Financial Times

Stocks soar despite tsunami damage
By Duruthu Edirimuni
When the rest of the country is struggling to pick up the pieces after the tsunami, the Colombo bourse is soaring to new highs with the All Share Price Index crossing the 1,600 mark last week supported by some big deals and bonus issues.

The rupee's strength has not affected the stock market significantly, but the market witnessed foreigners cashing in to take profits. "There was a lot of foreign sales when the rupee was getting stronger," an analyst said.

Some stockbrokers said the market is viewing the calamity as an opportunity because it has created a better fiscal position in the country resolving the balance of payment crisis. The rapid appreciation of the rupee and the delayed petroleum bills have eased the government's spending pressure.

Bartleet Mallory Stock Brokers said the declaration of a 4 for 11 bonus (scrip) issue by Hayleys Limited saw the market gaining momentum on the last day’s trading of the week.

The change of ownership in Land &Building Limited, a member of the East-West group, saw turnover levels increasing sharply during the later part of trading on Thursday. The deal accounted for 60 percent of the day’s turnover.

Almost 100 percent of Land & Building Ltd was acquired by Akbar Brothers Ltd for a total consideration of Rs. 436.7 million. It bought 2.1 million shares at Rs. 206.00 each.

However, analysts are divided on the performance of the corporate earnings this year. While some said companies in the manufacturing sector will add to their bottom line due to the post-tsunami reconstruction efforts, others predict corporate earnings to fall because the firms' price competitiveness and volumes will be affected.

Vajira Premawardhana, Executive Director, Lanka Orix Securities Company (Pvt) Ltd., said the sudden rise in the rupee will improve the trade balance in the short term because imports will cost less.

"This means commodities such as petroleum will reduce and theoretically, import costs should come down," he said. "If this situation is used as an opportunity, the long term results will be great."

He predicted that a large number of quoted companies, especially in the manufacturing sector, who import their raw materials, will post good earnings this year.

He said cement, tile and cable firms and value added rubber companies will add to their bottom line taking advantage of the rupee's rise, while borrowing costs of conglomerates will reduce greatly, again adding to their bottom line.

"Stocks such as ACL and Tokyo Cement are very likely to benefit," Premawardhana said, adding ACL will see a bigger demand for cables, as electricity and telecom networks have to be rebuilt.

Murtaza Jafferjee, Managing Director, J B Stockbrokers said some quoted companies will not benefit much because their competitiveness in the market will be hit. "Some corporate earnings will depreciate because the firms' price competitiveness and volumes will be affected," he said. He added that most of the incremental cement is imported and it has got cheaper due to the rupee's rise affecting the local manufacturers. Jafferjee said the enhanced demand for local products are met by cheap imported goods.

He said the power generation and petroleum sector will also not post good earnings this year. He added that companies in these sectors have administered prices built on a formula, which is based on many dollar-based components and the dollar-based revenues of companies dealing in electricity and oil such as Aitken Spence would get badly hit.

"The increase in the rupee will affect the top line of companies in this sector, which will erode their corporate earnings," he said. The moment the reconstruction effort starts, a significant amount of imports will come in because the six to seven percent rise in the rupee facilitates imports.

Niyaz Aboobucker, Senior Manager Trading, Asia Securities said when the government starts spending on infrastructure, companies in power and transportation sector will do well. "Because the war situation has been deferred by the tsunami, retail sentiments in the market are very positive," he added.

Many analysts predict the nation re-building exercise of the government with the hefty public expenditure programmes will increase value addition within the economy.

"Reconstruction means better infrastructure enhancing the country's production capacity and this promotes better growth prospects for the economy," an analyst said.

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