Financial Times

Liquor, insurance seen driving profits at Distilleries
Higher profits from the liquor business and improved contributions from insurance are being seen as growth propellers at the Distilleries Company of Sri Lanka (DCSL), the cash rich firm of influential tycoon Harry Jayawardena, which is now emerging as a diversified conglomerate.

Lanka Orix Securities has forecast a net profit of Rs 2,363 million for the full FY 2004/05, which would translate to earnings per share of Rs 7.88. Distilleries made a net profit of Rs 1,789 million in the year ending March 2004. Profits for the 2003-04 financial year include a one-off profit of Rs 885 million from the sale of several major shareholdings.

"As the company is now being gradually transformed to a diversified conglomerate we believe that current pricing level, at a forecast price-earnings (PE) multiple of 3.8 is a suitable opportunity to invest," the broker said in a research report.

It said that while other operating incomes may be at a reduced level in the second half of FY 2004/05 as income from disposal of shares is likely to be lower, this drop would be compensated by the enhanced profitability of the core business as well as the increased contribution from Sri Lanka Insurance Corporation (SLIC).

Distilleries and SLIC were both state corporations that were privatized and are now controlled by Jayawardena. The DCSL group subsidiaries and associates include SLIC, Aitken Spence and Co Ltd., Balangoda Plantations, Madulsima Plantations, Beruwala Distillery (Pvt) Ltd., fabric processing firm Texpro Industries Ltd., investing company Timpex (Pvt) Ltd., Periceyl (Pvt) Ltd., who are importers and distributors of liquor, and Milford Holdings (Pvt) Ltd., another investing company.

DCSL has a "dominating presence" in the domestic liquor market and is indicating healthy market growth in this sector while also aggressively pursuing a stronger position in the lucrative but relatively exclusive high-end liquor segment, Lanka Orix Securities said.

An improved contribution is also expected from segments like manufacturing, such as the subsidiary engaged in fabric processing, and insurance, the brokers said. "We are of the opinion that the strong cash-flow resulting from the core liquor operation and the subsidiary SLIC would enable the company to report results in excess of what it reported during the previous financial year."

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