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5th April 1998

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Rating agency here at last

US firm to assess local debt instruments

By Mel Gunasekera

The long-awaited domestic rating agency is to be set up at last with the US agency, Doff and Phelps (DCR), being selected to lead the project.

Rating agencies examine companies and give an opinion of their credit risk to money lenders.

Analysts say this becomes particularly important when debt instruments are issued to the public, who unlike major financial institutions, are unable to make an assessment of a firm's credit worthiness by themselves.

Capital contributions for the rating agency would come from the International Finance Corporation (IFC) and the Central Bank of Sri Lanka.

After four months of negotiations, a letter of intent is to be signed this month, a Central Bank official said.

DCR is said to be one of the four leading credit agencies in the US with offices in 14 countries, including Asian countries such as Malaysia, Hong Kong and Singapore.

The Central Bank conducted a feasibility study with the Canadian Bond Rating Services (CBRS) to establish a rating agency in Sri Lanka.

However, there was no commitment to allow CBRS to set up the rating agency here.

While Sri Lanka's equity markets are fairly well developed the debt markets have lagged behind.

The government has also given incentives for local corporates to issue debt instruments but so far only a few companies have done so.

Vanik Incorporation has been the most prolific issuer of quoted debt so far. At the moment Ceylinco Securities and Financial Services is also having a debenture issue.

However, these issues have not been given a credit rating. Companies also issue commercial paper in the over-the-counter market. These instruments are also unrated.

Analysts say the debt markets would receive a substantial boost once the rating agency becomes active and starts rating instruments and companies.


Mind your business

by Business Bug

Greens stick to their guns

After much ado, the bird of paradise had its wings tied to the emirs of the Gulf.

No sooner than the announcement was made, the green bigwigs went into conference to dicuss the deal. They had, after all, made an earlier announcement saying they would cancel any agreement in the hope that it would stop the sell-off.

But after the conference of the greens, the decision was the same - whenever the greens take back the reins of power, the deal will be abrogated, previous commitments notwithstanding!

GST chip as bait

And the new tax came into being on April Fools' Day.

Among those who are likely to make a windfall from the GST are computer vendors. Computers were earlier subject to zero tax but will now be subject to the GST.

Some vendors, we know are already planning to make a fast buck, using the GST as a ruse...

New phase in cell phone war

One cellular network this week announced free unlimited incoming calls for all its subscribers.

This has sent a shock wave among its competitors who are finding that hard to beat.

But one network, at least, is trying.

They will charge international calls at six-second segments shortly, instead of in one-minute segments, their executives say. Now, that will be hard to beat too...


Femidom leaves local lassies cold

Maiden efforts at marketing a female condom have so far generated little enthusiasm among Sri Lankan women.

The Femidom was launched in Sri Lanka a fortnight ago by the country's largest contraceptive distributor, the Family Planning Association of Sri Lanka (FPA).

However only a few dozen Femidoms have been sold so far from a consignment sent by the United Nations Fund for Population Activities (UNFPA).

"It's too early to say if it would be successful in Sri Lanka," says FPA's Medical Director, Dr. Sriani Basnayake. "May be those who purchased them, bought them out of curiosity."

The Femidom is still a relatively new concept, not only in Sri Lanka but even abroad. Despite being priced at only Rs 10 each (in the USA they are priced at one dollar each), 50 were sold two days after the marketing campaign began. By the second week 88 were sold.

The FPA is now selling a stock of Femidoms gifted by the UNFPA. But the first consignment had a few missing. FPA officials say box or two goes missing from each consignment at the port.

FPA officials say the future supplies of the Femidom would depend on the success of the present test marketing campaign.

Promotion of the Femidom has been limited, as the FPA does not have adequate resources for aggressive marketing. The Femidom has been hailed as a device that gives women more control over the prevention of sexually transmitted diseases such as AIDS.

On the other hand, the male condom is selling fast in Sri Lanka, with sales growing by 8 per cent during the past three years. FPA officials estimate around 11 mn condoms are annually sold in Sri Lanka.

"Sales have risen due to more awareness of condoms, its availability and fear of contracting Sexually Transmitted Diseases (STDs) like AIDS," FPA Executive Director Daya Abeywickrema says.

The FPA's condoms control 80 per cent of the market. The increasing demand for condoms from the market place has brought in a number of importers of new brands of condoms at varying prices.

But the FPA fears that low quality products may be entering the market, which could undermine consumer confidence in the product.Most FPA condoms are imported from the USA, the Netherlands, Korea and Belgium.

FPA brands are sold for prices ranging from Rs 13 per three-pack of the mass selling Preethi to Rs 50 for the premium Stimula brand, while government issues are priced at a mere five cents each. Condoms will also be charged GST from now on. An FPA attempt to get an exemption was turned down.

Preethi, being the oldest brand in the country, dominates 90 per cent of the FPA's total annual sales.

The FPA has also been operating 15 condom vending machines in the country. However, machine sales are poor.

FPA has found that customers prefer to go to the shop and buy, as the shop offers better variety compared to one brand in the machine. Points of sale dealers are also trained to answer customer queries. "We have told them not to be shy about it, and display the products better," Mr. Abeywickrema said.

FPA is also attempting to increase awareness of the use of such products after a survey found that 60 per cent of the adult males in the country did not know how to wear a condom.


CTC's turnover up but profits fall

Corporate Profile

By Company Watcher

Ceylon Tobacco Company's (CTC) revised mission of achieving world class standards in products and services to ensure consistently superior trade and consumer satisfaction, is indeed an ambitious goal.

Chairman Lt. Gen. Denis Perera is confident that it will be realized by the year 2000.

