gross asset turnover
Total asset turnover 0.6 0.6 0.7
Interest coverage ratio
Adjusted debt/equity 1.1 0.8 0.7 0.5
Valuation ratios (x)
EV/Sales 3.1 2.7 2.5 2.4
EV/EBITDA 13.6 7.1 5.9 5.2
P/E - 17.4 12.9 10.7P/BV 3.1 2.7 2.6 2.4
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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DuPont analysis
(%) CY09 CY10E CY11E CY12E
Tax burden (Net income/PBT) 103.6 91.0 91.0 91.0
Interest burden (PBT/EBIT) 117.4 102.3 100.6 102.0
EBIT margin (EBIT/Revenues) (27.7) 12.9 16.2 18.1
Asset turnover (Revenues/Avg TA) 0.0 0.6 0.6 0.7
Leverage (Avg TA/Avg equtiy) 2.6 2.5 2.2 2.1
Return on equity (43.4) 16.6 20.7 23.3
Company profile
Dialog offers a wide range of telecommunication services including
cellular telephony, fixed landline, broadband, and television
services, amongst others. It is the largest mobile phone service
provider in Sri Lanka with ~55% market share by revenue.
Stock performance
3
6
9
12
15
Jan-09 Jun-09 Nov-09 May-10 Oct-10 Apr-11
Recommendation history
Date Event Reco price Tgt price Reco
6-Apr-11 Initiating Coverage 10.6 12.5 Hold
l Hold
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Dialog Axiata Plc Initiating Coverage 06 April 2011
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Banking
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Banking Sector Report 06 April 2011
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Ishank Kumar Siddharth Teli Nikhil Rungta
(91-22) 6766 3467 (91-22) 6766 3463 (91-22) 6766 3451
[email protected] [email protected] [email protected]
Robust GDP growth to support 20%+ CAGR in loan
growth over 2010–12
Improving macro fundamentals and strong earnings
growth support our positive outlook
Banking
Good times ahead
We believe Sri Lanka―s financial sector is well positioned to leverage on growthopportunities emerging after an end to the country―s long-running civil war. Inour view, Sri Lanka has a sound financial system with a diversified loan portfolio,robust interest margins, a strong liability profile and comfortable capital positions.While asset quality did deteriorate sharply in 2008 and 2009 due to escalation of the war and the global financial crisis, we note that NPAs have declinedsignificantly in 2010 as economic growth gathered steam. Credit offtake is also setto improve with robust GDP growth and higher operating leverage, while thegovernment―s proposal to slash taxes would bolster earnings and ROE.
We initiate coverage on two large private banks—Commercial Bank of Ceylon(COMB) and Hatton National Bank (HNB)—with BUY recommendations. WhileCOMB and HNB have re-rated sharply in the last two years, we are positive onthese banks as we believe that strong earnings growth and improving macrofundamentals would drive stock performance.
Loan offtake to remain strong fuelled by robust GDP growth: Sri Lanka―s financial services industry is largely dominated by the banking sector, with totalassets of banks (both licenced commercial and specialised banks) constituting~62% of the assets of financial institutions. Moreover, the top 6 banks accountfor ~70% of cumulative banking assets. While loan growth was muted in 2009, ithas picked up strongly in 2010 and we expect a 20%+ CAGR over 2010 –12,underpinned by robust investment demand, falling interest rates and risingpersonal incomes. We note that the bank credit-to-GDP ratio remains low at
~30% as against ~50% in India.
NIMs strong due to high CASA: The sector―s liability profile remains strong withCASA funds contributing ~50% of the total deposits for large banks. This coupledwith stronger yields resulted in high NIMs of ~4.5% for the banking system in2009. Margins have remained stable in 2010 supported by an improvement inloan-to-deposit ratio (LDR). However, with the cost of deposits bottoming out andLDRs already at ~80%, we believe margins could come under pressure (albeitfrom a high base). We also note that the government has asked banks to depositsavings arising from lower taxes in a low-yielding investment fund, which couldfurther strain NIMs.
Higher operating leverage, better asset quality to bolster earnings: We expect
the cost-to-income ratio for banks to decline in 2011–12 as operating leverageimproves. Asset quality deteriorated significantly in 2008 and 2009 with GNPAincreasing from ~5.2% in December ―07 to ~9% in 2009 due to the financialcrisis, escalation of war efforts and a spike in interest rates in 2008. However,with a revival in global and Sri Lankan economies, asset quality has started toimprove and GNPA has climbed down to ~6%. Lower incremental slippages andhigher recoveries have boosted earnings growth of banks in the last few quarters.
Valuations – not cheap but earnings uptick to buoy performance: The Banking& Financial Index (BFI) has risen by more than 400% since April ―09. As a result,valuations of banking stocks are no longer cheap. COMB/HNB are currentlytrading at 2.4x/2.7x BV (adjusted for revaluation reserve) and 11.3x/11.9x EPS on2012E. However, we believe that improving fundamentals of the Sri Lankan
economy and strong earnings growth would drive stock performance. We have aBUY rating on both banks with target prices of LKR 330/ LKR 300.
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Banking Sector Report 06 April 2011
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Assets book well diversified
Sri Lanka―s banking system comprises licensed commercial banks (LCB) and licensedspecialised banks (LSB), which number in at 22 and 9 respectively. Out of the 22 LCBs,two banks, namely Bank of Ceylon (BOC) and People―s Bank are state-owned andaccount for ~35% of total banking assets (2009). Apart from these state-owned players,
there are 9 private sector and 11 foreign banks. In the private space, 3 large banks(COMB, HNB and Sampath Bank) constitute ~25% of the country―s total banking assets.Among LSBs, National Savings Bank (NSB) is the largest in Sri Lanka and accounts for~71% of the total assets of LSBs and 12% of total banking assets (2009).
Fig 97 - Composition of banking sector (as on 30 September 2010)
Type of Bank # Banks# Main
branches
Total assets
LKR bn % Share
Licensed Commercial Banks 22 1,408 2,809 83.6
- State Banks 2 640 1,156 34.4
- Private domestic banks 9 722 1,248 37.1
- Foreign banks 11 46 405 12.0Licensed Specialised Banks 9 468 553 16.4
- State Banks 6 405 470 14.0
- Private Banks 3 63 83 2.5
Banking Industry 31 1,876 3,362 100.0
Source: CBSL, RCML Research
As per CBSL―s regulation, LCBs are required to maintain ~20% of their net time anddemand liabilities in the form of government securities. As on 31 December 2009, thetotal investment in government securities far exceeded the regulatory requirement due tomuted advances growth and surplus liquidity in the system (which banks parked ingovernment securities). However, with the pick-up in credit demand in 2010, the loan-to-deposit ratio (LDR) has improved across banks.
Fig 98 - Composition of assets – LCBs (As on 31 Dec 2009)
GovtSecurities
25%
Loans andadvances
55%
Foreignbalances
6%
Other assets14%
Source: CBSL
Fig 99 - Sources of funds – LCBs (As on 31 Dec 2009)
Capital andreserves
8%
Rupeedeposits
57%
Foreigncurrencydeposits
17%
Rupeeborrowings
9%
Foreignborrowings
4%
Otherliabilities
5%
Source: CBSL
The loan book of the banking system is also well diversified. Exposure to tradingactivities made up ~26% of total advances in 2009 followed by the consumption,housing, agricultural and industrial sectors. About 47% of total advances have amaturity period of more than one year; however, we note that the CASA proportion of large banks (except NSB) is robust at ~50%.
3 large private banks including COMB
and HNB constitute ~25% of total
banking assets
Overall loan book well dispersed across
sectors
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Banking Sector Report 06 April 2011
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Fig 103 - Credit demand vs real GDP growth
(5)
0
5
10
15
2025
30
35
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
9 M 0 9
9 M 1 0
Advances growth (%) GDP growth (%)
Source: CBSL
Fig 104 - Strong GDP growth to boost credit demand
0
2
4
6
8
10
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1 E
2 0 1 2 E
(%) Real GDP growth
Source: CBSL
...and declining interest ratesWe note that interest rates for the banking system have declined in the last 18 monthswhich would boost consumption and investment. To encourage investment in theeconomy, CBSL has reduced repo/reverse repo rates by 3.5% since October ―08 to7%/8.5%. The central bank has also lowered the statutory reserve ratio (proportion of net time and demand liability required to be parked with CBSL) by 3% to 7%. Thiscoupled with lower inflation has resulted in a significant decline in lending and depositrates. As per data released by CBSL, the weighted average prime lending rate of commercial banks has declined from 19.2% at the end of 2008 to 10% at the end of September ―10. The weighted average deposit rate has similarly declined from 11.6% to6.6% over this period.
Fig 105 - CBSL has reduced policy rates significantly
0
2
4
6
8
10
12
0
2
4
6
8
10
12
14
J u l - 0 3
J a n - 0 4
J u l - 0 4
J a n - 0 5
J u l - 0 5
J a n - 0 6
J u l - 0 6
J a n - 0 7
J u l - 0 7
J a n - 0 8
J u l - 0 8
J a n - 0 9
J u l - 0 9
J a n - 1 0
J u l - 1 0
J a n - 1 1
RepoReverse repoStatutory reserve ratio (R)
(%) (%)
Source: Bloomberg, RCML Research
Fig 106 - As a result, lending and deposit rates have declined
0
4
8
12
16
20
2005 2006 2007 2008 2009 2010 *
Average weighted PLR Average weighted deposit rate(%)
Source: CBSL * As on 30 September 2010
NIMs strong at 4–4.5% but could decline from high base of 2010Overall NIMs in Sri Lanka are robust at 4–4.5% due to high yields on advances and astrong liability franchise marked by a CASA ratio of ~50% (Fig 102). NIMs of thebanking system remained largely stable in 2010 as a sharp decline in yield on assets wasoffset by a lower cost of deposits (led by higher low-cost deposit mobilisation and adecline in term deposit rates) coupled with an improvement in C/D ratio.
PLR of commercial banks down
from 19.2% at end-2008 to 10% at
end-Sept ―10
Higher CASA and stronger yields aided
margins in 2010
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Fig 107 - NIMs strong at 4.5% driven by high CASA ratio
3.0
3.4
3.8
4.2
4.6
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
9 M 1 1
(%) NIMs
Source: CBSL, RCML Research
Going forward, we believe that NIMs could come under pressure as banks focus onraising high-cost deposits to fund incremental growth. From our discussions with themanagements of Sri Lankan banks, we infer that the cost of deposits has largelybottomed out whereas the yield on advances is likely to fall further due to re-pricing of assets and high competition. We also note that the government has asked banks todeposit savings arising from lower taxes in a low-yielding investment fund, which couldfurther strain NIMs.
Cost-to-income ratio to decline with higher operating leverage
The cost-to-income ratio of the overall banking system has declined from 68% in 2001to ~50% in 9M2009 due to higher operating leverage. Going forward, we expectoperating expenses to increase at under 15% for banks under our coverage, leading to a
further decline in cost-to-income ratio.
