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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Short term challenges, but long term stability

Short term challenges, but long term stability

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Global Moderator
*Hayleys Chairman on recent policy reversals

Famously coined as the barometer of the Sri Lankan economy, diversified bluechip Hayleys PLC says it has achieved its highest earnings during the recently concluded financial year amidst a challenging environment. Recent policy reversals to contain a balance of payments crisis are causing some difficulties, but the group is confident they would soon secure longer term macroeconomic stability.

In 2009, then Chairman of Hayleys PLC, N. G. Wickremeratne brought out the private sector’s concerns and expectations at the Sri Lanka Economic Summit at a session on inflation, interest rates and exchange rates by showing how the diversified group was affected by all these, and in the process giving the groups the title ‘Barometer of the Sri Lankan economy’, which was repeated in the subsequent annual report.

This year’s annual report too tries to gauge the macroeconomic situation in the country. Its cover shows an iceberg and the message is clear; for Hayleys, and the country, what we see is just the tip of the iceberg.

The present Chairman and Chief Executive Mohan Pandithage also focused on how the macroeconomic environment was affecting the group in Hayleys PLC’s latest annual report for the year 2011/12.

"For the most part of the year we enjoyed domestic economic stability with low interest rates, low inflation and a strong economic growth performance. The measures taken by the government to address some constraints such as high credit growth and a wider current account deficit have resulted in short-term challenges due to higher interest rates, rupee volatility and higher costs of energy, but we believe these policy reforms are important to secure longer term macroeconomic stability," he said.

Pandithage told shareholders that the group was able to record its highest earning despite the challenging environment.

During the year, group turnover increased 15 percent to Rs. 62.5 billion.

Net profits surged 241 percent to Rs. 3.84 billion.

"Major contributions to earnings have been from Agriculture (17.6% of PBT), Hand Protection (39.1 % of PBT), Purification (14.7% of PBT) and Transport (13.8% of PBT)," Pandithage said.

The country’s export sector is facing some pressures from the gloomy economic environments of traditional markets in the west.

"In Hand Protection we have continually developed new products to cater to demands of a dynamic industry. Complex value added gloves such as electricians gloves, cut resistant gloves and chemical resistant gloves have been developed a DPL giving an edge over competition despite the challenges of managing rising cost of production. At the same time new markets have been penetrated in recent years. We are cognizant of the fact that our traditional markets in Europe and the United States are facing economic constraints, and therefore all Group companies have made a conscious decision to diversify export markets. DPL now has significant saes in key emerging economies such as Brazil and India. These measures helped this sector record a PBT of Rs. 1.8 bn this year. As a culture of industrial safety permeates the developing economies, DPL has entrenched itself in a strong position in a growing market," Pandithage said.

Hayleys has also tapped into the agriculture sector, another growth area that took off after a 30 year conflict ended in 2009.

"We enhanced our exposure to the Agri-inputs sub-sector, providing Sri Lanka’s rural farmers with the world’s best technology and grass roots level agricultural extension services. We connect farmers with global markets through our out grower networks for gherkins and jalapeno peppers - serving end markets such as McDonalds and Heinz. Hayleys also provides animal health services and nutrition supplements for a key growth area - the dairy industry. This year our Agriculture Sector turned in PBT of Rs. 846 mn," Pandithage said.

The group is also making use of the country’s geographic advantage and relations with India and China to spur its transport sector. It has also made inroads in to the oil exploration activities taking place in Mannar.

"Sri Lanka has always enjoyed the comparative advantage of location. Historically we have been a mid-point for trade between East and West. Today this advantage has been further enhanced by the fact that Sri Lanka is in close proximity to the fastest growing economic giants in the world - China and India. Intra-Asian trade is expected to grow rapidly in coming years as the emerging economies take their place at the centre stage of the global economy," The Hayleys Chairman said.

"The Transport Sector, Hayleys Advantis, has begun to take advantage of this tremendous potential. At present the Company provides a range of logistical services, providing high value added third party logistics services to multinational companies, represents major global shipping lines, and has more recently provided logistical support services to the ongoing oil exploration off the coast of Mannar.

"We have also rekindled our ship owning and operating activities, targeting certain niche markets, with a view to future expansion. As the country is being positioned as a transport hub for the region, the opportunities in this sector will continue to grow. Despite a weak global economy, which had dampened global trade and forced a reduction in freight rates, the Transport Sector brought in profits of Rs. 661 mn. As the global economy recovers after the current instability, we are confident that this sector will become one of the largest contributors to Group profit."

The group has also made inroads into other growth sectors such as leisure, power, consumer goods, construction materials and business process outsourcing, which is expected to take Hayleys to greater heights in the not too-distant future; again reflecting the opportunities and potential in the overall economy.

The group also had to face governance issues and undertake "substantial reforms to its textile sector, with further write down of assets leading to a drag in profits. But Pandithage said the difficult changes would help turnaround the sector in the "near future". This too, is reflective of the kind of steps state-owned enterprises would have to take sooner or later if the country is to realise its true potential.

The tea sector of the group also faced difficulties due to the wage increases in April 2011. However, by maintaining quality, adopting ethical practices and aggressive marketing, Pandithage is confident the tea sector has a bright future, which mirrors the issues faces by the country’s tea industry at present. Rubber continues to be buoyant and the group is making an effort to invest in re-planting and upgrading facilities.

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