23rd July 2000
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Mind Your Business
Opposites attract
It's election time and the greens have taken to the streets promising a wage hike of at least two thousand rupees for all- and the blue offer of six hundred rupees pales into insignificance.
That is why the blue boys have asked the Treasury to come up with an equally attractive alternative.
And those in the Treasury are said to be burning the midnight oil these days trying to formulate a financial 'package' with mass appeal.
And that package will be kept under wraps until the last days of campaigning- for the fear that the greens will suggest a better offer.
Beer Blues
Whatever has happened to the local beer industry?
Of course, it was hit first by an advertising ban and then a price increase but whatever the reason, sales have fallen dramatically.
And what is baffling those in the trade most is how arrack continues to hold it's place in the market.
Nevertheless, several leading breweries are likely to announce a price reduction- thereby absorbing the hike in excise taxes- in a bid to boost sales.
Rolling stones gather no moss
Everyone knows that heads will roll if the greens capture power but the talk in financial circles is that the same will be true even if the blues are re-elected.
The blue eyed boy who is under a cloud these days is tipped to head the big bank while the incumbent will be offered a diplomatic posting in Washington or Paris, they say.
And many are those vying for the post that will fall vacant in the board that invests and that is where the competition is. But of course all this is only if the blues are victorious…
Asian Hotels Corporation's hopes of building a high-rise haven in the heart of Colombo are sky high. Blueprints have been drawn for a multi high rise complex of luxury apartments and offices. At present the complex comprises one building of the Crescat apartments and the Oberoi Hotel. The model shows the complete picture. The two tall buildings on the left are the Crescat Apartments and in the middle is the 28 storey high rise office complex. On the right is yet another high-rise office complex planned for the future date when the economy takes off. Pic by Gemunu Wellage
Asian Hotels to invest in office complex
By dinali Goonawardene
Asian Hotels Corporation Ltd (AHCL) plans to invest in a twenty eight story office complex in the vicinity of its Crescat Residencies. The proposed investment is estimated at Rs. 800 mn and has already got off the ground with a Rs. 150 mn investment in the building's foundation.
"The decision to go ahead with the project will be based on the success of selling Crescat apartments and our ability to find an anchor tenant for the proposed office complex," Director, AHCL, Manohan Nanayakkara said.
While financing will be obtained by pre-selling the building, additional equity funding may also be sought. Four floors of the building have been demarcated for a shopping complex. Construction is expected to commence within an year. The building is expected to be information technology equipped. Sales of the Crescat apartments have been poor. Of the 152 apartments 50 have been sold outright and 55 leased while 45 remain unoccupied. Company officials said they have just introduced the concept of selling the apartment outright and renting it out for the purchaser and can offer investors a 10 percent tax free return in dollar terms.
Meanwhile Asian Hotels shares created a furore on the Colombo Stock Exchange last week. About 31.9 mn shares changed hands on Tuesday, 8.5 mn shares on Wednesday and 2.4 mn shares on Friday. The share closed the week at Rs.5.25. One of its shareholders, Kingdon Capital sold out a substantial part of its stake in the firm. Remaining shareholders include the company's Malaysian based Chairman, Tan Shri Azmi Hamza (38.5 %) and David Watt (7%).
AHCL owns the Hotel Lanka Oberoi and Crescat Developments Ltd. It also has a 43 percent stake in TransAsia Hotels Ltd. The company's turnover declined 16 percent YOY to Rs. 674.9 mn in the financial year 2000. Profit before tax fell 98 percent to Rs. 1.7 mn in this period.
The difficulty in selling apartments and lower hotel occupancies have curtailed the company's revenues. The proposed new office complex is part of a long term development plan which includes another apartment complex and office complex. However these long term plans are dependant on many factors internal and external factors including the performance of the economy.
Insurance Act passed in house
The much awaited amendments to the Insurance Act were passed in parliament last week giving the green light for the setting up of a regulatory body for the insurance sector. Altogether nine amendments to the Insurance Act of 1925 were put forward.
The new Act is mainly to provide for the establishment of an Insurance Board for the purpose of developing, supervising and regulating the industry, the act says.