Fig 108 - Cost-to-income ratio likely to improve further
45
50
55
60
65
70
75
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
9 M 0 9
(%)
Source: CBSL
Improvement in asset quality to lower credit costsOverall asset quality declined in 2008 and 2009 as slippages increased due to the globalfinancial crisis, escalation of war efforts and higher lending rates. However, with robusteconomic growth, a revival in external demand and surrender of the LTTE, incrementalslippages have come down significantly. Moreover, all large banks are witnessing strongrecoveries from earlier NPAs, boosting their non-interest income and profitability. As per
CBSL, gross NPA in the system has come down from ~9% in 2009 to ~6% and provisioncoverage has improved to ~56% from ~45% earlier. With strong economic growth
But margin headwinds ahead as deposit
cost has bottomed out and assets are
re-priced downward
Opex expected to increase at sub-15%
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Banking Sector Report 06 April 2011
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likely, we believe that asset quality could improve further and the GNPA ratio trenddown. Higher recoveries from earlier NPAs and lower incremental provisions are likelyto bolster profitability.
We note that CBSL guidelines require NPAs to be recognised when an account is
overdue for 90 days and over and these are classified under the Specific Mentionsaccount. However, NPA provisions start only when the account is six months overdue(or a sub-standard asset).
Fig 109 - Improvement in asset quality to reduce provisioning expenses
0
10
20
30
40
50
60
70
0
2
46
8
10
12
14
16
18
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
9 M 0 9
N o v 1 0
GNPA NNPA Provision coverage ratio (R)(%) (%)
Source: CBSL
We also note that banks in Sri Lanka are carrying excess provisioning on the standardasset portfolio. To create a buffer, CBSL had earlier mandated that banks create astandard asset provision of 1%. However, with robust economic growth, CBSL nowplans to reduce this requirement to 0.5% by Dec ―11 (in phases as a 0.1% reductionevery quarter effective from Q410).
Banks adequately capitalised for growthSri Lankan banks have a total CAR/tier I ratio of 14.5%/12.3% at the end of September―09 (as against the regulatory requirement of 10%/5%). While current mandatory capitalrequirements are lower than Basel III norms (common equity/tier I/total CAR of 7%/8.5%/10.5%), we believe that the high CAR and strong ROE profile of Sri Lankanbanks would support growth in the medium term.
Large banks seeing strong recoveries
from older NPAs and lower incremental
defaults
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Banking Sector Report 06 April 2011
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Fig 110 - Tier I ratio of banks above 10% as against regulatory requirement of 5%
0
2
4
6
8
10
12
14
16
1 9 9 8
1 9 9 9
2 0 0 0
2 0 0 1
2 0 0 2
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
9 M 0 9
CAR Tier I(%)
Source: CBSL
Effective tax rate likely to declineSri Lankan banks are heavily taxed as they have to pay a value-added tax (financial VAT)of 20% apart from a corporate tax of 35%. However, the government recently proposedto reduce the corporate tax rate from 35% to 28% (from 1 April 2011) and financial VATfrom 20% to 12% (from 1 January 2011). As a result, we expect the effective tax rate forbanks to decline in 2011 and 2012, supporting higher profitability. However, thegovernment may require banks to pass on the benefits arising from the lower taxes,either partially or fully.
Valuations not cheap but strong earnings growth to provide support
The Sri Lankan stock market has run-up significantly since April ―09 in anticipation of strong GDP growth in the post-war period, rallying 114% in 2009 and 96% in 2010.
Banking and financial services stocks have outperformed the broader market with theBFI index rising by 125% in 2009 and 141% in 2010.
While valuations are no longer cheap, we believe that strong earnings growth andimproving macro fundamentals would support stock performance. We initiate coverageon COMB and HNB with BUY ratings and expect these companies to post an earningsCAGR of 27%/24% over 2010–12 backed by a strong credit CAGR of ~20%, healthymargins, higher operating leverage and lower taxes.
Fig 111 - Banks have outperformed broader market in the last two years
-
100
200
300
400
500
M a r - 0 6
J u n - 0 6
S e p - 0 6
D e c - 0 6
M a r - 0 7
J u n - 0 7
S e p - 0 7
D e c - 0 7
M a r - 0 8
J u n - 0 8
S e p - 0 8
D e c - 0 8
M a r - 0 9
J u n - 0 9
S e p - 0 9
D e c - 0 9
M a r - 1 0
J u n - 1 0
S e p - 1 0
D e c - 1 0
M a r - 1 1
ASPI BFI
Source: RCML Research
Sector CAR/tier I ratio of 14.5%/12.3%
at end-Sept ―09 versus regulatory
requirement of 10%/5%
Government proposes to slash
corporate taxes and financial VAT in
2011
Strong earnings growth and an
improving macro would support stock
performance
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Fig 112 - Valuation summary – Sri Lankan vs Indian banks
CMP(Rs/LKR)#
Target(Rs/LKR)#
RecoMCAP
(Rs/LKR bn)#
P/BV (x) P/E (x)EPS
growthAverageRoE (%)
AverageRoA (%)
FY12E* FY13E* FY12E* FY13E* FY11-13E* FY11-13E* FY11-13E*
Indian banks
PSU Banks
SBI 2,823 3,500 BUY 1,793 2.1 1.8 12.0 9.9 25.6 18.0 1.1
SBI # 2,191 2,867 1,391 1.7 1.5 9.6 7.9 26.0 18.9 1.1
PNB 1,198 1,475 BUY 378 1.6 1.3 7.0 5.8 21.8 24.3 1.4
BoB 959 1,130 BUY 349 1.6 1.4 8.2 7.0 12.5 23.2 1.3
BoI 487 520 HOLD 255 1.4 1.2 7.4 6.1 22.9 20.6 1.0
Canara Bank 641 660 HOLD 284 1.3 1.1 6.5 5.9 6.0 23.9 1.2
Dena Bank 112 160 BUY 32 0.9 0.8 5.2 4.3 11.3 21.5 0.9
UBI 348 410 BUY 176 1.3 1.1 6.7 5.8 20.0 21.8 1.1
OBC 394 445 BUY 98 1.0 0.8 6.4 5.0 13.7 18.1 1.1
Corporation Bank 644 745 BUY 92 1.1 0.9 5.7 4.7 19.4 21.9 1.1
Private Banks
ICICI Bank 1,108 1,175 HOLD 1,276 2.1 1.9 19.0 15.2 26.1 11.4 1.4
ICICI Bank # 867 934 998 2.1 1.9 15.2 12.1 26.7 14.4 1.8
HDFC Bank 2,371 2,390 HOLD 1,103 3.8 3.2 21.8 17.3 27.5 18.6 1.7
Axis Bank 1,436 1,650 BUY 590 2.6 2.2 13.8 11.4 24.3 20.2 1.7
Yes Bank 315 380 BUY 109 2.4 2.0 12.5 9.7 27.2 21.4 1.4
Sri Lankan banks
COMB 268 330 BUY 96 2.8 2.4 13.7 11.3 27.2 20.8 1.8
HNB 253 300 BUY 83 3.2 2.7 14.7 11.9 24.4 23.2 1.7
Source: Company, RCML Research; # Units in LKR for Sri Lankan Banks; conversion rate - Rs 1 = LKR 2.49; *Numbers based on calendar years for Sri Lankan Banks
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Commercial Bank of Ceylon Initiating Coverage 06 April 2011
55
Ishank Kumar Siddharth Teli Nikhil Rungta
(91-22) 6766 3467 (91-22) 6766 3463 (91-22) 6766 3451
[email protected] [email protected] [email protected]
Profitability and return ratios
(%) CY09 CY10 CY11E CY12E
Net interest margin 4.2 4.9 4.7 4.6
Non-int inc/Total inc 38.3 29.3 28.9 27.9
Cost/Inc Ratio 45.7 43.1 43.0 41.4
RONW 16.2 18.6 21.4 22.5
ROA 1.4 1.6 1.8 1.8
Net NPA 4.9 2.8 2.3 1.9
Financial highlights
(LKR mn) CY09 CY10 CY11E CY12E
NII 12,421 16,374 18,409 21,784
Growth (%) (3.7) 31.8 12.4 18.3
PPP 10,923 13,191 14,752 17,702
Growth (%) (7.2) 20.8 11.8 20.0
FDEPS (LKR) 11.2 14.6 19.5 23.6
Growth (%) 1.5 30.5 33.6 21.2
Commercial Bank of Ceylon
Poised for take-off
We initiate coverage on Commercial Bank of Ceylon (COMB) with a BUY ratingand a target price of LKR 330. COMB is the largest private sector bank inSri Lanka with a 12% market share by asset base. The bank also has a healthypresence in Bangladesh which constitutes ~10% of total advances (2009).While NIMs could decline from 2010 levels as the incremental C/D ratio trendslower in 2011, the bank―s robust liability franchise (CASA proportion of ~55%)would support strong margins of ~4.5%. We also expect asset quality toimprove with the ongoing revival in domestic and external demand. The stock istrading at 2.4x/11x BV/EPS on 2012E. We believe strong earnings growth(27%+ CAGR over 2010–12E) and an improving macro environment would bekey drivers for stock performance.
Strong GDP growth to drive 21% CAGR in advances: Overall credit demand inSri Lanka has picked up in H2CY10 after remaining muted in 2009 and H1CY10.We note that the overall credit-to-GDP ratio in the country remains low at~30%. A sharp decline in interest rates (~9ppt drop in weighted average PLR of Sri Lankan banks since December ―08 to ~10%) and robust GDP growthprospects (~8.5%+ over 2010–12) would fuel strong business growth for banks.COMB would also benefit from its presence in Bangladesh and its plan to expandinto retail. We are factoring in a 21% CAGR in advances over 2010–12.
NIMs to remain in 4–4.5% range: NIMs have improved from 4% in Q2CY09 to4.7% in Q4CY10 driven by higher CASA mobilisation and an improvement inLDRs. However, with LDRs already at ~82% at the end of December ―10 and thecost of deposits close to bottoming out, we expect NIMs to decline and are
factoring in a 25bps dip in 2011–12. Nonetheless, this still leaves COMB withstrong 4.5%+ margins.
Asset quality to improve further: The bank―s GNPA shot up from 4.8% inDecember ―07 to 8.9% in June ―09 due to the global financial crisis and theescalation of war efforts at home. However, with the revival in domestic andexternal demand, GNPA has fallen to 4.2% by the end of December ‘10 . Weexpect a further decline to sub-4% levels by December ―12.
Well placed to leverage strong emerging demand: Given its leadership position,we believe that COMB is well placed to capitalise on the strong credit demand inSri Lanka. We expect earnings to grow at a 27% CAGR over 2010–12 backed bystrong credit growth, lower credit costs, higher operating leverage and a lower
effective tax rate. ROE is likely to improve from 16% in 2009 to 22%+ by 2012.While valuations are not cheap at 2.4x 2012E BV (adjusted for revaluationreserve) and 11.3x 2012E EPS, we expect strong earnings growth and improvingfundamentals to buoy stock performance.
