Following an analysis of recent financial statements of several listed companies, the outlook of different industries in Sri Lanka in the year 2011 is promising although there are concerns in certain sectors such as plantation due to the wage agreement putting pressure on earnings, and in the ceramics industry due to rising costs of oil prices, according to economic research analysts.
The tourism industry had benefited from sector earnings with an increase in profitability mostly in the hotel sector while in the plantation industry the highest prices had been recorded from the rubber plantations which had done exceptionally well, according to Talaal Maruzook, Senior Research Analyst at C T Smiths Stock Brokers.
“Tourism has been moving forward with a lot of foreign companies having expansion plans in Sri Lanka. This is good for the economy because financial expenses would resultantly go up,” Maruzook said.
According to a recent research report released by NDB Stockbrokers this week, profits of the largest firms in Sri Lanka’s stock market had shot up by 74 percent in the 9-months to December 2010 to 69.3 billion rupees up from 39.8 billion rupees a year earlier. The broker had sampled 68 companies representing 64 percent of total market capitalization at the Colombo Stock Exchange for their study and had also used twelve month results for 15 firms represented in the analysis.
The report said financial firms, diversified holdings Banks, finance and insurance firms in the sample had reported a 28 percent increase in profits without exceptional items, pharmaceuticals 32 percent, food beverages and tobacco 42 percent, chemicals, diversified holdings 65 percent and, manufacturing 82 percent.
Telecoms showed a profit of 197 percent, plantations 213 percent, healthcare 297 percent and hotels 927 percent. The sector was still trading at 35 times earnings estimated for the 2010/11 financial year, NDBS Stockbrokers said.
Hotels and travels had reported the strongest turnaround with earnings growth of 927 percent as companies which lost money in 2009, returned to profits.
Maruzook said that foreign investors were waiting to see what the government has in store for pushing Foreign Direct Investments (FDI) he said, “There has been a strong keenness by foreign investors with lots of inquiries coming in the tourism sector. This is in the wake of Shangri La and a Chinese company looking to develop properties in the Galle Face Hotel-wise.”
But he pointed out that in the plantation sector the concern was that the wages agreement would put pressure on earnings. Adverse weather patterns have affected production. “But I believe strong prices will help them,” added Maruzook.
In the banking sector, the industry had benefited from strong loan growth that brought profits, according to Maruzook.
He went on to note that the ceramics industry was performing well in respect of tiles and wall tiles.
“Ceramic companies have shown strong profitability. But there are concerns regarding cost of production which had gone up to 30 to 40 per cent with oil prices going up,” pointed out Maruzook.
Meanwhile, another Senior Research Analyst at C T Smiths Stock Brokers, Sanjeewa Fernando said that in the banking sector according to the annual report released a few weeks back, the profits had been good.
“When you take 2010, the low interest environment because of the Central Bank’s soft monetary policy had seen interest rates spread between fixed deposits (FDs) and savings being minimal. Therefore, people did not go for FDs. Instead they opted for savings and current accounts which resultantly saw an improvement in the net interest margin of the banking sector,” opined Fernando.
He attributed that improvement because when depositor’s Current and Savings Account Ratio (CASA) improved which saw total costs come down. As such, the net interest margin had improved.
Fernando pointed out that in a ‘low interest scenario with two rate cuts in July-August 2010 when the rates were reduced by the Central Bank, banks reacted by reducing deposit rates and increased their net interest margins. “This saw sector non performing advances improve in 2010 because of the low interest rate environment,” he further observed adding that when non performing advances improved people paying loans with it transferred into interest in suspense account transferred back to interest income.
“This resulted in improving sector net interest margin. These reasons lending to growth contributed to an improvement in net interest margin.”
He concluded that banks’ non interest expenses did not rise much driven by the low interest scenario in 2010.