The insurance sector was fully liberalised earlier this year with the opening up of the insurance sector to 90% foreign ownership in the March 2000 budget and setting up a regulator has become essential with this liberalisation.
The Regulatory Board will be appointed by the Finance Minister and will include the Deputy Secretary Treasury, Deputy Governor Central Bank appointed by the Monetary Board, Director General, Securities and Exchange Commission and four members appointed by the Finance Minister. These four members will have academic or professional qualifications and experience in the field of insurance, commerce, financial management, business management, economics, law or any other related field, the Act says.
Amendments to the Act were a collection of proposals forwarded by the Chambers Of Commerce. The Ceylon Chamber of Commerce and the opposition UNP had made submissions on certain clauses in the amended act , mainly to clause 12.3 which lets some government controlled insurance institutions off the hook of the new act.
The opposition arrived at a compromise with the government on this when deputy finance Minister Prof. G.L. Peiris agreed to make special mention of the three institutions which will not come under the jurisdiction of the new Act. The three institutions which have specific responsibilities are the Agriculture Insurance Board, Sri Lanka Export Credit Insurance Corporation and the Social Security Board.
Another submission made by the opposition and the Ceylon Chamber that insurance companies should have the right of appeal in instances when they are suspended by the regulator or have their licences cancelled was also accepted and included.
Vanik sheds its leasing portfolio
Vanik Incorporated divested Rs. 17 mn of its leasing portfolio to Mercantile Leasing Ltd (MLL) in a deal which fashions an increase in liquidity for the leasing industry.
"This is the first time in the history of financial markets that a transaction of this nature has taken place," Chairman, MLL, N U Jayawardena said referring to the deal which transferred credit risk between the two financial institutions. The profitability of leasing contracts declines as the portfolio ages and the ability to divest and enter into new contracts ensures that margins remain high.
For cash strapped Vanik the deal is expected to be a forerunner to the divestment of a further Rs.250 mn of its leasing portfolio within the next month.
A leading commercial bank has expressed its interest in this tranche which consists mainly of machinery and vehicle leases. Vanik plans to divest Rs. 1bn of its Rs.1.2 bn leasing portfolio within the next six months. However Vanik officials said they had no intention of discontinuing their leasing operations.
The Citi National Investment Bank was instrumental in structuring and placing this deal. Vanik's clients will start paying their lease rentals to MLL from August. MLL will service the needs of these clients and retain absolute ownership of the leased assets.
Sampath goes to courts
In the continuing battle between Sampath Bank and Hatton National Bank (HNB), Sampath Bank went to court last week to take further action against HNB. The District Court of Colombo issued an enjoining order last week preventing the Stassens Group, HNB, Smart Development PVt Ltd,, M U D E Siva, D N Daluwatte and Masons Mixtures, from making a mandatory offer which does not refer to Central Bank approval to implement the transaction.
Sampath Bank also secured an enjoining order prohibiting the Securities and Exchange Commission from approving a mandatory offer until the Central Bank's monetary board approved the registration of these shareholders. An enjoining order preventing the Colombo Stock Exchange from permitting the transfer of these shares in the meantime has also been obtained.
The Banking Act currently restricts an entity's shareholding in a bank to 10 per cent. However HNB and related parties including Smart Developments Pvt. Ltd, HNB EPF, M. U. D. E. Silva and D. N. Daluwatte have lodged shares in excess of this at the Central Depositary System although the shares are not registered with the company.
Implications of being unable to dispose of the shares while concurrently not being registered in the shareholders register will now have to be faced by these parties, legal experts said.
The Securities and Exchange Commission recently declared that the Stassens Group and HNB had been acting in concert to purchase Sampath Bank shares and must make a mandatory offer to remaining shareholders. The mandatory offer would have been enforced at a share price of Rs. 70 but shareholders did not appear to have confidence that the offer would see the light of day. Sampath Bank shares continued to trade below Rs.60 last week and ended the week at
As the drama unfolds, market watchers await the decision of the Central Bank who have referred the matter to the Attorney General. The AG has to decide whether HNB flouted the Banking Act.
