SL Unplugged: Macro and private sector

Tuesday, 7 January 2014 00:01 -     - {{hitsCtrl.values.hits}}

Last week at the launch of the Central Bank 2014 Road Map, my mind went back to the days when I used to travel in the C130 military aircraft with soldiers on route to Jaffna in the last phases of the war and how we used to travel from Pallaly Airport to the heart of Jaffna town on work, under stringent convoy protection. Banking density Today, the economy has exploded with an average growth of 6.7% in the last four years with the Hotels and Restaurant sector booming at 13.6%, Eastern Province growing by 25% to 6.3% of the GDP registering value of Rs. 472 billion and the Northern economy growing by 25.9% as a share of GDP of 4% registering a value of Rs. 305 billion, which to my mind are post-war economic dividends. Banking density picking up from 9.9 in 2009 to become the number one ranked at 21.5 in 2013 indicates the asset-based growth that has happened in that part of the country and the overall increase in economic activity. Tourism On the tourism front, way back in 2009 the value of the income generated by tourism was at 447 million and today this business has increased by Rs. 1 billion to Rs. 1.35 billion, which is an indication of the direct beneficiary of the peace dividend. Whilst there is a question of the control sector tourism struggling to grow given that the uncontrolled sector has taken this business needs careful analysis and may be a strategy to correct the situation but the numbers are certainly encouraging from the macro basis. Private sector experience To take these macroeconomic numbers to private sector performance, let me cite an example – Lion Brewery (Ceylon) PLC. The company was incorporated in 1996 by Ceylon Beverage Holdings PLC (CBL), formerly known as Ceylon Brewery PLC, in collaboration with Carlsberg International to carry on the business of brewing, bottling and sale of beer, under license for local and export markets. The company produces the popular ‘Lion’ brand of beers and stouts and also ‘Carlsberg’ beer (under license from Carlsberg International Denmark). LBC’s brewery is located at Biyagama and was commissioned in 1998, with an initial capacity of 300,000 hectolitres (hl) per annum. The company has made regular investments to enhance capacity. The current capacity of the brewery is 750,000hl per annum. The company also operates four breweries in India – one each in Maharashtra, Rajastan, Himachal and Kolkatta. LBC has been awarded ISO 22000, which is the equivalent of HACCP, the food safety standard. Background of the industry The local alcohol industry consists of 22 licensed producers accounting for total alcohol production of approximately 153m litres in 2010. However, traditionally the illicit production of alcohol has also been rampant in the country (kassippu being the common form of illicitly distilled alcohol and the most frequently consumed illicit alcohol). According to a study carried out by LBC, illicit alcohol dominates the consumption of alcohol in the country with a 50-60% consumption level. Of the legal alcohol consumption in 2010, spirits accounted for a market share of 59% while beer accounted for a market share of 41%. Performance post-war Based on data available in the public domain, the performance of the organisation post-war has been outstanding with the brand value of ‘Lion’ in 2010 valued as Rs. 2 billion, ranking it as the 21st brand among the top Sri Lankan brands by LMD. The brand value has changed by 47% compared to 2010 and the brand was valued as Rs. 3 billion in 2011. There was a remarkable increase in brand value by 128% recorded in 2012, ranking the brand at the ninth position at a value of Rs. 6.8 billion. This dramatic change has happened due to many reasons:
  • Government policy decisions like ‘Mathata Thitha’ and the restriction of advertising alcoholic beverages, creating a huge entry barrier to new companies trying to enter the emerging economy of Sri Lanka.
  • The post-war economy has created an expanded market especially in the north and east provisions, where new distribution channels are opened.
  • Increase of the arrival of tourists heavily impacted the increase in soft liquor consumption.
  • Expanding to new markets with different market segments, example ‘Machang’ pub.
LBC’s enterprise value has also increased with the brand value due to the highlighted facts and the value of Rs. 6 billion in 2010 has increased to Rs. 18 billion by 2012, resulting in a change of 211%. LBC’s cumulative revenue has grown from Rs. 8 b to Rs. 17.5 b during 2010 to 2012, with an increase of 223%, which was the highest revenue in LBC’s history. As per information made available through the Excise Department, the annual production of beer increased during the years 2010, 2011 and 2012, as a result of the following: 1. Increased consumer spending due to higher disposable income – economy growth was 8.3% during 2011 and the continuous pattern of economic growth during 2012 2.Improved business confidence due to the post-war condition 3.Increased tourist arrivals – 46% increase in tourist arrivals and hotel occupancies of over 70%; beer consumption is more favoured by tourists compared to the local population 4.Focus on curtailing the production of illicit alcohol 5.The general ‘feel good’ factor in the country during this post-war period contributed to improved consumer sentiment 6.Opening up of the north and east regions 7.Expansion of the availability of recreational/entertainment facilities Considering that the brands under Millers Brewery have for some time been out of the market, Millers will have to embark on a revitalisation campaign to regain the lost market visibility. With the current restrictions in advertising and distribution this might be a challenge. With the idea of moving closer to the customer and moving further downstream, CBL Retailers Ltd. was set up as a fully-owned subsidiary of Ceylon Beverage Holdings PLC, which runs a chain of wine shops under its own name. CBL Retailers also operates a chain of pubs styled ‘Machan’ to provide the consumer a value-for-money experience and also to facilitate a ‘beer culture’ in the country. Being the third largest tax payer to the Government, LBC contributes Rs. 42 million per day as Government taxes and pay 40% income tax being in the alcoholic industry whereas the other companies pay 28% as their final tax. This explains the low profit margins of the company. During 2011, the MPS does not reflect the increase in EPS and brand value, where the MPS stood at the price of Rs. 200 both years without any change. The reason behind the issue is the decline of the whole stock market in Sri Lanka. The ASPI and Milanka price indexes have fallen by 25% and 29% respectively in 2011 whereas the LBC share price remained constant without making any capital losses to its shareholders. However, the latest share price has shot up to more than Rs. 300 as of now. This robustness is mainly gained through its brand equity with consumers and investor confidence given the possible shareholder value that the company is expected to generate. We believe that further analysis is required on the basis of valuation in order to explain the higher rate of increase in LBC’s enterprise value compared to the increase in brand value. One consideration will be the expansion projects initiated to increase capacity which in turn contribute towards an increase in the value of tangible assets. Brand Finance uses enterprise value as a benchmark for its brand valuations, since brand is one of the many assets that make up the business. If all the assets in a business (both tangible, like buildings and machines, and intangible, like patents, airport landing slots, a trained-up workforce, and also goodwill) are added up, it will give you the enterprise value. Other brands owned by the company may be another contributor to the increase in enterprise value. Concluding thoughts Hence we see how the macro performance of the economy can be seen with the reality in the market place in the private sector. The challenge is how we can drive the economy to a 8.5% targeted for 2016 and how the private sector can take centre-stage in the development agenda given that in the Doing Business Index we are at 85th position in the world even though we are the best in South Asia. (The thoughts shared have no links to the organisations the author serves in Sri Lanka or globally. Writing is only a hobby he pursues. In 2012 Rohantha won the Business Leadership Achievement Award by the Global Association of Business and World Education Congress. The author acknowledges the research done by the MBA graduates of the University of Colombo and the Central Bank of Sri Lanka.)

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