CMP TARGET RATING RISK
LKR 268 LKR 330 BUY MEDIUM
CSE BLOOMBERG
COMB.N COMB SL
Company data
Market cap (LKR mn / US$ mn) 95,650 / 867
Outstanding equity shares (mn) 357
Free float (%) 100
Dividend yield (%) 1.9
52-week high/low (LKR) 293 / 145
3-month average daily volume 318,016
Stock performance
Returns (%) CMP 1-mth 3-mth 6-mth
COMB 268 1.9 0.0 (3.6)CSE Index 7,022 (0.1) (1.0) (8.6)
Valuation matrix
(x) CY09 CY10 CY11E CY12E
P/BV @ CMP 3.7 3.2 2.8 2.4
P/BV @ Target 4.6 3.9 3.4 2.9
P/E @ CMP 24.0 18.4 13.7 11.3
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Investment rationaleLargest private sector bank in Sri LankaCOMB is the largest private sector bank in Sri Lanka (fourth largest includinggovernment-owned banks) with assets worth LKR 370bn (US$ 3.3bn) at the end of December ―10, equivalent to ~12% of the country―s total banking assets. At the end of
2009, the bank had a strong distribution network of 144 branches in Sri Lanka. Apartfrom regular branches, the bank also has 24 outlets in supermarkets and a network of 355 ATMs.
Fig 113 - Key metrics of largest banks in Sri Lanka – 30 September 2010
OwnershipAssets Deposits CASA NIMs Tier I GNPA NNPA
(LKR mn) (LKR mn) (%) (%) (%) (%) (%)
Bank of Ceylon Government 635,539 456,020 49.0 3.3 10.6 5.0 2.6
People's Bank Government 570,569 452,685 50.5 5.4 7.8 5.9 1.4
Commercial Bank of Ceylon Private 364,614 252,562 54.2 4.6 10.8 5.0 3.4
Hatton National Bank Private 304,594 221,238 51.1 5.3 10.3 5.9 3.1
Sampath Bank Private 178,131 143,072 48.9 5.1 10.0 5.5 1.2
Source: Company, RCML Research
Loan book likely to grow at 21% CAGR through 2012COMB―s loan growth was subdued in 2008 and 2009 as credit demand slowed downsignificantly due to the global financial crisis and the heightened internal conflict.However, with a revival in macro conditions in Sri Lanka and other economies, creditgrowth has picked up. Over July–December ―10, COMB―s advances grew by 27% andconsequently YoY growth improved from 7% at the end of H1CY10 to 29.5% at the endof CY10. Considering GDP growth of ~8.5–9% over CY10-CY12, we believe that thebank―s loan book could grow at a 21% CAGR over this period.
Fig 114 - Loan book to grow at 21% CAGR over CY10-CY12
50
60
70
80
90
100
(10)
0
10
20
30
40
C
Y 0 4
C
Y 0 5
C
Y 0 6
C
Y 0 7
C
Y 0 8
C
Y 0 9
C
Y 1 0
C Y
1 1 E
C Y
1 2 E
(%)(%) Credit growth Deposit growth
C/D ratio (R)
Source: Company, RCML Research
Fig 115 - Breakup of advances – 2009
Industrial16%Exports
10%Imports
12%
CommercialTrading
10%
Services13%
Housing &Construction
9%
Tourism &Allied
3%
Agriculture &Fishing
5%Consumption
5%
Others17%
Source: Company, RCML Research
International presence to support balance sheet growthApart from Sri Lanka, COMB has operations in Bangladesh and the Maldives whichaccounted for 9.8% and 2.8% of total advances respectively at the end of 2009. Thebank ventured into Bangladesh in 2003 with the acquisition of Credit Agricole Indosuezand had ~15 delivery points in the country at the end of 2009. It is currently focusing onthe corporate segment and has a market share of less than 1%. Going forward, it aims tofurther expand its operations and venture into the retail segment.
Asset base totals US$ 3.3bn or 12% of
the country―s banking assets
Revival in advances with 27% growth
over Jul-Dec ―10
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Liability franchise strong; NIMs healthy at ~4.5%Reported NIMs have improved from 4.1% at the end of December ―09 to 4.7% at end-December ―10 due to strong CASA growth (27% YoY in 2010) and a better C/D ratio(82% vs. 70% in Dec ―09). The CASA ratio has improved from 48% in 2009 to 55% in2010 as the bank relied primarily on low-cost deposits to fund incrementalgrowth—term deposits declined by ~5% in 2010 as against 27% growth in CASA. With
C/D deposits already at 82%, COMB would have to raise high-cost deposits goingforward. This coupled with a bottoming of deposit rates could put pressure on NIMs. Weare factoring in a 25bps decline in NIMs through 2012 in our estimates.
Fig 116 - NIMs have remained above 4.5%...
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
0
20
40
60
80
100
Q 1 0 8
Q 2 0 8
Q 3 0 8
Q 4 0 8
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
Q 4 1 0
(%)(%) CASA LDR NIMs (R)
Source: Company, RCML Research
Fig 117 - … driven by low cost deposits mobilisation
(10)
0
10
20
30
40
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
Q 4 1 0
CASA deposits Term deposits
Total deposits
(YoY growth %)
Source: Company, RCML Research
Asset quality to improve furtherGNPA increased from 3.4% in March ―08 to 8.9% in June ―09 owing to unfavourablemacro conditions both at home and globally. However, asset health has improvedsignificantly in the last 18 months driven by a revival in exports and robust GDP growth
in Sri Lanka. GNPA/NNPA are down from 8.9%/6.7% in June ―09 to 4.2%/2.8% inDecember ―10. We expect a continued improvement in 2011 and 2012 as recoveriespick up and slippages remain low.
Credit costs are also likely to come down from 0.9% in 2009 to ~0.65% in 2011 and2012. We note that Central Bank of Sri Lanka plans to reduce the standard assetprovisioning requirement to 0.5% (from 1% currently) by December ―11 in a phasedmanner (0.1% reduction every quarter). Thus, the bank would not be required to makeany incremental provisions on standard assets in the next few quarters.
Fig 118 - Asset quality deteriorated in 2008 and 2009…
0
10
20
30
40
50
60
70
012345678
C Y 0 5
C Y 0 6
C Y 0 7
C Y 0 8
C Y 0 9
C Y 1 0
C Y 1 1 E
C Y 1 2 E
(%)(%)Gross NPA
Net NPAProvision coverage ratio (R)
Source: Company, RCML Research
Fig 119 - …but is on the mend
0
10
20
30
40
50
0
2
4
6
8
10
Q 1 0 8
Q 2 0 8
Q 3 0 8
Q 4 0 8
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
Q 4 1 0
(%)(%) Gross NPA
Net NPAProvision coverage ratio (R)
Source: Company, RCML Research
CASA ratio up from 48% in 2009 to
55% in 2010
Recovery in export segments and robust
GDP growth to help contain NPAs
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Return ratios set to expandWith strong business growth expected through 2011–12, we believe that higheroperating leverage would improve the profitability of Sri Lankan banks in general. In2010, COMB―s operating expense as a percentage of its asset base was rather high at~2.9%; we expect this to dip to 2.6–2.7% as operating expenses increase at a 12%CAGR over 2010–12 against a 14% increase in net revenues. NII is projected to grow at
a 15% CAGR over the same period; however, non-interest income growth could belower at a 11% CAGR due to the higher base of 2009/10 which saw a boost from higherNPA recoveries.
We expect total costs (operating expenses + credit costs + taxes) to decline from 5.1% in2010 to 4.4% in 2012 driven by higher operating leverage and a reduction in effectivetax rate. We note that the government of Sri Lanka has reduced the corporate tax ratefrom 35% to 28% (effective 1 April 2011) and financial VAT from 20% to 12% (effective1 January 2011). We thus expect the bank―s ROA/ROE to improve from 1.6%/18.6% in2010 to 1.8%/22.5% in 2012 (ROE based on net worth ex-revaluation reserve).
Fig 120 - ROA and ROE to improve going forward
(%) CY06 CY07 CY08 CY09 CY10E CY11E CY12E
Net interest income/Assets 3.8 4.7 4.7 4.1 4.7 4.5 4.5
Non-interest income /Assets 2.4 1.9 2.5 2.6 2.0 1.8 1.7
Net revenues/Assets 6.2 6.6 7.2 6.7 6.7 6.4 6.3
Operating expense/Assets 3.3 2.5 2.9 3.1 2.9 2.7 2.6
Provision/Assets 0.3 0.7 0.8 0.5 0.3 0.4 0.4
Taxes/Assets 1.6 1.7 2.0 1.7 1.9 1.4 1.4
ROA 1.0 1.7 1.5 1.4 1.6 1.8 1.8
Equity/Assets 7.3 7.7 8.7 8.6 8.6 8.5 8.2
ROAE 14.1 22.1 17.3 16.2 18.6 21.4 22.5
Source: RCML Research
Capital position comfortableCOMB―s CAR/tier I ratio at the end of December ―10 stood at 12.3%/10.9% which ismuch higher than the regulatory requirement of 10%/5%. While we note that currentminimum capital requirements could go up in line with recommendations of theBasel III committee (mandating common equity/tier I/CAR of 7%/8.5%/10.5% for banks),we believe that COMB―s strong ROE profile would support balance sheet growth.
Fig 121 - Adequately capitalised for growth
0
2
4
6
8
10
12
14
16
18
CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E CY12E
(%) CAR Tier I
Source: Company, RCML Research
Improvement in return ratios to be led
by operating leverage and lower taxes
CAR of 12.3% far above regulatory
requirement of 10%
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Commercial Bank of Ceylon Initiating Coverage 06 April 2011
59
Well placed to leverage emerging demand; initiate with BUYThe Sri Lankan stock market has appreciated significantly since May ―09 as the advent of peace in the country has boosted business confidence. The benchmark index of thebanking, finance and insurance sector (BFI Index) has risen by 125% in 2009 and 140%in 2010. At the CMP of LKR 268, COMB is trading at 2.4x 2012E BV (adjusted forrevaluation reserve) and 11.3x 2012E EPS. While valuations are not cheap (see fig 112
for a comparison with Indian banks), we are positive on the stock and believe that strongearnings growth amid an improving macro backdrop is likely to propel stockperformance.
We expect COMB―s earnings to grow at ~27%+ CAGR over 2010–12 driven by strongbusiness growth, higher operating leverage and a reduction in effective tax rate. ROE islikely to improve to 22%+ by 2012 from 19% in 2010 (calculated after excludingrevaluation reserve from net worth). Given the strong GDP and earnings growth alongwith improving ROEs, we believe the stock could trade at 14x 2012E EPS, implying a23% upside from current levels. We initiate coverage on COMB with a BUY rating.