Puttalam Cement in largest restructuring
Puttalam Cement Company Ltd. (PCCL) has pumped in Rs. 2 billion to retire some of its existing short-term debt, VP Dr. Martin Foreman said last week.
In one of the largest corporate restructuring deals ever, PCCL has privately placed five year, cumulative, redeemable, preference shares to the value of Rs.2 billion with commercial and development banks. These shares will be in turn sold to high net worth investors by the banks who hold them.
The main subscribers to the issue were PCCL's parent company Holderbank, lead arranger and underwriter ABN AMRO Bank, co arranger and lead manager DFCC, underwriter Standard Chartered Bank and lead managers Sampath Bank and Deutsche Bank.
Holderbank and DFCC invested Rs. 500 mn each, while ABN AMRO invested Rs. 450 mn, Standard Chartered Rs. 300 mn, Deutsche Bank Rs. 150 mn, and Sampath Bank Rs. 100 mn, official sources said.
The preference dividend on the share is a very competitive 12.65% net of tax, the source added.
The PCCL Group includes PCCL of which Holderbank owns 94.4%, Galle Cement an import terminal and packing plant 100%, Ruhunu Cement, a grinding plant, 75.4% and Lanka Quarries 100%.
The Group is the only fully integrated cement plant in Sri Lanka and the only nation wide distributor, a profile on the company says.
The PCCL Group has already invested Rs. 2 billion to rehabilitate and upgrade plant and machinery and has borrowed short-term credit from commercial banks for this. Dr. Foreman said at a media briefing to announce the restructuring that the additional Rs. 2 billion funds should make the matching of debt and assets more balanced. He said that this was a rare occasion when a non-state organization was refinancing its balance sheet. The total group debt currently is Rs. 3.2 bn of which Rs. 2.5bn is PCCL debt. The RS 2 bn infusion into PCCL would wipe off 80% of its debt, Foreman said.
Puttalam Cement who holds 40% of the local cement market with their brand name Sangstha recently received a shot in the arm when the import tariffs on cement were jacked up from 10% to 25%. Now we operate in a level playing field, Dr. Foreman said. The company had earlier publicly complained that cheap imported cement was killing their market share and that they were forced to operate in an uneven playing field. The government opened up the cement market to importers when the major players PCCL Group and Tokyo Cement Group, could not supply the increasing domestic demand.
Price increases will be inevitable in a situation where energy, transport and power prices have shot up, Dr. Foreman said.
Holderbank with over 100 plants in 70 countries is the largest cement manufacturer in the world and is quoted on the Zurich and London stock exchanges.
Lead arranger and underwriter ABN AMRO's top officials told The Sunday Times Business that they are fully confident of the future and the success of the PCCL Group owned and managed by Holderbank.
The plight of paddy farmers
The fact that farmers are unable to sell their paddy at a reasonable price is a serious indictment on our economic system. Rice is our staple crop and paddy farming involves such a large proportion of our people that paddy farming should have been given priority in our national policies. It is shameful that when farmers who have produced a good harvest, they are unable to sell it. The current crisis could have a serious impact on future paddy production and food security.
Despite all the criticisms that one could make about our agricultural policies, it has to be recognised that we have nearly achieved self sufficiency in rice production. In 1998 we imported only about 8 per cent of our rice requirements. In 1999 rice imports increased somewhat despite increases in production. Last year our imports of rice were about 10 per cent of our total requirements. With possibly higher production in Maha this year the requirement of rice imports might decline, provided the Yala crop is as good as last year's. This prospect is unlikely given the current scenario of farmers being unable to sell their paddy at a reasonable price. Farmers who are threatening to burn their Maha paddy crop are unlikely to cultivate in the Yala.
The serious long term implication of the current marketing crisis is that at a price of about Rs 10 per kilo of paddy the cost of production is higher than the revenue. Even at a slightly higher price the viability of paddy farming is questionable. Even farmers who obtain high yields using optimum dosages of inputs and cultivate both seasons find themselves obtaining a net income less than required for their living expenses. The sale of paddy at depressed prices has made that situation much worse. This has led to farmers in Polonaruwa using low levels of fertilizer and other inputs in the current Yala season with rather disastrous impacts on the crop condition. It is now feared that paddy production might drop sharply the next season.