"The mission has been revised in line with global trends in order to face new challenges that lie ahead of us. Despite a decline in sales and a resultant decrease in profit after tax which can be attributed mainly to the availability of smuggled and illegally manufactured 'white' cigarattes, we are confident that the objectives we have set ourselves for 1998 will be achieved", he says.

Emphasizing that the co-operation of CTC's largest stakeholder, the Government of Sri Lanka is imperative if the decline of sales is to be arrested, he calls for the speedy enactment of legislation, with stringent punitive measures to counter the increasing menace of smuggling the manufacture of illicit cigarettes.

"An assurance to this effect has been given to the Company by the authorities. This legislation would undoubtedly ensure the viability and sustainability of the Company into the future", Lt. Gen. Perera states in his message to the shareholders.

Elaborating on the new mission, Managing Director & CEO Gottfried Thoma says: "Our ambition is to focus, drive and accelerate all corporate activities towards achieving this objective, with no room for compromise, before the year 2000."

"You might call this a passion for excellence. We at CTC believe that, with increasing globalization and competitive pressures, the company has to be truly world class in all aspects of its business if it is to survive and grow on a long-term basis. The Company is strongly committed to achieve sustainable world class performance through world class people, products and services".

In its drive for corporate excellence, very positive outcome of several existing and new initiatives is mentioned in the CTC Annual Report. These include the winning of the prestigious Worldware Award for Sustainable Development (first time ever that the award has been conferred to a tobacco company or to a company in Sri Lanka); winning a Merit Award for Productivity, achieving the highest product quality ratings for John Player Gold Leaf among all companies in British American Tobacco, and implementing a major re-engineering and cost reduction programme throughout the Company.

Despite a 5.7% decline in sales last year CTC's gross turnover (Rs 18,689 million) grew by 4.7% due to price increases. Very tight cost controls helped the Company to achieve a Profit before tax of Rs 785 million, 7.4% lower than in 1996. Profit after tax was Rs 572 million, a marginal decrease due to the Company's substantial investment in modern technology, resulting in high investment relief.

"By all means, 1997 was a disappointing year regarding sales and profit growth", Mr. Thoma sums up.

Commenting on this situation, he adds that declining sales and profits, in an environment of relatively high inflation do not necessarily create a high degree of investor confidence. "CTC has always been a law-abiding, good corporate citizen, who pays any and all taxes associated with the business. However, we simply cannot compete with tax-free illegal products, selling at a much lower price or providing much higher margins to retailers".

Should this trend continue or accelerate, he assures the shareholders that the Company will do whatever is necessary to protect the legitimate interests of all stakeholders.

In the field of human resources, CTC took several initiatives last year to encourage innovation and decision-making. The excellent industrial relations climate that prevailed facilitated the smooth conduct of business.

It also helped the Company to identify and fully address future challenges. Company teams, including union representatives, addressed seminars and workshops at CTC. They also visited other organisations to share the Company's positive experiences and spread 'Best Practices' which should help the country as a whole.

"Our corporate culture focuses on peoples development, encouragement, winning attitudes, and the least possible degree of formal hierarchy. This applies both to CTC and our valued trading partners. We strongly encourage innovation and personal initiative ('Daring to try rather than fearing to fail') as well as decision-making at the lowest possible level", Mr. Thoma says.

"In most companies around the world, senior executives pay lip service by stating that 'people are our most important asset'. This is not the case at CTC. Our senior management deeply believes in it and we act accordingly. I would like to put on record my heartfelt appreciation of all our employees, which fully includes all union members and their dedicated leadership. Without them, we could not have achieved our unique corporate culture and excellent industrial relations", he concludes.


Corporate Focus

UAL another successful year

Union Assurance's (UAL) best profit todate were recorded for the year ending 31.12.97, with profit tax and transfer to the tax equalization reserve, of Rs. 70.3 million in 1997, compared to Rs 63.7 million in 1996. The Profits included a life surplus of Rs. 15.0 million.

A first and final dividend of 20% including a 10% tax free dividend income received from Cornhill (Pvt) Ltd., a fully owned subsidiary of UAL, will be paid to shareholders, a company release added.

General Insurance Premium had increased from Rs. 790 million in 1996 to Rs. 853 million in 1997. Life insurance premiums had increased from Rs. 261.3 million in 1996 to Rs. 329.2 million in 1997. Life Funds has increased from Rs. 285.6 million in 1996 to Rs. 354.7 million in 1997.

For the tenth successive year UAL had declared a bonus to all its Life policy holders participating in profits. After providing for this bonus the company had a Life surplus of Rs. 15 million which has been credited to the Profit & Loss account. The corresponding surplus for 1996 was Rs. 12.5 million. Total funds available for investments was Rs. 922.8 million as at 31.12.97. The corresponding figure in 1996 was Rs 738.4 million. Investment income had increased from Rs 94.3 million in 1996 to Rs 106.7 million in 1997. This was achieved after fully providing for any fall in value of investments.

The final profit of Rs 70.3 million was achieved after fully provisioning for present and future liabilities. The total technical reserves of both Life and General insurance business was Rs. 664.6 million as at end 1997.

In addition, the Company had also provided a reserve to meet tax on Life Insurance business if and when payable in the future. The amount so reserved up to the end of 1997 was Rs. 73 million. CEO Hydery Rehmanjee stated that this reserve was neither a statutory nor an accounting requirement. However, the directors felt that such a reserve would further add to the strength and stability of Union Assurance. The net assets of the company which was Rs 522.7 million was the highest in its history.


More Business * Lukewarm blessings for nut imports * AirLanka gets better terms than govt. * Local tyre giants to merge * Missed opportunities

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