Fig 122 - Price to 1-yr fwd BV vs ROE
0
5
10
15
20
25
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
M a r - 0 5
S e p - 0
5
M a r - 0 6
S e p - 0
6
M a r - 0 7
S e p - 0
7
M a r - 0 8
S e p - 0
8
M a r - 0 9
S e p - 0
9
M a r - 1 0
S e p - 1
0
M a r - 1 1
(%)(x) Price/ 1-yr fwd book 12 mth rolling RoE (R)
Source: Bloomberg, Company, RCML Research
Fig 123 - Price to 1-yr fwd EPS
02468
1012141618
J a n - 0 5
J u l - 0 5
J a n - 0 6
J u l - 0 6
J a n - 0 7
J u l - 0 7
J a n - 0 8
J u l - 0 8
J a n - 0 9
J u l - 0 9
J a n - 1 0
J u l - 1 0
J a n - 1 1
(x) Price/ 1-yr fwd EPS
Source: Bloomberg, Company, RCML Research
30%+ earnings CAGR lends confidence
on stock performance
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Commercial Bank of Ceylon Initiating Coverage 06 April 2011
61
Quarterly trend
Particulars Q4CY09 Q1CY10 Q2CY10 Q3CY10 Q4CY10
Net interest income 3,587 3,574 3,819 4,312 4,668
YoY growth (%) 1.2 21.5 34.2 41.5 30.1
QoQ growth (%) 17.7 (0.4) 6.9 12.9 8.3
Non - interest income 1,365 1,256 1,339 1,469 1,626
Total income 4,952 4,830 5,158 5,781 6,295
Total operating expenses 2,507 2,349 2,288 2,365 2,977
- Employee expenses 1,473 1,356 1,294 1,338 1,642
Pre-provision profit 2,445 2,481 2,870 3,416 3,317
Provisions (272) (27) 104 196 (188)
PBT 2,719 2,509 2,767 3,225 3,508
Income taxes 1,512 1,401 1,561 1,804 1,734
PAT 1,207 1,108 1,206 1,422 1,774
YoY growth (%) 8.3 24.1 7.4 46.4 47.0QoQ growth (%) 24.2 (8.2) 8.9 17.9 24.8
Company profile
COMB is the largest private sector bank in Sri Lanka with a total
asset size of LKR 370bn (US$ 3.3bn) at the end of December 2010.
The bank has a strong distribution network and liability franchise
marked by a CASA ratio of ~55%. Apart from Sri Lanka, COMB has
operations in Bangladesh and the Maldives which accounted for
9.8% and 2.8% of total advances respectively at the end of 2009.
Stock performance
0
50
100
150
200
250
300
350
Jan-09 Jun-09 Nov-09 May-10 Oct-10 Apr-11
Recommendation history
Date Event Reco price Tgt price Reco
6-Apr-11 Initiating Coverage 268 330 Buy
l Buy
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Hatton National Bank Initiating Coverage 06 April 2011
62 Ishank Kumar Siddharth Teli Nikhil Rungta
(91-22) 6766 3467 (91-22) 6766 3463 (91-22) 6766 3451
[email protected] [email protected] [email protected]
Profitability and return ratios
(%) CY09 CY10 CY11E CY12E
Net interest margin 5.8 5.6 5.5 5.5
Non-int inc/Total inc 30.8 32.3 32.6 31.9
Cost/Inc Ratio 56.6 58.9 57.8 55.9
RONW 24.1 21.8 23.4 24.5
ROA 1.7 1.7 1.8 1.8
Net NPA 2.9 2.0 1.7 1.5
Financial highlights
(LKR mn) CY09 CY10 CY11E CY12E
NII 14,555 15,787 17,902 21,286
Growth (%) 16.1 8.5 13.4 18.9
PPP 9,123 9,597 11,207 13,795
Growth (%) 18.6 5.2 16.8 23.1
FDEPS (LKR) 12.9 13.7 17.2 21.2
Growth (%) 57.6 6.3 25.5 23.3
Hatton National Bank
Strong earnings profile to drive valuations
We initiate coverage on Hatton National Bank (HNB) with a BUY rating and atarget price of LKR 300. HNB is the second largest private sector bank in SriLanka with a strong distribution network and market leadership in the retail andSME segments. A robust liability franchise (CASA proportion of ~52%) and highpricing power support best-in-class NIMs of 5%+. We also expect asset quality toimprove with the ongoing revival in domestic and external demand. While thestock has appreciated significantly since April ’09 (currently at 2.7/11.9 BV/EPSon 2012E) and valuations are no longer cheap, we believe strong earnings growth(24%+ CAGR) and an improving macro environment would bolster valuations.
Loan book to grow at 20% CAGR: HNB’s business growth was subdued in 2009and H1CY10; however, credit demand has picked up in H2CY10 driven bystrong GDP growth (~8% in 2010) and a revival in external demand. We notethat the overall credit-to-GDP ratio in Sri Lanka remains low at ~30%. Thiscoupled with a lower interest rate (9ppt drop in weighted average PLR of SriLankan banks to 10% over December ’08 to September ’10) and robust GDPgrowth prospects would fuel strong business growth for banks.
High pricing power and robust liability franchise to support NIMs: HNB’s loanbook is quite granular in nature with a strong emphasis on the retail and SMEsegments. As a result, pricing power on the asset side is higher. On the liabilityside, the bank has a solid retail depositor base and robust CASA levels of ~52%.We therefore expect NIMs to be maintained at 5%+ through FY12 despite strongcompetition and a sharp drop in interest rates.
Asset quality to improve further: Asset health deteriorated in 2008 and 2009 dueto the financial crisis and the escalation of war efforts, with GNPA increasingfrom 6.3% in December ’07 to 8.7% in June ’09. However, with the revival indomestic and external demand, asset quality has improved significantly, asevidenced by a drop in GNPA to 4.5% in December ’10. We expect a furtherdecline to sub-4% levels by December ’12 as slippages continues to trend downand recoveries pick up.
Strong earnings growth to drive valuations: We expect earnings to grow at a24% CAGR over 2010–12 backed by strong credit growth, higher operatingleverage and a lower effective tax rate. With strong earnings growth, we expectROE to increase from ~22% in 2010 to 24-25%+ in 2012 (ROE based on net
worth ex-revaluation reserve). The stock has appreciated by ~385% since April’09 and is currently trading at 2.7x BV and 11.9x EPS on 2012E. Given the strongGDP and earnings growth along with improving ROEs, we believe the stockcould trade at 3.2x 2012E BV and 14x 2012E EPS, implying a 19% upside. BUY.
CMP TARGET RATING RISK
LKR 253 LKR 300 BUY MEDIUM
CSE BLOOMBERG
HNB.N HNB SL
Company data
Market cap (LKR mn / US$ mn) 83,113 / 750
Outstanding equity shares (mn) 287
Free float (%) 100
Dividend yield (%) 1.8
52-week high/low (LKR) 360 / 130
3-month average daily volume 143,916
Stock performance
Returns (%) CMP 1-mth 3-mth 6-mth
HNB 253 (1.7) (4.5) (6.9)CSE Index 7,022 (0.1) (1.0) (8.6)
Valuation matrix
(x) CY09 CY10 CY11E CY12E
P/BV @ CMP 4.3 3.7 3.2 2.7
P/BV @ Target 5.2 4.4 3.8 3.2
P/E @ CMP 19.7 18.5 14.7 11.9
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Investment rationaleRobust presence and brand nameHNB is the second largest private commercial bank in Sri Lanka with an extensivedistribution network of 187 branches. It has a strong presence in rural and semi-urbanareas driven by its emphasis on building a regional presence—this in turn results in a
robust client base and access to low-cost deposits (CASA ratio of ~52% at the end of December ―10). A strong regional footprint has also translated to a more granular assetcomposition and a leadership position in the SME and retail segments where interestspreads are higher. The company―s asset book is well diversified in terms of its exposureto industries and counterparties, as indicated in the charts below.
Fig 124 - Industry-wise exposure – 2009
Agricultureand fishing
10%Manufactruing
14%
Tourism7%
Construction17%Traders
12%
Financial andbusinessservices
6%
Pawning12%
Others22%
Source: Company, RCML Research
Fig 125 - Exposure by counterparties – 2009
Corporates >LKR 1bn
10%
CorporatesLKR 100mn -
1bn24%
CorporatesLKR 35mn -
100mn8%
SME LKR10mn -35mn
8%
Microfinance4%
Housing10%
Personal loans31%
Leasing5%
Source: Company, RCML Research
Loan book likely to grow at 20% CAGR through 2012
HNB―s loan growth was subdued over 2008–09 as the bank adopted a cautious lendingapproach against the backdrop of the global financial crisis, a ramp-up of home warefforts and a spike in interest rates. However, with the macro revival in Sri Lanka andother economies, the bank has once again trained its sights on business growth. After amuted performance in 2009 and a sequential decline in Q1CY10, HNB―s loan bookgrew by 4.4%/7%/12% QoQ in Q2/Q3/Q4CY10. Overall, loan book grew by 22% YoYin 2010. Considering GDP growth of ~8.5% over 2010–12, we believe that the bank―soverall loan book could grow at a 20% CAGR over this period. HNB is also likely tobenefit from a stronger government thrust on infrastructure and economic revival in thehitherto war-torn northern and eastern regions where it has a strong presence.
No. 2 private bank in Sri Lanka with
187 branches and strong regional
footprint
Economic revival post-war to supportstrong credit demand
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Fig 126 - Credit growth has picked up from Q2CY10 onwards
68
70
72
74
7678
80
82
84
(5)
0
5
10
15
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
(%)(%) Credit growth Deposit growthC/D ratio (R)
Source: Company, RCML Research
Fig 127 - Loan book could grow at 20% CAGR over 2010–12
70
75
80
85
90
95
(5)
0
5
10
15
20
25
30
C Y 0 4
C Y 0 5
C Y 0 6
C Y 0 7
C Y 0 8
C Y 0 9
C Y 1 0
C Y 1 1 E
C Y 1 2 E
(%)(%) Credit growth Deposit growth
C/D ratio (R)
Source: Company, RCML Research
Higher pricing power, robust liability franchise to support best-in-class NIMsDespite a sharp reduction in interest rates, HNB has reported robust NIMs of 5%+ due
to its strong liability franchise (CASA proportion at ~52%, up 28% YoY in CY10) and thedeployment of surplus liquidity. The LDR rose from ~76% in December ―09 to 83% inDecember ―10 as the bank trimmed its high-cost deposits and credit growth picked up.While LDR is likely to remain at this level going forward, we believe that higher pricingpower (driven by a strong presence in pawning, SME and other retail segments) wouldprotect NIMs.
Fig 128 - NIMs have remained above 5%...
