Performance has been enhanced, despite price increases, by growing consumer preference for soft alcohol, increased tourist arrivals helping beer sales and growing affluence, a research report on Lion says.
John Keells Stockbrokers said in the report that the performance by the country’s dominant brewer was driven mainly by higher revenue and a substantial foreign exchange gain of Rs.42 million which offset sharply higher finance expenses that had nearly doubled and margin contraction at both the gross and operating level.
Cumulative earnings for the first six months were up 15.4% year-on-year though slightly dragged down by a weak first quarter in which earnings grew by just 4% year-on-year due to higher finance charges and foreign exchange losses on foreign currency denominated borrowings.
The report said that gross margins in the first half had dropped sharply by six percentage points on the back of a 47% year-on-year increase in cost of sales while operating margins dipped 3.1 percentage points year-on-year.
The company had been hit by electricity and fuel price hikes imposed in February this year which had increased both manufacturing and transportation costs, as well as an increase in the price of imported raw materials due to the sharp depreciation of the rupee in the first quarter.
The report also said that soft liquor production, largely beer, had increased 14.5% year-on-year between January and May this year while hard liquor production dropped 2.6% during this period. Demand for beer remained strong despite dampened consumer sentiment and an excise duty hike of 15% to 18% over the first half that pushed up retail prices of beer.
"While local consumers had traditionally preferred hard liquor, we believe beer is gaining increased domestic acceptance against the post war economic factor of rising disposable incomes, higher affluence and an expansion in the availability of recreational/entertainment facilities," the report said.
It noted that the growth in tourist arrivals up 16% to October 2012 has further driven growth in the soft liquor market as per capita beer consumption is typically higher among tourists against domestic consumers.