Despite all these problems, paddy production is not likely to crash completely. A minimum production level is assured owing to the subsistence level of production, paddy farming becoming a part time occupation and the lack of any alternate avenues of employment to many. Yet all these factors are likely to lead to reduced production of paddy and an increased dependence on imports of both rice and wheat. Is this desirable?
At the best of times when the government operated a Guaranteed Price Scheme for paddy with a price above the international rice price too paddy farmers were exploited by government and cooperative officials conniving with traders to give them a lower price thus enabling traders to obtain paddy at a lower price and later sell it to the government.
Despite these deficiencies farmers obtained a reasonable price and the pricing for paddy remained adequately remunerative. The expectation that private traders through competition would ensure a reasonable price has not worked out. A monopolistic control of the market has driven down the paddy price to as low as Rs. 9 per kilo in some areas. This price converts to about Rs 13 per kilo of rice. Current wholesale price of rice in Colombo is between Rs 21 to 27.There is a Rs 8 to 14 margin for milling, transport and other expenses.Readers are left to judge whether this margin is reasonable.
The government has taken two significant measures to resolve this problem.It has stipulated a price of Rs.14 per kilo as the price at which government agencies would purchase paddy and banned the import of rice.The first measure would succeed only if the government could operate effective mechanisms to purchase paddy at this price.This has not worked.Even if the government is effective from now on, much of the damage has already occurred.The measure to ban imports of rice would raise prices and we may expect traders to offer a higher farm gate price.The farm gate price of Rs 14 is equivalent to a rice price of Rs.20.We could expect the effective implementation of these measures to raise retail prices of rice and perhaps lead to a substitution of wheat flour and bread for rice,especially owing to the subsidy for wheat flour announced recently.
The paddy marketing crisis has demonstrated a very weak aspect of national policy.It is imperative that the government studies all the ramifications of this problem and devices a fundamental and integrated policy on paddy farming,marketing and pricing,as well as import and price policies on rice and wheat. If we fail to act now we may be jeopardising the country's food security and the incomes of a significant proportion of our people.
Castrol flexes its muscle
Castrol's ownership has changed hands to British Petroleum(BP). But Castrol's Colombo Chief, G.K. Rao says that even BP knows the value of Castrol's international brand equity. So nothing will change from Castrol's products, their technology to their philosophy. We will be known as the Castrol division of BP, Rao said in an interview with the Sunday Times Business (STB). In Sri Lanka with the opening up of the lubricant market, Castrol and the other lubricant players have to be a few steps behind Caltex and their local partner Lanka Lubricants because of a monopolistic agreement which ends only in 2004. None of the new lubricants players can produce or pack here. They can only sell at non CPC stations and the products come with a 25% customs duty as against 10% import duty on the crude oil used by the Caltex to manufacture locally. Obviously the playing field is uneven. But Castrol still sees a market here just like all the other international players. The STB asked Rao what exactly has attracted them to come here….. Excerpts from the interview
By Ruvini Jayasinghe
Your competitor Caltex who enjoys a domestic production and marketing monopoly obviously has the egde over all other lubricant companies here. You had to pay a stiff licensing fee of Rs. 5 million. What benefit does Castrol see here?
Castrol used to be in this country in the early 1960s and subsequently after the nationalisation all oil companies had to leave the country. And during those times we were one of the leading lubricant company. There were other companies like Shell, but then all of us had to leave the country.
Caltex which came in 1994 has a monopoly.
The government wanted Rs. 35 million, to be paid by each of the licencees. The licencees felt that it was too high for a situation where there was a monopoly.
Because if we have to pay a licensing fee of Rs. 35 million in a market like India, China or the US, we know that over a period of time we will recover it. But for such a small market paying Rs. 35 million was it worth? After much dialogue and questioning, finally the government decided to bring down the licence fee to Rs. 5 million. This again we thought was high, but then the government wanted to resolve the matter at that. Because in India, in 1993 they decided to liberalise the lubricant market and when they liberalised it was free for all. There were no restrictions, as a result at the moment there are close to 40 players in that country. But it was free for all with no licence fees etc.