4.0
4.4
4.8
5.2
5.6
6.0
40
44
48
52
56
60
Q 1 0 8
Q 2 0 8
Q 3 0 8
Q 4 0 8
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
(%)(%)CASA NIMs (R)
Source: Company, RCML Research
Fig 129 - …and expected to remain stable
(10)
(5)
0
5
10
15
20
25
30
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
Q 4 1 0
CASA deposit Term deposit
Total deposits
(YoY growth %)
Source: Company, RCML Research
Asset quality to improve further
GNPA increased from 6.3% in December ―07 to 8.7% in June ―09 owing to theunfavourable macro conditions. However, with a revival in exports and robust GDPgrowth, asset quality has shown an improving trend. GNPA has already declined to4.5% at the end of December ―10 and we expect a further decline to sub-4% levels by2012 as recoveries pick up and slippages continue to trend down.
Credit costs have come down from 0.4% in 2009 to 0.2% in 2010. We are factoring in35bps credit costs in 2011 and 2012. We note that Central Bank of Sri Lanka (CBSL) isplanning to reduce the standard asset provisioning requirement to 0.5% (from 1%currently) by December ―11 in a phased manner (0.1% reduction every quarter). Thus,HNB would not be required to make any incremental provisions on standard assets inthe next few quarters.
Presence in pawning, SME and other
retail segments strengthen pricing
power
GNPA likely to fall below 4% by 2012
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Fig 130 - Asset quality deteriorated in 2008 and 2009…
0
20
40
60
80
0
2
4
6
8
10
C Y 0 5
C Y 0 6
C Y 0 7
C Y 0 8
C Y 0 9
C Y 1 0
(%)(%)Gross NPANet NPAProvision coverage ratio (R)
Source: Company, RCML Research
Fig 131 - …but improving now
0
20
40
60
80
0
2
4
6
8
10
Q 1 0 8
Q 2 0 8
Q 3 0 8
Q 4 0 8
Q 1 0 9
Q 2 0 9
Q 3 0 9
Q 4 0 9
Q 1 1 0
Q 2 1 0
Q 3 1 0
(%)(%) Gross NPANet NPAProvision coverage ratio (R)
Source: Company, RCML Research
Return ratios set to improve on operating leverage and lower taxesOperating expenses for HNB (and Sri Lankan banks in general) are higher at ~4.6% of
assets; however, we expect a reduction to 4.2–4.4% in 2011/12 driven by higheroperating leverage. We expect operating expenses to grow at a 13% CAGR over2010–12 as against a 16% increase in net revenues. ROA is likely to improve from 1.6%to 1.8% in 2012 due to a lower effective tax rate. We note that the government of SriLanka has reduced the corporate tax rate from 35% to 28% (effective 1 April 2011) andfinancial VAT from 20% to 12% (effective 1 January 2011).
Fig 132 - ROA and ROE to improve going forward
(%) CY08 CY09 CY10 CY11E CY12E
Net interest income/Assets 5.1 5.4 5.3 5.2 5.2
Non-interest income /Assets 2.4 2.4 2.5 2.5 2.4
Net revenues/Assets 7.4 7.8 7.8 7.7 7.6
Operating expense/Assets 4.3 4.4 4.6 4.4 4.2
Provision/Assets 0.6 0.3 0.1 0.2 0.2
Taxes/Assets 1.4 1.4 1.4 1.2 1.3
ROA 1.2 1.7 1.6 1.8 1.8
Equity/Assets 7.2 7.0 7.5 7.6 7.5
ROAE 16.3 24.1 21.8 23.4 24.5
Source: RCML Research
Capital position comfortable
HNB―s CAR/tier I ratios at the end of December ―10 stood at 12.7%/11% which is muchhigher than the regulatory requirement of 10%/5%. While we note that current
minimum capital requirements could go up in line with recommendations of the BaselIII committee (common equity/tier I/CAR of 7%/8.5%/10.5%), we believe that a strongROE profile would support balance sheet growth. In the medium term, the managementaims to maintain a tier I ratio of 9%. As per our estimates, tier I capital would remainabove 10% by the end of 2012 despite ~20% CAGR in advances over 2010–12.
Opex to trend down to 4.2–4.3% of
assets
Tier I expected to remain above 10% by
end-2012 despite ~20% CAGR in
advances
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Fig 133 - Adequately capitalised for growth
0
2
4
6
810
12
14
CY04 CY05 CY06 CY07 CY08 CY09 CY10E CY11E CY12E
(%) CAR Tier I
Source: Company, RCML Research
Strong earnings potential to support valuations; initiate with BUY
Sri Lankan banks (and the broader market) have appreciated significantly since May ―09as the return to peace in the country boosted business confidence. At the CMP of LKR253, HNB is trading at 2.7x 2012E BV (after excluding revaluation reserve from networth) and 11.9x 2012E EPS. While valuations are not cheap (for a comparison withIndian banks, please refer to fig 112), we believe that improving fundamentals andstrong earnings growth are likely to drive stock performance.
We expect HNB―s earnings to grow at ~24%+ CAGR over 2010–12 backed by strongbusiness growth, higher operating leverage and a reduction in effective tax rate. ROE islikely to improve to 24%+ by 2012 from 22% in 2010 (ROEs calculated on net worthex-revaluation reserve). Given strong GDP and earnings growth along with improvingROEs, we believe the stock could trade at 3.2x 2012 BV and 14x 2012E EPS, implying a19% upside from the current level. We initiate coverage on HNB with a BUY rating.
Fig 134 - Price to 1-yr fwd BV vs ROE
0
5
10
15
20
25
30
0.0
0.8
1.6
2.4
3.2
4.0
M a r - 0
5
S e p - 0 5
M a r - 0
6
S e p - 0 6
M a r - 0
7
S e p - 0 7
M a r - 0
8
S e p - 0 8
M a r - 0
9
S e p - 0 9
M a r - 1
0
S e p - 1 0
M a r - 1
1
(%)(x) Price/ 1-yr fwd book
12 mth rolling Core RoE (R)
Source: Bloomberg, Company, RCML Research
Fig 135 - Price to 1-yr fwd EPS
0
3
6
9
12
15
18
M a r - 0 5
S e p - 0 5
M a r - 0 6
S e p - 0 6
M a r - 0 7
S e p - 0 7
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
(x)Price/ 1-yr fwd EPS
Source: Bloomberg, Company, RCML Research
Earnings projected to grow at ~30%+CAGR over 2010–12; BUY
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Standalone financials
Profit and Loss statement Key ratios
Y/E March (LKR mn) CY09 CY10 CY11E CY12EInterest earned 34,836 30,564 35,882 42,875
Interest expended 20,281 14,777 17,980 21,589
Net interest income 14,555 15,787 17,902 21,286
Non-interest income 6,481 7,541 8,672 9,973
Operating expenses 11,913 13,731 15,367 17,464
Pre-provisioning profits 9,123 9,597 11,207 13,795
Provision & contingencies 710 344 772 927
PBT 8,361 9,112 10,435 12,868
Income tax & VAT 3,807 4,225 4,300 5,303
Net profit 4,553 4,887 6,135 7,566
Y/E March (LKR mn) CY09 CY10 CY11E CY12EValuation ratios (x)
P/E 19.7 18.5 14.7 11.9
P/BV 4.3 3.7 3.2 2.7
P/ABV 5.0 4.1 3.5 2.9
Return Ratios (%)
Spread analysis
Yield on advances 16.6 12.9 12.6 12.6
Yield on investments 12.2 9.6 9.8 9.9
Cost of funds 9.1 6.0 6.2 6.2
NIMs 5.8 5.6 5.5 5.5
Operating ratios
Operating cost to income 56.6 58.9 57.8 55.9
Operating expenses/Avg. assets 4.4 4.6 4.4 4.2
Proportion of CASA deposits 46.1 52.2 50.9 49.8
Non-int Inc/ Total income 30.8 32.3 32.6 31.9
Credit-Deposit ratio 79.3 84.5 84.6 84.7
Investment/Deposit 27.8 27.0 26.6 26.1
Asset quality & Capital
Gross NPA 6.2 4.5 4.0 3.6
Net NPA 2.9 2.0 1.7 1.5
Coverage ratio 52.8 56.6 57.7 58.3
CAR 13.2 12.6 12.2 11.9
Tier I 11.1 11.0 10.8 10.7
Growth ratios
Net interest income 16.1 8.5 13.4 18.9
Non-interest Income 10.2 16.4 15.0 15.0
Pre-provisioning profit 18.6 5.2 16.8 23.1
Net profit 57.8 7.3 25.5 23.3
Assets 9.3 12.7 18.6 18.6
Advances (3.6) 20.2 20.0 20.0
Deposits 12.7 12.9 19.9 19.8
Du pont analysis
Net interest income/assets 5.4 5.3 5.2 5.2
Non interest income/assets 2.4 2.5 2.5 2.4
Operating expense/Assets 4.4 4.6 4.4 4.2
Provisions/Assets 0.3 0.1 0.2 0.2Taxes/Assets 1.4 1.4 1.2 1.3
ROA 1.7 1.7 1.8 1.8
Equity/Assets 7.0 7.5 7.6 7.5
ROAE 24.1 21.8 23.4 24.5
Balance sheet Y/E March (LKR mn) CY09 CY10 CY11E CY12E
Cash in hand & bal with CBSL 16,165 18,373 21,449 25,380
Bal with banks, money at call 22,403 15,682 18,034 20,739
Investments 58,476 64,057 75,722 89,007
Advances 166,812 200,590 240,708 288,850
Fixed assets (net) 8,559 8,762 9,634 10,559
Other assets 9,322 10,020 11,022 12,125
Total assets 281,737 317,484 376,570 446,660
Equity capital 5,084 5,319 5,319 5,319
Reserves & surplus 15,516 18,886 22,978 28,024
Net worth 20,600 24,204 28,296 33,342
Deposits 210,363 237,404 284,665 340,925
CASA deposits 97,021 123,929 144,997 169,646
Term deposits 113,342 113,475 139,668 171,279
Borrowings (+sub-ord bonds) 20,651 27,024 31,078 35,739
Other liabilities & provisions 30,123 28,852 32,532 36,653
Total liabilities 281,737 317,484 376,570 446,660
Per share data
Y/E March CY09 CY10 CY11E CY12E
Shares outstanding (mn) 354 357 357 357
FDEPS (LKR) 12.9 13.7 17.2 21.2
DPS (LKR) 4.3 4.7 5.7 7.0
Book value (LKR) 58 68 79 93
Adjusted book value (LKR) 50 62 73 86
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Quarterly trend
Particulars Q4CY10 Q1CY10 Q2CY10 Q3CY11 Q4CY11
Net interest income 3,822 3,661 3,863 3,933 4,330
YoY growth (%) 11.1 6.9 7.1 6.2 13.3
QoQ growth (%) 3.2 (4.2) 5.5 1.8 10.1
Non - interest income 1,333 1,393 2,001 2,014 1,706
Total income 5,155 5,054 5,863 5,947 6,036
Total operating expenses 2,874 3,306 3,400 3,689 3,335
- Employee expenses 1,370 1,472 1,508 1,477 1,526
Pre-provision profit 2,281 1,748 2,463 2,257 2,701
Provisions (339) 46 8 37 (42)
PBT 2,618 1,697 2,451 2,230 2,739
Income taxes 732 1,035 1,218 1,172 799
PAT 1,887 662 1,233 1,058 1,940
YoY growth (%) 151.5 (7.5) 23.2 11.3 2.8QoQ growth (%) 98.5 (64.9) 86.4 (14.2) 83.5
Company profile
HNB is the second largest private sector bank in Sri Lanka with a
strong distribution network and market leadership in the retail and
SME segments. The bank has an extensive distribution network of
187 branches and has a strong presence in rural and semi-urban
areas driven by its emphasis on building a regional presence.
