Business

 
Ceylon Glass in Rs. 500 mln expansion
By a Staff reporter
Ceylon Glass Company (CGC) plans to invest in new technology to augment its product range and launch an export drive to take advantage of its skills in catering to niche markets.

New bottles emerging from the furnace.

The company, which has a near monopoly of the market for glass bottles and containers, will spend Rs. 500 million to modernise its plant and put up its own power station, said Niraj Tipre, executive director of Ceylon Glass.

"This investment has been on hold for the last one year because of the downturn in the economy. When the going is tough, prudent financial management is required," he said in an interview. "Now, we're going to phase out the investment, starting in October. It will increase our production capacity by 25 percent."

The firm, which employs 426 people and is owned by India's Gujarat Glass, makes glass packaging (bottles and jars) for liquor, pharmaceuticals, food, beverages, perfumes and cosmetics.

Half the company's raw material consists of broken bottles, which it recycles. This helps to conserve energy and protect the environment. It requires less energy to melt bottles than silica sand, calcite and dolomite.

Gujarat Glass is a member of Piramal Enterprises, a big business organisation in the sub-continent with a turnover of Rs. 30 billion.

Tipre said the planned investment would be spent on re-lining the furnace, an incremental capacity addition, the modernisation of all downstream equipment to give more flexibility in operations before it enters export markets, and on a two-megawatt power plant.

"Our furnace is old," Tipre said. "The re-lining of the furnace would give us the flexibility to cater to a changing product mix. We will also invest in new technology that will help us make 'boutique' coloured bottles without changing the glass colour in the furnace."

Local market
CGC has over 95 percent of the local market, there being no other manufacturers of glass containers, and only very small quantities of imports.

Although a virtual monopoly, the company which was founded in 1956, was in the red for the financial year ending March 1999 when it was acquired by Gujarat Glass.

Energy, freight critical cost elements
The glass industry is divided into companies that make sheet glass (also known as float glass) and glass for television picture tubes, and glass containers used as packaging material and tableware.

Ceylon Glass makes two types of glass containers - amber coloured glassware for products that are sensitive to sunlight such as pharmaceuticals and flint (transparent) glass.

The most significant features of the industry are that it is an extremely capital-intensive and energy-intensive industry that is also freight-sensitive.

A big initial capital outlay is required to build the furnace required to make glass, huge amounts of power are needed to power the plant, and freight costs are high given the high volume, low-value nature of the product.

"This is a continuous process - we work round the clock," said Ceylon Glass Director NirajTipre.

The company's turnover last year was Rs. 780 million on a gross asset base of Rs. 1.6 billion.

Its net profit of Rs. 90 million "looks good" but in relation to the return on capital, the firm "still has a long way to go," Tipre said.

"Even today we carry an accumulated book loss of Rs. 42 million," said Tipre. "So if we fix prices arbitrarily, it would put us in a bigger mess."

Ceylon Glass made a profit after tax of Rs. 90 million for the year ended March 31 2002, up by 38 percent, on a turnover of Rs. 779 million.

"Given that we are the single source of glass packaging material, it puts a lot of responsibility on us," said Tipre.

This was because of certain distinct characteristics of the Sri Lankan market. Its small size makes it difficult for the firm to maximise the economies of scale. Ceylon Glass has an installed capacity of only 100 tonnes or 200,000 bottles a day. Its parent, Gujarat Glass, can make six million bottles a day. By comparison, Thailand, with a population of around 60 million, has two big suppliers with an individual installed capacity of 1,800 tonnes a day and three suppliers with a total installed capacity of 700 tonnes a day.

The company's wide range of products - 120 different shapes and sizes of containers - creates its own problems. Very few of the individual products have a large enough volume to give the required efficiencies of production.

The firm also has continuous problems with energy given the power cuts and price hikes caused by the shortage of installed generation capacity. "Our cost of energy has virtually doubled in the last two years," said Tipre. "We're spending Rs. 100 million more on energy alone. " Furthermore, the cost of manpower here is also quite high.