In India it's a huge market and it is still worth for them to come. But in Sri Lanka it's a very small market and the situation is that, Caltex and Lanka Lubricant between them have got 100 per cent of the market both in production and marketing. And to get into this 100 per cent market, is difficult and we are all trying to have a piece of the market that is available to us.
What is your plan or strategy to get into this seemingly unpenetrable market?
Castrol's worldwide operations are in 110 countries. And we are the brand leader in the world. We have a 11% market share of the worldwide lubricant market. And the number two is far behind us with a market share of something like 7% or 8%.
We currently do not have any fuel back up and in a large part of the world we don't have the benefit of fuel stations.
That however does not bother us. On the other hand, we focus only on lubricants. And that is our strength. And that is one of the main reasons, that although we do not have the benefit of fuel stations, we are the brand leader. People go searching for us all over the world. If they don't get it at a petrol pump station, they go to a supermarket etc.
Even in Sri Lanka when our products were not available, people travelling abroad would bring back cans of Castrol lubricants. We therefore are very comfortable that we will have a market. In Sri Lanka you have the best of cars. Your government has taken a very good decision in liberalising this market.We genuinely feel, that for the cars you have in the country you must offer the best lubricants. You have BMWs, Volvos, Jaguar, Mercedes Benz, Ferraris etc and after liberalisation they should have a wide choice of selecting what they think is best.
But with Caltex controlling the market through their wide network of selling through Ceylon Petroleum Corporation (CPC) petrol stations and even selling at a slightly lower price than the other lubricants (as per the liberalisation agreement) how are you expecting to build up a brand loyalty even for a niche market?
Quite frankly it is an uneven playing field for us. Because like you said, we have no access to the retail petrol stations. Our duty structure varies. Whereas Caltex pays 10 per cent on the raw material we have to pay 25% on the finished product. I feel that by charging this 25% duty, on international oil companies ultimately we have to charge a higher price. If the government charged the same duty on other lubricant finished products then the customer could have a wide choice for a similar price. Now there is a huge price difference between Caltex and the other lubricants. The government realises that it is not good for the country or consumer to have a monopoly situation. When you have competition that always brings out the best in you, price wise and quality wise.
We have been building up our brand equity with a sponsorship of the last Royal Thomian cricket match and the Motor Cross up in Nuwara Eliya, during the April season. Large crowds attended the motor cross. Then we have started advertising in a big way.
Is your price very much higher than the competitors, especially Caltex?
Not much, only marginally higher. Because we are catering to a niche market, and there are a large number of people who do not mind paying, Rs. Something extra, for a superior brand/product. Because they get value for money.
So since the service stations are not accessible to us what is accessible to us is, non CPC service stations. Then, franchisees, spare part dealers and all that. We have also begun this novel marketing system with Cargills Food City. Our whole objective was to make the consumer access our products in air-conditioned comfort.
We had a lot of inquiries from customers as to where they could purchase our product. Here at Cargills Food City people have the parking facility, air-conditioning, no bargaining and hassles etc and people do not have to go out of their way to buy our oils.
People may go to buy their groceries and pick up a lubricant can or vice versa. Also we found that there are a large number of lady drivers in Sri Lanka. And in Colombo particularly. And we wanted to take care of the ladies if I may say so and Cargills is very convenient for them. The objective is to make it available and to what extent it will succeed is yet to be seen, but the recent response has been very good.
Does this mean that you are only looking for a niche market in Colombo? And maybe Kandy? What about the outstations?
In any country the distribution network is vital. So it's not that we are not looking at the outstations. We are looking at them because there are a large number of vehicles in those areas. But for a start up operation like ours, it takes time. So what we want is - let's make a beginning somewhere. Otherwise we will neither be here nor there.
And we want to build up the equity even if we do not have significant sales volume. What is important to us is the visibility. You go to shop for your groceries you may not have the need to buy Castrol, but you look around that product and see it being displayed.Something will register in your mind and maybe four to six months down the line when you need an oil change you could possibly remember what you saw in the Food City and go back to get it.
So we just want to build up that kind of awareness. And you will agree that 99% of those who use expensive vehicles shop at these places. And we have different pack sizes of oils for cars, vans trucks jeeps etc.