Stock performance
0
50
100
150
200
250
300
350
Jan-09 Jun-09 Nov-09 May-10 Oct-10 Apr-11
Recommendation history
Date Event Reco price Tgt price Reco
6-Apr-11 Initiating Coverage 253 300 Buy
l Buy
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Diversified
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70
Gaurang Kakkad Varun Lohchab
(91-22) 6766 3470 (91-22) 6766 3458
[email protected] [email protected]
Profitability and return ratios
(%) FY10 FY11E FY12E FY13E
EBITDA margin 5.4 5.2 8.6 12.2
EBIT margin 0.6 0.9 4.4 8.2
Adj PAT margin 8.4 10.3 12.0 13.8
ROE 8.5 11.7 14.9 17.9
ROCE 0.5 0.8 4.7 9.3
Financial highlights
(LKR mn) FY10 FY11E FY12E FY13E
Revenue 47,980 58,381 70,397 83,727
Growth (%) 17.0 21.7 20.6 18.9
Adj net income 4,045 6,033 8,450 11,549
Growth (%) 39.2 49.2 40.1 36.7
FDEPS (LKR) 6.5 9.7 13.6 18.6
Growth (%) 41.2 49.2 40.1 36.7
John Keells Holdings Plc
Diversification remains the key
We initiate coverage on John Keells Holdings Plc (JKH) with a BUY rating and aMarch ―12 price target of 340, offering a 15% upside from current levels. JKH isthe largest company by market capitalisation in Sri Lanka and a dominantplayer in the leisure, consumer foods, retail, and transportation businesses. Thecompany will also be able to capitalise on the fast growing financial servicesbusiness through its presence in insurance, banking and capital marketoperations. Further, JKH has interests in property, information technology andplantation services in Sri Lanka. We believe the company is well placed tocapture the resurgence in growth across sectors in the post-war economy.
Strong growth in transportation with stable margins: Transportation remains JKH―slargest profit contributor, accounting for 20% of the group―s revenues but 41% of
profits. We expect the transportation segment to report revenue CAGR of 19% overthe next three years to LKR 16.1bn in FY13. EBIT margins for the segment are at25% and are likely to be maintained over our forecast period.
Strong rebound in leisure business post-war: JKH is amongst the top players inthe hotel industry with ~2,000 hotel rooms (including resorts in the Maldives).The leisure segment has the group―s single largest net asset exposure,encompassing two city hotels that offer more than 40% of the five-star roomcapacity in Colombo, seven resorts spread across prime tourism spots in SriLanka and four resorts in the Maldives. We expect the leisure business to report a25% revenue CAGR over FY10-FY13 as average room rates (ARR) andoccupancy levels improve across assets. EBIT margins for the business are
projected to nearly double from 13% in FY10 to 25% in FY13.Retail expansion to spur growth in consumers business: JKH is a market leaderin the soft drink and ice cream categories in Sri Lanka with its Elephant House brand. It is also a dominant player in the processed meats segment. This apart,the company operates in the retail segment through its Keells Super chain of supermarkets. We expect the foods and retail businesses to report a 10% and25% CAGR in revenues respectively over FY10-FY13.
Property biz to see stable margins; for Financials strong all-round growth: Weexpect a bulk of property business sales to come from the three towers comprising475 apartments at Colombo, while the financial services business is likely to reportstrong growth across insurance, banking and capital market operations.
Initiate with BUY: JKH is currently trading at a P/E of 21.7x and 15.9x its FY12Eand FY13E earnings respectively. We initiate coverage on the stock with a BUYrating and an SOTP-based price target of LKR 340.
CMP TARGET RATING RISK
LKR 296 LKR 340 BUY MEDIUM
CSE BLOOMBERG
JKH.N JKH SL
Company data
Market cap (LKR mn / US$ mn) 183,635/ 1,700
Outstanding equity shares (mn) 620.4
Free float (%) 100
Dividend yield (%) 1.0
52-week high/low (LKR) 360 / 177
3-month average daily volume 321,982
Stock performance
Returns (%) CMP 1-mth 3-mth 6-mth
JKH 297 2.5 (0.4) (12.2)
CSE Index 7,022 (0.1) (1.0) (8.6)
Valuation matrix(x) FY10E FY11E FY12E FY13E
P/E @ CMP 45.4 30.4 21.7 15.9
P/E @ Target 52.2 35.0 25.0 18.3
EV/EBITDA @ CMP 76.0 64.6 32.6 19.3
RCML vs consensus
ParameterFY12E FY13E
RCML Cons RCML Cons
Sales (LKR mn) 70,397 NA 83,727 NA
EPS (LKR) 13.6 NA 18.6 NA
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Investment rationale
Conglomerate with well-diversified presence
JKH is a dominant player in Sri Lanka―s transportation, leisure, consumer foods and retailindustries. The company also has a presence in insurance, banking and capital market
operations, apart from interests in property, information technology and tea/rubberplantations. We believe JKH is in a strong position to capture the resurgence in growthacross sectors in post-war Sri Lanka.
Fig 136 - JKH segmental revenue breakup (FY10)
Consumer
Foods &
Retail
33.0%
Leisure
24.0%
Financial
Services
11.0%
Others
5.9%Property
3.4%
Information
Technology
3.0%
Transportation
19.8%
Source: Company, RCML Research
Fig 137 - JKH segmental EBIT breakup (FY10)
Transportati
on
30.2%
Others
29.8%
Leisure
18.8%
Financial
Services
10.7%
Consumer
Foods &
Retail
5.3%
Property
4.9%
Information
Technology
0.2%
Source: Company, RCML Research
Fig 138 - JKH segmental revenue breakup (FY13)
Consumer
Foods &
Retail
31.9%
Leisure
26.7%
Financial
Services
12.3%
Others4.5%
Property3.1%
Information
Technology
2.3%
Transportation
19.2%
Source: Company, RCML Research
Fig 139 - JKH segmental EBIT breakup (FY13)
Information
Technology
0.6%
Property4.0%
Others5.4%
Financial
Services
12.9%
Consumer
Foods &
Retail
16.7%
Leisure
35.1%
Transportation
25.2%
Source: Company, RCML Research
Strong growth visibility in transportation JKH―s mainstay is its transportation business which accounts for 20% of the group―srevenues but 41% of the profits (PAT of LKR 2.3bn in FY10, up 38% YoY). JKH holds a42% stake in South Asia Gateway Terminals (SAGT) which is the strongest growth driverfor the business. SAGT has a capacity of 2mn TEU and reported a throughput of 1.88mnTEU in FY10, a growth of 7%. The expected build-up in infrastructure projects and tradevolumes in Sri Lanka, with accelerated development in the formerly strife-torn northernand eastern regions, augurs well for growth in the transportation business.
JKH remains the largest cargo and
logistics service provider in Sri Lanka
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Fig 140 - SAGT monthly TEU―s trend
0
20,00040,000
60,000
80,000100,000120,000
140,000
160,000180,000
200,000
J a n - 0 9
M a r - 0 9
M a y - 0 9
J u l - 0 9
S e p - 0 9
N o v - 0 9
J a n - 1 0
M a r - 1 0
M a y - 1 0
J u l - 1 0
(TEU's)
Source: Company
The company plans to bid for a new terminal at the Colombo South Harbor, which
could lead to a capex requirement of US$ 350mn over the next 4 –5 years, if successful. JKH also has joint ventures with Deutsche Post for DHL Air Express and A P Moller forMaersk Lanka. Other operations include freight forwarding, warehousing and supplychain management.
We expect the transportation segment to report a 19% CAGR in revenue over the nextthree years to LKR 16.1bn in FY13. Segmental EBIT margins are at 25% and will likelybe maintained over our forecast period.
Fig 141 - Transportation segment sales trend
02,0004,0006,0008,000
10,00012,00014,00016,000
18,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
(30)(20)(10)0102030405060
70
Sales Sales growth (R)(LKR mn) (%)
Source: Company, RCML Research
Fig 142 - Transportation segment EBIT trend
0500
1,0001,5002,0002,5003,0003,5004,0004,500
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
0%
500%
1000%
1500%
2000%
2500%
3000%
3500%
EBIT EBIT margin (R)(LKRmn)
Source: Company, RCML Research
Conflict resolution supporting strong recovery in leisure business JKH is amongst the top players in the Sri Lankan hotel industry with ~2,000 hotel rooms(including resorts in the Maldives). The company―s hotel business, which was makinglosses during the long-running civil war, is now likely to be a key beneficiary of thegrowing influx of tourists into the country as well as the government―s thrust on tourismas a key growth driver for the economy. Tourist arrivals into Sri Lanka rose 22% in FY10following the end of civil war in May ―09 (and subsequent removal of internationaltravel advisories).
Strong revival in tourist traffic with the
return to peace
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Fig 143 - Monthly tourist arrivals
0
10,000
20,000
30,000
40,000
50,00060,000
70,000
80,000
90,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2006 2007 2008 2009 2010
Source: Company
Fig 144 - Tourist arrivals to the region
0
5,000
10,000
15,000
20,000
25,000
India Indonesia Vietnam Sri Lanka
1990 2008('000)
Source: Company, RCML Research
Fig 145 - Tourist arrivals to Sri Lanka (1982 – 2010)
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
1982 1986 1990 1994 1998 2002 2006 2010 Source: Company, RCML Research
JKH operates under two brands, Cinnamon Hotels and Resorts, and Chaaya Hotels and
Resorts. The leisure segment has the group―s single largest net asset exposure,encompassing two city hotels that offer more than 40% of the five-star room capacity inColombo, seven resorts spread across prime tourism spots in Sri Lanka, and four resortsin the Maldives.
