The country’s manufacturing sector is enjoying a stronger pace in earnings growth post war, a top stock broker said last week.
December aggregate earnings of manufacturing sector listed companies grew by 175.9% YoY on back of a 19.7% revenue growth.
“Now with sharper revenue growth thanks to the current resurgent economy, the sector has started increasing earnings at a stronger pace than its historical averages with companies starting to improve utilisation of their capacity,” said John Keells Stock Brokers in an earnings update on the manufacturing sector.
It said the CSE’s manufacturing sector is mostly oriented towards domestic market needs and has a market cap of Rs. 135.7 b, which amounts to 8.4% of total market. “The sector trades at a marginal discount to our expected market multiple this year with December 2010 annualised aggregate earnings coming to 14.6x. We estimate that historically the sector has grown earnings at 16.7% over the last five years despite the dislocations caused by the ethnic conflict.”
December aggregate earnings grew by 175.9% YoY on back of a 19.7% revenue growth. The margin expansion is mostly attributable to a sharp reduction in operational costs due to belt tightening in reaction to revenue falls as well as lower finance costs due to monetary easing.
Now with sharper revenue growth thanks to the current resurgent economy, the sector has started increasing earnings at a stronger pace than its historical averages with companies starting to improve utilisation of their capacity.
Construction in particular has boosted volumes sold of the cement and floor tiles companies, and both major floor tiles players have indicated higher capex for expansion. The more export oriented companies in the sector should also benefit despite expectations of a marginally appreciating Rupee since the restrictions on foreign borrowing appear to be relaxing. JKSB expects the sector to ramp up on capex going forward as revenues improve.
Twenty of the largest companies in the sector amount to 93% of the sector market capitalisation and JKSB has summarised their results below. Impressive quarterly results came from Bogala Graphite, Piramal Glass, Grain Elevators and Tokyo Cement.
Bogala Graphite produces and exports value added graphite and is attempting to sell graphite-based lubricants with assistance from German parent Graphit Krophmuhl AG. The company’s turnaround was bolstered by a conversion of debt to equity in 2009.
Piramal Glass has a near monopoly of the market for glass bottles and containers and has also turned around from making losses partly thanks to restructuring of previous debt to a foreign currency loan. The company continues to expand revenue with a focus on niche export products.
Grain Elevators’ main business of feed increased revenue and widened GP margins mainly due to cost effective feed formulations. However the poultry breeder farm segment made a significant contribution to earnings effectively matching the feeder segment.
Tokyo Cement has finally started to see construction demand rise and improving utilisation of their expanded capacity. Although the Eastern Province floods earlier this year might have an impact on their next quarter, JKSB feels the reconstruction needs of the areas will keep construction demand high in the longer term.
source - www.ft.lk
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