*So your marketing is at the moment limited to super markets?
No, We have already started marketing through service stations which are non CPC, There are about 2500 private service stations.
Are the other lubricant manufacturers also selling through these private stations?
Yes, they are all selling through the private stations.
*With seven lubricant players in the market now and the sole manufacturer having a monopoly how are you going to break into this market and make money?
The thing is that we are quire aware that in the short term maybe the next two to three years we are unlikely to make any profits. But it is always the policy of the transnational or multinational companies to operate in as many countries as possible. Now we operate in 110 countries. I won't say that in every country we make a lot of money. In some countries we make money in others we just break evew and yet in others we don't make money. But the eventual objective is to make money. And we have started off in some countries in the same fashion as we have started out in Sri Lanka. And over a period of five to six years we have built up a market share and a profitable business.
*What about manufacturing your own oils here?
We have an agreement with the government of Sri Lanka that until the Caltex monopoly ends in 2004, we cannot manufacture any products here. We are forbidden to even do any packaging of the lubricants in this country.
What about after 2004?
Yes, depending on the market we might think of putting up a small plant. As a matter of fact in some countries like China and Indonesia, the government allows only those companies who are willing to invest in terms of the manufacturing facilities. Because when we have the manufacturing facility here, and we pay only 10% duty, Castrol could be made available at a much cheaper price.
*What is your world market ranking in marine lubricants?
We are not market leaders but we are one of the biggest players in the field. We have a good market share for marine lubricants but Castrol Singapore is currently looking after that. I am looking at the possibility of someday taking over that operation to Colombo.
*What is the status of your proposed merger with BP? What will happen to Castrol's identity if it goes through?
Yes, there is going to be a Castrol division. We will become the Castrol division of British Petroleum. We will be having our own brands, and continue as Castrol and all our Castrol brands, technology, philosophy everything will continue. The only thing that will change is that instead of Castrol being the owner, British Petroleum will be the owner. But it will not have any impact on Castrol operations. Because even BP has recognized that we have tremendous brand value in the world.
*The lubricant market has been liberalized and there are many players but yet a monopoly situation exists. Are you unhappy with this situation and are there any plans to band together to exert pressure on the government for a better deal?
I would respond by saying that we are not unhappy. Each country has the right to decide what is good or bad for them. I will only say that people must have a choice to decide what they want. That's the bottom line. And the government of Sri Lanka perhaps belatedly realized that what was done probably was not right. And they want to rectify it. But in view of the contractual obligations they have made some kind of attempt to get out of the situation. But it has not provided a fully even playing field for us. Because we don't have the access to CPC service stations. We cannot manufacture here, we cannot sell at a competitive rate. We have a higher duty and so on….And then actually I would have preferred , that if the government really wanted to take care of the market to give more benefits to the newcomers so that they could in turn give the consumer the full benefit of their products. And I sincerely hope that sooner than later, the government will make efforts to do something for them. We are not lobbying for anything but trying to bring to the attention of the government so that they will try and do something for us. And as I mentioned at the beginning that it is not such a huge market for us, we are not here to make a huge amount of money At the same time we are not here for charity. But what we feel is that if an even playing field is made available to all, ultimately it is the Sri Lanka consumer who will benefit.
The Sri Lanka consumer must get the best products at the cheapest prices. And that is possible only if the government gives the right benefits, creates the right environment for all the players. If the duty is reduced from 25% to 10%, it is not that we will start making a lot of money but we will definitely bring down the price of lubricants. If the price difference between the local Lanka Lubricant products, Caltex and the imported brands is about Rs. 50/- the customer will have a choice to make. But if the price difference is much more than that, even if she/he wants to buy an imported product the price will be a deterrent.
*What is the price difference between Caltex, Lanka Lubricants and other brands?
If you are looking at Caltex and the other products it may be about Rs. 50/- to Rs. 75/-. But if you are looking at Lanka Lubricants the price difference is substantial. Now in my view, these are not realistic prices. Today oil prices have gone up. We operate on commercial considerations.But Lanka lubricants have other considerations.
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