Fig 146 - Cinnamon Grand operational performance
0
20
40
60
80
100
M a y - 0 9
J u n - 0 9
J u l - 0 9
A u g - 0 9
S e p - 0 9
O c t - 0 9
N o v - 0 9
D e c - 0 9
J a n - 1 0
F e b - 1 0
M a r - 1 0
0
20
40
60
80
100
Average room Rate Occupancy (R)(US$) (%)
Source: Company, RCML Research
Fig 147 - Cinnamon Lakeside operational performance
0
1020
3040
50
607080
S e p - 0 9
O c t - 0 9
N o v - 0 9
D e c - 0 9
J a n - 1 0
F e b - 1 0
M a r - 1 0
0
20
40
60
80
100
Average room Rate Occupancy (R)(US$) (%)
Source: Company, RCML Research
JKH operates 13 hotels and resorts in Sri
Lanka and the Maldives with ~2000
rooms
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Fig 148 - JKH Hotels operational details
Colombo Hotels
Rooms (No) 850 850 850 850
Increase (%) 0.0% 0.0% 0.0%
Room Revenues LKR mn 1,885 2,356 3,141 3,770
Occupancy rate(%) 75.0% 75.0% 80.0% 80.0%
ARR (LKR) 8,100 10,125 12,656 15,188
Realisation Increase (%) 10.3% 25.0% 25.0% 20.0%
Other Revenues 1,335 1,602 1,923 2,307
Growth% 20% 20% 20%
Country side resorts
Rooms (No) 800 800 1,000 1,200
Increase (%) 0.0% 25.0% 20.0%
Room Revenues LKR mn 946 1,537 2,255 2,976
Occupancy rate(%) 75.0% 75.0% 80.0% 80.0%
ARR (LKR) 4,320 7,020 7,722 8,494Realisation Increase (%) 2.6% 0.0% 10.0% 10.0%
Other Revenues 3,079 3,695 4,434 5,320
Growth% 20% 20% 20%
Maldives Hotels
Rooms (No) 340 340 340 340
Increase (%) 0.0% 0.0% 0.0%
Room Revenues (LKR mn) 402 653 719 791
Occupancy rate(%) 75.0% 75.0% 75.0% 75.0%
ARR (LKR) 4,320 7,020 7,722 8,494
Realisation Increase (%) 0.0% 10.0% 10.0%
Other Revenues 1,323 1,587 1,905 2,286
Growth% 20% 20% 20%
Destination Management Revenues 2,530 3,162 3,953 4,941
Growth% 25% 25% 25%
Source: RCML Research
In the resorts segment, JKH has an inventory of 800 rooms across the countrysideoutside Colombo, which have seen a spike in ARR in the second half of FY10. JKH―sMaldivian resorts have a total of 340 rooms. While the Maldives saw a drop in touristarrivals from the traditional European nations in FY10, these have been partly offset byimproved arrivals from China and other emerging destinations like Japan and Russia.
JKH―s Maldivian resorts thus witnessed a recovery from the fourth quarter of FY10 whichhas continued in FY11 as well.
JKH―s hotels business is complemented by its destination management services in SriLanka, the Maldives and India, where it has a 30% market share. Tour operator partnersinclude global players such as Thomas Cook, Kyoni, Hotel Plan and Virgin Holidays.This business reported a 45% growth in the number of passengers handled in FY10. Weexpect a 25% CAGR in revenues from destination management over FY10-FY13.
Growth in destination management coupled with higher hotel ARRs and occupancy ratesis expected to drive a 25% CAGR in the leisure business over FY10-FY13. EBIT margins forthe business are projected to nearly double from 13% in FY10 to 25% in FY13 as theimproved ARRs and occupancy rates flow largely to the bottomline. The company is
unlikely to see any significant capex in its city hotels over the next 3–4 years, though itdoes plan to expand its resorts, with a likely addition of 200 rooms per year.
Hotel operations complemented by
destination management in Sri Lanka,
Maldives and India
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Fig 149 - Leisure segment sales trend
0
5,000
10,000
15,000
20,000
25,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
(20)
0
20
40
60
80
100
120
140
Sales Sales growth (R)(LKR mn) (%)
Source: Company, RCML Research
Fig 150 - Leisure segment EBIT trend
0
1,000
2,000
3,000
4,000
5,000
6,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
0
5
10
15
20
25
30
EBIT EBIT margin (R)(LKR mn) (%)
Source: Company, RCML Research
Retail to augment consumer business growth JKH―s consumer foods business, which includes soft drinks, ice creams, processed meats andretailing, has witnessed a recovery in FY11 after significant downtrading in premium brands
in the aftermath of the global recession. Incremental growth in the business is likely to comefrom the expanded consumer base in the northern and eastern regions of the country.
JKH is a leader in carbonated soft drinks (40–45% market share) and ice creams (65%market share) in Sri Lanka with its Elephant brand. The company is also a market leaderin the processed meats segment with a 75% share, under the Keells and Krest brands. Abulk of its revenues in the consumer foods segment is, however, derived from icecreams and soft drinks. JKH has a strong island-wide distributor network acrosssegments. We expect the consumer foods business to report a revenue CAGR of 10%over FY10-FY13 from LKR 6.7bn to LKR 8.9bn. EBIT margins currently stand at 6–7%which are likely to rise to 10–12% by FY13.
JKH also operates in the retail segment through the Keells Super chain of supermarkets. It
has 40 stores with an average area of 6,000sq ft and average sales of LKR 37,916/sq ft(FY10). We expect the company to add 10 stores per year and clock an average salesCAGR of 3% (per sq ft) over FY10-FY13. On the back of this robust expansion, weestimate a 25% CAGR in revenues from the retail business, with revenues rising fromLKR 9.1bn in FY10 to LKR 17.7bn in FY13. Private labels (currently 5% of retailturnover) are likely to contribute a higher share of revenues as the company hasintroduced several new private label products over the past two years. We expect animprovement in retail business EBIT margins from the current flat margins to 2–3% overFY13. The company is likely to incur capex of US$ 20mn in this business over the nexttwo years.
Fig 151 - Consumer Foods & Retail segment sales trend
0
5,000
10,000
15,000
20,000
25,000
30,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
(5)
0
5
10
15
20
25
30Sales Sales growth (R)(LKR mn) (%)
Source: Company, RCML Research
Fig 152 - Consumer Foods & Retail segment EBIT trend
0
500
1,000
1,500
2,000
2,500
3,000
F Y 0 3
F Y 0 4
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
0
2
4
6
8
10
12EBIT EBIT margin (R)(LKR mn) (%)
Source: Company, RCML Research
Market leader in soft drinks, ice creams
and processed meats
Retail chain Keells Super set for rapid
growth
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Fig 153 - Retail store count and sales per sqft
4050
60
70
37,916
38,674
40,221
42,233
0
10
20
30
40
50
60
70
80
FY10 FY11E FY12E FY13E
35,000
36,000
37,000
38,000
39,000
40,000
41,000
42,000
43,000Reta il outle ts Sales pe r sqft (R) (LKR)
Source: Company
Property business to see stable margins
Over FY10 and FY11, 90% of the property business sales accrued from a singleresidential project called “Emperor Apartments‖. This project has now been fully sold bythe company, at an average rate of US$ 230/sq ft. We expect the next leg of growth tocome from the construction of a new apartment complex with three towers and 475apartments at Union Place, Colombo. Construction is likely to begin in April–May thisyear and will continue for 2–3 years. About 70% of the apartments have been pre-soldat a price of ~US$ 120/sq ft. We expect the property business to report 16.5% salesCAGR over FY10-FY13, with EBIT margins likely to remain stable at 25%. The companyhas invested US$ 10mn as land cost for the new apartment complex and expects toincur US$ 50mn as construction cost.
Going forward the end of the conflict presents many opportunities for the Propertybusiness of the group. Expectations of relatively low interest rates over the short tomedium term and increased willingness of banks to lend money is expected to spurgrowth in the property prices. Increased economic activity and the return of expatriateSri Lankans is likely to boost the rental market. This is likely to filter through to demandfor apartments as an increase in rentals is considered as a primary driver of real estateprices. The group will use its land bank to cater to the development opportunitiesavailable. The JKH group is in the process of identifying and evaluating opportunities toexpand its land bank both within and outside Colombo. JKH currently has 30 acres of prime land in Colombo with an estimated market value of US$ 200mn.
Fig 154 - Property segment sales trend
0
500
1,000
1,500
2,000
2,500
3,000
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
(100)(50)050100150200250300350
Sales Sales growth (R)(LKR mn) (%)
Source: Company, RCML Research
Fig 155 - Property segment EBIT trend
0
200
400
600
800
1,000
F Y 0 5
F Y 0 6
F Y 0 7
F Y 0 8
F Y 0 9
F Y 1 0
F Y 1 1 E
F Y 1 2 E
F Y 1 3 E
0
10
20
30
40
50
6070
EBIT EBIT margin (R)(LKR mn) (%)
Source: Company, RCML Research
Property business EBIT margins likely to
remain healthy at 25%
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78
Valuation
SOTP-based price target of LKR 340
Considering the JKH group―s diversified presence, we have valued each of thebusinesses separately to fully capture their growth potential. JKH is currently trading at aP/E of 21.7x/15.9x FY12E/FY13E earnings. We initiate coverage on the stock with aMarch ―12 target price of LKR 340, providing a 15% upside from current levels.
Fig 158 - SOTP valuation
Basis BusinessFY13
(LKR mn)EPS
ValuationMethodology
Multiple(x)
Price
EPS
Transportation 3,826 6.2 P/E 15.0 92.5
Consumer Foods & retail 1,253 2.0 P/E 20.0 40.4
Leisure 4,512 7.3 P/E 20.0 145.5
Property 556 0.9 P/E 15.0 13.4
Financial Services 1,341 2.2 P/E 15.0 32.4
Sales Information Technology 1,915 3.1 P/Sales 1.0 3.1
Others 3,755 6.1 P/Sales 1.0 6.1Cash per share 4,355 7.0 7.0
Target Price (LKR) 340
CMP (LKR) 296
Upside / (Downside) (%) 15%
Rating BUY
Source: RCML Research
Initiate with BUY rating and March ―12
price target of LKR 340
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Key concerns
Significant dependence on the leisure segment JKH―s leisure business accounts for ~40% of capital employed, 25% of the group―srevenue and 30% of EBIT. Thus, the group―s performance is highly dependent on
tourism in the country.
Illiquid stock marketDuring the civil war, Sri Lanka―s stock market was highly illiquid with stagnatin gvolumes and fund flows. Only in the past couple of years, following resolution of theconflict, has liquidity emerged and investor interest increased. Any withdrawal of flowsremains a key risk for investors in such a market.
Company profile
Conglomerate with diverse business interests in Sri Lanka
JKH is Sri Lanka―s largest listed company with business interests in transportation,leisure, consumer foods & retail, financial services, information technology andplantation, amongst others. The company started as a produce and exchange broker inthe 1870s and has constantly reinvented itself to cater to the growth opportunities in theSri Lankan market.
Entire shareholding free float in nature JKH is a professionally run company and has no promoter group holding. Its entireshareholding is free float with the largest investor being an individual, Mr. S E Captain,who holds a 14.9% stake. A majority of the board of directors comprise independentnon-executive directors.