Freight sensitive
Given these difficulties, why invest in a plant here? Tipre points to what he calls the "extremely freight sensitive" nature of the business. The cost of shipping glass containers - one of the lowest value, high volume products - is very high. "For example, our parent company is based in Gujarat but we can't compete in New Delhi because of the freight costs," Tipre said. If a client here wants a product available for filling on a particular day, Gujarat Glass would not be able to meet the delivery schedule, even if there was a very efficient port through which to make shipments.

"So we need to be here if we want to cater to this market," Tipre said. "We can't supply from India." Another reason to invest in the island was that the product mix of Ceylon Glass is complementary to that of Gujarat Glass, which makes smaller bottles.

But perhaps the most important reason for the investment here was the desire to penetrate export markets. "Sri Lanka's location is ideal for exports," Tipre said.

Although the odds are heavily stacked against exports because of the freight costs, Ceylon Glass has developed a set of skills by operating in a small market that give it certain advantages. "Over the years, we specialised in small quantity production," said Tipre. A "huge amount of downtime" is required in changing from one product to another - the firm typically loses about one shift of production. By contrast, production runs in India are at least for a million bottles.

Ceylon Glass is eyeing export markets in Australia and South Africa, hoping to exploit niche markets for glass products, which command higher prices. "They have very large glass manufacturers," Tipre said. "So customers with smaller requirements are starved."

Export drive
The export drive is expected to be launched next April once the seasonal rush, between November and March when the bulk of orders is generated, is over. Before that, the company has to go for a shut down of its furnace and is under pressure to fulfil outstanding orders.

"In Sri Lanka, we've developed the expertise to make bottles with smaller production runs to serve niche markets where international clients pay higher prices," Tipre said.

So far, the company has hardly made any exports, because of the need to supply the local market. But once the investment in the new plant comes on stream, the incremental increase in capacity would enable it to meet export orders.

Power cuts have had "disastrous consequences" on the company's production. Even a trip disrupts the entire production process. While the support and co-operation of the Ceylon Electricity Board has ensured the smooth running of the furnace, Tipre said the company was setting up its own captive power plant given the power crisis in Sri Lanka. Having its own power plant ensures a continuous availability of power although not at lower cost. The company has just set up a design and development centre with professional glassware designers whose job is to develop new products, particularly for export.

Frosting
CGC is also looking at 'decoration avenues' such as frosting, colouring and printing to further add value to its products. The new products are seen as a significant revenue stream in the future.

"You need to create some amount of excitement and difference to make the market grow," said Tipre.

The outlook for the immediate future is "tough", Tipre said. He described last year's 10 percent fall in the market as a "huge worry". The market has not grown in the last six months but there were positive signals coming from the peace process, the revival of tourism and the opening up of Jaffna, which is expected to improve sales.

"We're putting our faith in the economy, making this huge investment, in the hope that the market would show positive signs of growth," Tipre said.

"We need to take risks in business," he added. "This is a long-term business. Success and risk are different sides of the same coin. If you try to play very safe you'll never make money."

Letter
Stock markets and the Banking Act
Nominations before August 14 The Sunday Times Business Club invites nominations from among its membership for the new executive committee of the TBC which was re-launched last month. The club will have a nine-member committee inclusive of a president and vice president while the secretary of the club would be a nominee of the Sunday Times.

Nominations should be sent to Club Secretary Ms Devi at 304179 or 075-345163 on or before Wednesday, August 14.


CSE to offer diverse products
The Colombo Stock Exchange (CSE) will seek to re-position itself from a small illiquid equity-based exchange to being an exchange offering diverse products, its chairman Ajit Gunewardene has said.

In a bid to internationalise the operations of the exchange and promote strategic alliances, the CSE will pursue opportunities to promote cross trading and cross listing of securities with other markets, he said in the CSE's annual report.

