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29th June 1997

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Bourse to strike a brighter note

By Asantha Sirimanne

The Colombo stock market is looking to make further gains by the year end after a period of consolidation.

Last week the All Share Index topped 800 points, representing a massive 30 per cent gain. Local retailers have been active accounting for an estimated 58 per cent of the action in recent months.

However foreigners have also begun to buy heavily into the market.

"From January to date the net inflow from foreign buyers is Rs 1.1 bn," Jardine Flemings Head of Research Palitha Ambanpola said.

In 1996 net foreign purchases had been Rs 353 mn and in 1995 it was a negative Rs 89 mn.

With the market price to earnings multiple now at 14 analysts believe some stocks are fully valued. But better corporate profits in the coming months are expected to fuel further gains in the coming months.

"With the second quarter results coming in a moderate boom they can be expected by August," says Nouzab Fareed, head of research at Allied Philips Securities.

"We expect the market to reach 875 to 900 by the end of the year."

Others are less bullish expecting a similar performance during the next 12 months.

But in the short term, the market is expected to consolidate below 800, perhaps moving as far down as 750, before moving up later.

Analysts expect substantial earnings growth this year.

Jardine Flemings for example expect earnigns of companies included in their HDF tracker to grow by more than 20 per cent. In 1995 profits growth was a negative 4.5 per cent. In 1993 however it was 40 per cent, recovering from a somewhat low base.

Against the backdrop of a bleak performance during the last two years this year's earnings growth too is expected to be high.

In addition there is better sentiment all around, making people more optimistic.

The recent upswing of the market has been spearheaded by several key sectors.

"Food and beverages, hotels and travel, diversified holdings and plantations have outperformed the index," observed Mr. Ambanpola.

"But there are fundamentally sound reasons for their performance."

The food and beverages sector had been led by stocks such as Ceylon Brewery and Lion Brewery. Brewery rose to Rs 77 from 55 during the last two weeks. This was a direct result of the tax changes that boosted the industry.

Plantations profits were also on the up due to better tea prices and favourable weather. Tea Small Holder Factories for example rose to Rs 69 from only Rs 53 during the past two weeks.

The banking sector has been somewhat subdued except for Sampath Bank. In the past banking stocks have been a favoured target of foreign buyers who were always after liquid stocks.

But increasingly other sectors were becoming more liquid, especially sectors such as plantations.

Analysts say there is a substantial upside for hotel sector shares, and the 25 per cent improvement in tourist arrivals has not been reflected in recent price increases. However the sector's sensitivity to terrorist strikes had increased their relative risk.

"Bookings for the upcoming winter season seem to be very good," says Mr. Fareed.

In addition to higher operating profits from increased revenue, hotels also had tax losses to increase their bottom line.

Lower interest rates, in addition to helping companies improve their profits, were also driving funds into equities as the opportunity cost of equity holdings is much lower now.

However analysts expect interest rates, at least T -Bill yields, to pick up later in the year. But even a 200 basis point increase is thought to be insufficient to make a substantial impact on the market.


Airfares under review

By Asiff Hussein

The IATA Agents Association of Sri Lanka will be shortly appointing a sub-commitee to monitor the recently implemented Market Development Programme (MDT) and its impact on the local air ticketing industry, its new President Nilmin Nanayakkara said at a press briefing recently.

The committee would also be gathering information pertaining to fare structures in neighbouring countries for comparison with local rates, so that the country would not be at a higher selling level than other competing countries.

"If we are at a higher selling level than the other countries, we can lose out our business in the form of pre-paid tickets to other destinations", he explained.

He said that, in this connection, his association would be making recommendations to the government to adjust local fares in accordance with prevailing market rates in neighbouring countries.

Mr. Nanayakkara observed that the Market Development Programme, which has been in operation since January 1997, has helped in salvaging the local air travel industry from hard competition which has threatened to cripple the industry.

The MDP stipulated that no travel agent can discount anything more than five percent. The airlines operating in the country also have agreed fare structures.

Mr. Nanayakkara explained that the idea here was to put an end to the severe competition that characterized the industry before the law came into force. Competition had taken such a serious turn that a number of airlines that were operating the Sri Lankan route (to and from Colombo ) at a loss had decided to pull out.


Germany pledges aid

Germany has committed Rs. 2.475 bn. for Sri Lanka's social and economic development in 1997/98.

Rs. 1.32 bn. in soft loans is earmarked for financial cooperation and Rs. 1.155 bn. in grants for technical cooperation projects, a German Embassy news release states.

Bilateral negotiations on development cooperation between Sri Lanka and Germany were concluded on June 19 in Colombo. The heads of delegation B.C. Perera, Secretary, Ministry of Finance and Planning, and Dr. K. van de Sand, Director for Asia and Eastern Europe, Ministry of Economic Cooperation and Development, signed the summary record where both governments agreed upon the basic principles of poverty alleviation and the following focal areas for bilateral cooperation.

• education and vocational training;

• promotion of the performance of the private economic sector;

• rural development;

• energy supply;

• management of natural resources and environmental protection;

• rehabilitation measures for Jaffna and Mannar.

The German side expressed the hope that a lasting negotiated settlement of the military conflict could be reached which would facilitate social and economic development of the country.

The negotiations were preceded by a workshop on poverty alleviation. Policy advisors, representatives of NGOs and scientists elaborated recommendations to increase the efficiency of Sri Lankan-German projects for poverty alleviation They agreed that participatory development models are most successful in bringing about poverty reduction and that capacity should be built up to improve monitoring of the poverty reducting impact of projects.