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Consolidated financials
Profit and Loss statement Balance sheet
Y/E March (LKR mn) FY10 FY11E FY12E FY13ERevenues 47,980 58,381 70,397 83,727
Growth (%) 17.0 21.7 20.6 18.9
EBITDA 2,586 3,041 6,033 10,179
Growth (%) (10.4) 17.6 98.4 68.7
Depreciation & amortisation 2,298 2,515 2,935 3,313
EBIT 287 525 3,097 6,866
Growth (%) (63.7) 83.0 489.5 121.7
Interest 1,370 1,481 1,777 2,023
Other income 5,021 5,128 5,008 4,998
EBT 3,982 4,172 6,329 9,841
Income taxes 985 1,053 1,434 2,380
Effective tax rate (%) 24.7 25.2 22.6 24.2
Extraordinary items - - - -
Min into / inc from associates 2,205 2,914 3,555 4,088
Reported net income 5,201 6,033 8,450 11,549
Adjustments - - - -
Adjusted net income 4,045 6,033 8,450 11,549
Growth (%) 39.2 49.2 40.1 36.7
Shares outstanding (mn) 620.4 620.4 620.4 620.4
FDEPS (LKR) (adj) 6.5 9.7 13.6 18.6
Growth (%) 41.2 49.2 40.1 36.7
DPS (LKR) 3.0 3.0 3.0 3.0
Y/E March (LKR mn) FY10 FY11E FY12E FY13ECash and cash eq 3,013 1,196 1,812 3,424
Accounts receivable 9,934 12,156 14,465 17,204
Inventories 2,295 2,814 3,520 4,783
Other current assets 23 23 23 23
Investments 44,365 42,365 39,365 39,365
Gross fixed assets 34,565 40,563 47,760 54,238
Net fixed assets 34,565 40,563 47,760 54,238
CWIP 4,577 4,577 4,577 4,577
Intangible assets 2,556 2,556 2,556 2,556
Deferred tax assets, net - - - -
Other assets 1,907 2,335 2,816 3,349
Total assets 98,658 104,009 112,317 124,942
Accounts payable 16,699 19,194 22,180 25,233
Other current liabilities 6,430 6,430 6,430 6,430
Provisions 12,946 12,946 12,946 12,946
Debt funds 10,707 9,707 8,757 8,957
Other liabilities 2,044 2,044 2,044 2,044
Equity capital 620 620 620 620
Reserves & surplus 49,212 53,068 59,340 68,711
Shareholder's funds 49,832 53,688 59,961 69,332
Total liabilities 98,658 104,009 112,317 124,942
BVPS (LKR) 80.3 86.5 96.7 111.8
Cash flow statement Financial ratios Y/E March (LKR mn) FY10 FY11E FY12E FY13E
Net income + Depreciation 5,312 3,996 4,712 5,336
Non-cash adjustments 1,238 1,721 3,471 6,095
Changes in working capital 3,245 1,325 2,491 (1,482)
Cash flow from operations 9,794 7,042 10,674 9,948
Capital expenditure (1,597) (5,998) (7,197) (6,478)
Change in investments 174 - - -
Other investing cash flow (671) - - -
Cash flow from investing (2,094) (5,998) (7,197) (6,478)
Issue of equity 797 - - -
Issue/repay debt - - - -
Dividends paid (1,224) (1,861) (1,861) (1,861)
Other financing cash flow (209) (1,000) (999) 2
Change in cash & cash eq 7,064 (1,817) 616 1,612
Closing cash & cash eq 3,013 1,196 1,812 3,424
Y/E March FY10 FY11E FY12E FY13E
Profitability & Return ratios (%)
EBITDA margin 5.4 5.2 8.6 12.2
EBIT margin 0.6 0.9 4.4 8.2
Net profit margin 8.4 10.3 12.0 13.8
ROE 8.5 11.7 14.9 17.9
ROCE 0.5 0.8 4.7 9.3
Working Capital & Liquidity ratios
Receivables (days) 60 59 57 58
Inventory (days) 22 21 22 26
Payables (days) 29 25 25 26
Current ratio (x) 2.1 1.7 1.5 1.6
Quick ratio (x) 1.2 0.8 0.7 0.7
Turnover & Leverage ratios (x)
Gross asset turnover 1.4 1.6 1.6 1.6
Total asset turnover 0.5 0.6 0.7 0.7
Interest coverage ratio 0.2 0.4 1.7 3.4
Adjusted debt/equity 0.2 0.2 0.1 0.1
Valuation ratios (x)
EV/Sales 4.1 3.4 2.8 2.3
EV/EBITDA 76.0 64.6 32.6 19.3
P/E 45.4 30.4 21.7 15.9
P/BV 3.7 3.4 3.1 2.6
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Quarterly trend
Particulars Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11
Revenue (LKR mn) 12,754 13,925 12,919 13,967 15,616
YoY growth (%) 37.03 40.65 28.33 24.33 22.44
QoQ growth (%) 13.53 9.18 (7.22) 8.11 11.80
EBITDA (LKR mn) 1,753 3,418 1,406 3,502 2,635
EBITDA margin (%) 13.74 24.55 10.88 25.07 16.87
Adj net income (LKR mn) 1,242 3,012 1,077 3,038 2,027
YoY growth (%) 57 35 56 401 63
QoQ growth (%) 105 143 (64) 182 (33)
Company profile
John Keells Holdings PLC is a diversified business operating in Sri
Lanka. The group's businesses include food and beverage,
transportation, tea and rubber plantations, tour operations, hotel
ownership and operations, share broking, investment banking,
computer hardware and software services, breeding of fresh water
fish, domestic and international trade, and property development.
Stock performance
0
50
100
150
200
250
300
350
Jan-09 Jun-09 Nov-09 May-10 Oct-10 Apr-11
Recommendation history
Date Event Reco price Tgt price Reco
6-Apr-11 Initiating Coverage 296 340 Buy
l Buy
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References
Mahinda Chintana Vision 2010, Department of National Planning, Govt. Of Sri Lanka
Sri Lanka – Millennium Development Goals, United Nations DevelopmentProgramme (UNDP)
Sri Lanka Labour Force Survey, Annual Report – 2009, Department of Census andStatistics
Roadmap – Monetary and Financial Sector Policies for 2011 and Beyond, CentralBank of Sri Lanka
Sri Lanka: Improving the Rural and Urban Investment Climate, ADB/World Bank
Annual Statistical Report (2009), Sri Lanka Tourism Development Authority
Budget Speech 2011, Ministry of Finance and Planning, Govt. Of Sri Lanka
Investment Policy Review – Sri Lanka (2004), United Nations Conference on Tradeand Development
Telecommunications Regulatory Commission of Sri Lanka, www.trc.gov.lk
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Sri Lanka Diary1 January 2011
Dehiwala–Mount Lavinia: 30km from ColomboA group of us from the Religare equity research team
rang in the New Year at Sri Lanka―s capital city of
Colombo, where celebrations were
joyous as locals and tourists
alike ushered in the nation―s
second year of peace after
decades of strife. As the
New Year dawned, it was
time for us to leave the
celebrations behind and
head into the hinterland for a
taste of life in Sri Lanka―s rural
and semi-urban pockets. We drove
down to Dehiwala and Mount Lavinia which are
located just south of Colombo.
Dehiwala is home to Sri Lanka―s National Zoological
Gardens which remain one of Asia―s largest. The zoo
houses an exciting variety of wildlife and
we were able to spot an exotic
white tiger, several lions,
double-horned camels, a
stately giraffe, the elusive
hippopotamus and an
assortment of primates. But
the highlight of our visit was
an ‘Elephant Show― that ran to a
full house of 500 enthusiastic
visitors and saw the pachyderms kicking
off the evening with a lively game of football and
closing the show with some remarkable ‘disco― dance.
MOUNT LAVINIA
From Dehiwala, we started for Mount Lavinia, a popular seaside tourist spot. Mt. Lavinia has a breathtaking beachfront
and boasts of modern facilities blended with a magical touch of antiquity. The seafront is studded with attractive
colonial villas, the most popular being The Mount Lavinia Hotel which is a symbol of the legendary love of the British
Governor General of Ceylon, Sir Thomas Maitland, and the beautiful mestizo dancer, Lovina.
2 January 2011
Pinnawala Elephant Orphanage–Kandy: 120km from Colombo
On the next leg of our journey, we headed for Kandy,
the capital of the Central Province of Sri Lanka. En
route, we stopped at Pinnawala Elephant
Orphanage (90km from Colombo)—
among the country―s most popular
tourist destinations. Here,
elephant herds range about in asetting that―s as close to nature
as possible even as they are
closely monitored by mahouts
and volunteers. In a thrilling
experience, we were allowed to
feed some of the (not so little) cubs!
We headed for Kandy around noon. The Colombo–
Kandy road was a pleasure to travel on and gave us a
chance to admire Sri Lanka―s famed scenic beauty—
endless rubber plantations, emerald green paddy fields
and gently rolling hills. At steady intervals, we found
small shops that sold souvenirs of cane and
coconut fibre. The shops actually
fronted the artisans― homes.
These craftsmen surprised us
with their awareness of domestic politics and the
economy as well as their
keen interest in educating
their children. Most of the
youngsters help create the
souvenirs but also attend school.
After a few pit stops at these craft stores, we
drove on but not without a selection of the local
paintings and coconut elephant ‘sculptures―.
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TEMPLE OF TOOTH RELIC, KANDY
We arrived at Kandy (1,640ft above sea level) at around
3pm. Kandy is known for the Buddhist Temple of Tooth
Relic, a UNSECO world heritage site. It was raining when
we reached The Temple of Tooth, shrouding the entiresetting in a beautiful mist. The temple was originally part of
the Royal Palace complex of the Kandyan Kingdom and is
now one of the holiest places of worship and pilgrimage for
Buddhists around the world.
Kandy―s economy is second only to that of Colombo. The
city houses branch offices of major banks and corporations, with a vibrant retail economy offering prominent brands
of textiles, FMCG, furniture, tea and jewellery. Government offices and research centres also dot the landscape. Of
course, Kandy―s markets cater to buyers not only of commercial goods but also of cultural artifacts.
GIRAGAMA TEA ESTATE AT PILIMATALAWA
Our last excursion was to the Giragama Tea Estate at
Pilimatalawala. Sri Lanka is the world―s fourth largest
producer of tea, with the industry being one of the
country―s main sources of foreign exchange and a
significant source of income for labourers. We learnt that
Ceylon tea is divided into three groups: high or upcountry
(Udarata), mid-country (Medarata), and low-country
(Pahatharata), based on where the crop is grown. Tea
produced in Sri Lanka carries the ‘Lion Logo― (as doesLion Beer, a favourite among the Lankan population).
Friendly employees showed us around the tea plantation
and explained the various stages involved in bringing the
finest quality brew to customers. We left the estate carrying with us the delicious aroma (and several packets) of Sri
Lankan tea along with memories of a most delightful journey.
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Religare Capital Markets – India Research
Suhas Harinarayanan
(91-22) 6766 [email protected]
Manoj Singla
(91-22) 6766 [email protected]
Co-Heads India Equity Product, Religare Capital Markets
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