"This will help the CSE to position itself as an international exchange and overcome the limitations of size and liquidity," he said.

The government should treat capital market development as an objective as equally important as raising revenue and increasing productivity when considering the privatisation of state-owned enterprises, Gunewardene said.

It was inevitable that liberalisation and globalisation would pose threats, especially to a small and illiquid market such as the Colombo bourse, he said.

The natural reaction when faced with such a threat is to seek protection in laws and regulations, he added. In the context of financial markets such protection could work to the detriment of the industry and service sectors.

"A developing economy cannot afford the luxury of inefficiency created by protection afforded to financial markets," he said.

The CSE has asked the government to consider relaxing foreign exchange control restrictions and enable local companies that can borrow in foreign currency to list foreign currency denominated securities in the CSE.

"An extension of this principle will enable foreign companies to list foreign exchange denominated securities in the CSE," Gunewardene said.

Exchange control regulations that prevent local companies accessing the capital market to raise foreign currency denominated securities while being able to borrow in foreign currency or list in international markets create an imbalance which is detrimental to the development of the local capital market, he said.

New Waves Logistics wins UK award
New Waves Logistics (UK) Ltd, (NWL-UK), one of the UK logistics companies of the Nippon Yusen Kaisha (NYK) group, has been named the Logistic Company of the Year 2002 at the Motor Transport Awards 2002 in London.

This award ceremony is sponsored by the U.K. transport business newspaper, 'Motor Transport'. The most outstanding performers from among companies of the logistics and transport equipment industries are selected from a total of 17 categories.

NWL - UK this time entered the competition for the first time; therefore its recognition was significant in that a first-time candidate won the award. NYK Line (Europe) Chairman Minoru Sato, Managing Director Malcolm Wilson and Rohan Morris, both of NWL - UK were present at the ceremony, representing the NYK group. The award winner intends to affix a "Logistics Company of the Year 2002" logo on all its trucks for one year.

NWL-UK is represented in Sri Lanka by New Wave and Kusuhara Colombo Ltd of the Maritime Holdings Group of Hayleys.

Commercial Bank maintains steady growth
The Commercial Bank group representing the bank and its subsidiaries and associate companies has declared a post tax profit of Rs. 651.8 million, an increase of Rs. 91.3 million representing a growth of 16.30 percent for the first half of 2002.

The group recorded a pre-tax profit of Rs. 835.375 million for the period, representing an increase of Rs. 57 million, a growth of 7.33 percent over the corresponding period last year. The bank said this profit growth was achieved despite a considerable drop (22.88 percent) in exchange profits due largely to the slower depreciation of the Rupee against the US Dollar in comparison with the steep depreciation experienced in the corresponding period last year, following the free-floating of the currency in January 2001.

Commercial Bank's Deputy General Manager (Finance and Planning) Ranjith Samaranayake said the bank has been able to improve profit levels due to many factors. It was able to maintain its growth momentum in business volumes with the growth of 20.42 percent in deposits and 18.46 percent in net advances over the corresponding period last year. The higher growth in deposits over advances generated excess liquidity, which was gainfully invested by the bank in government securities and inter-bank money market, he said. The bank reported a post tax profit of Rs. 586.194 million, up Rs. 69 million and a gross income of Rs. 3,860 million (Rs. 3.86 billion) for the period under review.

Action against market manipulators
The Securities and Exchange Commission (SEC), the capital markets watchdog, has compounded offences against 12 people connected to four cases that were investigated by the Investigations and Market Monitoring Division.

The SEC's annual report said the offences were compounded, or settled out of court, under Section 51A of the SEC Act, which allows it to compound offences for a sum of money not exceeding one-third of the maximum fine imposable for such offence.

Under the SEC Act anyone found guilty of an offence shall be liable, on conviction after summary trial by a Magistrate, to a maximum jail term of five years or to a maximum fine of Rs. 10 million or to both imprisonment and a fine.