Close cooperation with community based organisations of the civil society would considerably enhance both the effectiveness and the acceptance of government policies and programmes for poverty alleviation.


Power Generation projects that backfired

By Indika Kulamannage

During the severe 1996 power crisis, many fingers were pointed at the UNP regime on being mainly responsible for not foreseeing and preparing for the crisis.

Here Dr. Sarath Amunugama, Kandy District MP, talks to The Sunday Times Business about some UNP power generation projects that backfired.

The power and energy ministry has made denials about a further electricity price hike, but most consumers are weary of the assurances and expect a tariff hike sooner than later.

It is no secret that the CEB's reserves are the first dwindling as a result of the recent crisis and more so because neither the ministry nor the government is in favour of an immediate 30 percent hike.

Last year's power crisis had a detrimental effect on the economy forcing the CEB to take drastic steps to avert a similar crisis this year. These emergency measures although immensely expensive had to be implemented following the Presidential promise to provide power uninterrupted at any cost?

The finger of accusation is pointed all around at people and organisations to implicate them as those responsible for the power crisis. The main among the accused is the former holder of power in the country, the UNP.

UNP MP for Kandy District Dr. Sarath Amunugama dismissed these 'unfounded' accusations.

"The crisis the country is facing no doubt has put an unfair burden on business and daily life; and until a permanent solution is found, this burden will hover around and constantly keep popping up with the changing weather".

The crisis has also severely affected the poor, Dr. Amunugama added. The UNP during its regime launched a very ambitious rural electrification project which is now in jeopardy .

"We do admit that there were certain shortcomings in this project but as a whole the project was very ambitious. This venture was sponsored by the Asian Development Bank. As a result of this project many a rural home was able to start cottage industries. The quality of life in these areas improved by leaps and bounds. In fact today, the demand is for power more than roads, schools or hospitals."

"Just when the rural sector which has been using only a little electricity was poised to reach greater heights, the crisis set upon them who are unable to afford generators or the like".

The UNP towards the end of its tenure were promoting two major coal power stations. These were the controversial Mihaly International Limited of Canada and another coal plant for which a site was identified at Mawella in the south.

Mihaly was to construct a 300 Mw coal fired power plant in Trincomalee. The UNP government signed a Letter of Intent (LOI) in February 1993, which was valid for one year. Mihaly , however, was not able to generate financing for the project. The LOI was subsequently extended for a further one year.

In the meantime disturbing details started appearing in the local press regarding the operations of Mihaly. According to reports, Mihaly International Limited did not have a regional office and was operating from a private residence. Once the PA government came into office, the agreement was cancelled after a further bit of haggling.

The cancelling of the agreement drew a strong protest from diplomatic quarters with the heads of missions of Canada , Australia, USA and Italy jointly demanding an explanation from the President in a letter dated September 5, 1995.

The letter states that Mihaly has devoted almost five years to the negotiation of an agreement for the building of the power plant. The letter adds that Mihaly International Limited is a "highly professional company with exemplary business credentials and an excellent reputation".

This statement stands in stark contrast to facts already known about the company. It was later revealed that Mihaly had no past experience in building power plants which would have been the reason why it was unable to secure financing for the project.

Dr. Amunugama was however confident that, had the Mihaly power project been given a fair hearing, Sri Lanka would be better off now.

The second project, also a 300 Mw coal fired plant in Mawella had to be abandoned as the SLFP member of parliament in the area organised a massive protest campaign which was based on trivial and unfounded accusations.

Among these accusations was that the Sinharaja forest and the tea plantations would be destroyed, had the Mawella project been implemented. But if the project went through, it would have been a definite beacon to the area especially since the Southern Development Authority would have found the availability of additional power a great boon for its activities.

News has surfaced recently that the PA is now considering the Mawella site for a possible coal plant. Two PA MPs are reported to be backing this proposal at the very site which the SLFP objected to, he said.

Commenting on the proposed coal fired power plant at Kalpitiya, Dr. Amunugama explained that the area concerned was being heavily used for smuggling which he attributed as a reason for the heavy opposition. The land adjoining the proposed site is heavily cultivated and provides a large section of the Colombo market with fruit and vegetables. The farmers are genuinely worried about the coal plant's effect on their crops as well, he added.


MIND YOUR BUSINESS

By BUSINESS BUG
Tobacco forhealthcare

Whenever governments wanted some extra revenue, cigarettes were helpful. A five cent increase and many millions were made in the Treasury by way of taxes.

But now, more than a mere five cent hike is on the cards because a task force on health has recommended that a share of tobacco industry earnings be siphoned to maintain state healthcare services.

So when the new laws come into effect, there maybe a major increase in cigarette prices, and in the not too distant future too...

Beverage style ice cream

A newly introduced ice-cream, launched by a multinational company sans any media publicity has been a tremendous success.

So much so that another giant company, now making the most out of the soft drinks market is also considering a launch into the ice-cream industry.

With an old, established house already feeling the pinch, it seems things are getting hot in the cold world of ice-creams...

Tax respoite for tourism

Tourist arrivals maybe on the rise this year but industry big wigs are keeping their fingers crossed.

Which is why many of them appealed to the government to renew tax-holiday status for hotels which were liable for taxes from 1998.

And, it is likely that the appeal will be granted, they say...


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