The Investigations Division and the Market Monitoring Division were integrated last year. The new division carried out about 50 preliminary inquiries into possible abuses in the stock market and 30 investigations during the year, of which fifteen were completed. The SEC did not institute any legal proceedings against people who were investigated for stock market abuses last year.

In the action against Kotagala Plantations, where the SEC instituted proceedings in 1997 against Kotagala and its directors for failing to comply with the continuing disclosure requirements in the SEC rules, the case was compounded on a request made by the accused with Kotagala Plantations paying a sum of Rs 3.3 million and each director making a payment of Rs. 80,000.

In another case, the SEC filed charges against Magpek Exports and its directors for not disclosing certain material information in its annual report as required by the SEC rules.

Charges against three non-executive directors, Tennyson Rodrigo, Deemathi de Silva and Piyasiri Ratnayake were compounded at their request on payment of Rs. 500,000 each.

The trial against the remaining defendants, the executive directors, whose request to compound the charges was refused by the SEC, is pending.

Another case that was compounded was a probe into share price manipulation.

An SEC investigation into significant increases in the share prices of certain listed companies in the latter part of December 1998 revealed that two fund managers, Gihan Rajapakse and Vajira Premawardena, were responsible for making the investment decisions to buy these shares for National Development Bank and CTC Eagle whose securities accounts were managed by Eagle NDB.

"The investigations revealed that the purchases were manipulative in nature and resulted in a significant increase in the share prices of the companies," the SEC annual report said.

The SEC filed charges against these two fund managers in January 2000 and the case was pending as at December 31, 2001.

Another SEC investigation that was concluded was into certain trades in respect of Commercial Bank shares, which suddenly fell more than 12 percent in a day from Rs. 185 to Rs. 162.

Investigation revealed that Rohan Fernando, a director of CT Smith Stock Brokers, had executed a sell order of 1,375,000 shares of Commercial Bank at a pre-determined price of Rs. 162 per share and that, in order to facilitate this transaction, the broker had executed another sell order at Rs. 170 and brought down the market price of Commercial Bank shares from Rs. 185 to Rs. 170.

The SEC filed charges against Fernando for violating rule 19 of the SEC rules, which covers market manipulation, and the case was compounded for a sum of Rs. 200,000 on a request by Fernando and the charges were withdrawn.

The SEC investigation into the business affairs of Horana Plantations Ltd (HPL) was also compounded. The inquiry was launched on information that big sums of money had been transferred directly out of HPL to Uni Walker Ltd, an unlisted subsidiary.

HPL's J.B. Wimalasekara refused a SEC request for information and he was charged with non-compliance with Section 45 of the SEC Act. The case was compounded for a sum of Rs. 3 million at Wimalasekara's request and the charges withdrawn.

In all cases except one where the SEC has compounded offences, the fines imposed have been more than the unethical gain made by the accused, SEC officials said.

The SEC decides whether or not to compound offences after taking into consideration the magnitude of the offence and the unethical gains made.

The SEC compounds cases, on requests made by the accused, largely because of the inefficiencies of the legal system where cases can drag on for years, officials said.

NCE awards on August 16
The National Chamber of Exporters of Sri Lanka (NCE) will be celebrating its 10th "Year of Export Excellence" Awards on August 16 at the Colombo Hilton.

These awards are for the members of the NCE and recognises them for their commitment and contribution to the nation, NCE founder chairman Patrick Amarasinghe told a press conference.

German ambassador Juergen Elias will be chief guest at the event. Past presentation of awards have been an outstanding success prompting the group's members to improve the performance year on year, NCE Senior Vice President Kingsley Bernard said.

In a bid to improve the awards scheme by eliminating discrepancies, the awards committee had called for applications covering six important sectors: traditional agriculture, non-traditional agriculture, value-added tea, industry, gem and jewellery and service providers to exporters.

This year NCE will be presenting 74 awards for extra large, large, medium and small categories of business.

Mobitel is sponsoring the NCE awards for the seventh successive year. (HR)


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