Sunday, April 28, 2013

Highest growth in profits last year from plantations sector in 2012

Highest growth was witnessed by the plantations sector last year, which saw its profits boosted by 375 per cent, a research report by NDB Stockbrokers (Pvt) Ltd says.

Excluding non-recurring items (items of income or expense that is not a normal item and which has a one-off effect and/or is unlikely to occur again), sector profits grew by 89 per cent on the back of the global reduction in tea production, improving tea auction prices and the depreciated rupee that resulted in higher prices for tea in rupee terms, the report said. It added that plantations such as Maskeliya, Talawakelle and Bogawanthalawa which have high exposure to high grown tea witnessed the highest growth due to record high auction prices. Furthermore these companies suffered the most from the wage hike in 2011, as tea is more labour sensitive than other crops, it noted.

Companies with higher exposure to rubber experienced lower returns amidst lower rubber prices due to reduced global demand. Profitability of plantations with exposure to tea should remain robust in this year’s first quarter given stable tea prices and favourable weather conditions, the report added.

“The impending wage hike in 2013 as well as market uncertainty created by the revisions to CESS on bulk tea exports could hamper profitability.”

Bank, finance and insurance sectors, the report said was the highest contributor to the earnings in absolute terms. “This sector recorded a profit growth of 29 per cent while the profit growth on a recurring basis 19 per cent,” it said, adding that food, beverage and tobacco sectors with 12 per cent and telecommunications with 8 per cent came in next in terms of contribution to earnings in absolute terms. Several companies made foreign exchange losses due to depreciation of the rupee, which however impacted banks positively, the report said further.

It said that companies with higher borrowings saw their profits slump as a result of increased finance cost owing to the high interest rate regime that prevailed during last year.

In the bank, finance and insurance sector, the report noted that Central Finance, DFCC, First Capital, LB Finance, LOLC, Lanka Ventures, People’s Merchant Finance, Vallibel Finance and People’s Leasing were reporting profits for the nine months ended 31st December. “The bank, finance and insurance sector recorded a profit growth of 29 per cent while the profit growth excluding non-recurring items was 19 per cent. The banking sector extended its performance during the last financial year to achieve a non recurring profit growth of 49 per cent (27 per cent on recurring basis),” the report said, explaining that this growth was attributable to the foreign exchange gains made during the first half of last financial year (by Commercial, Samath and HNB) and the Rs 5.9 billion capital gain that was made by NDB through the sale of its stake in Aviva NDB Insurance.

The net interest margins (NIM) of most banks also saw quarter on quarter improvement which resulted in a growth in net interest income (NII), it said. It added that credit growth was restrained in line with the credit ceiling of 18 per cent (or 23 per cent with foreign borrowing) that was imposed by the Central Bank. The insurance sector performed well with a profit growth of 26 per cent while the profitability of finance sector came down by 20 per cent on a recurring basis and a 3 per cent dip in profitability on a non recurring basis. The report predicted that the credit growth in the banking sector is likely to increase by 15 per cent to 20 per cent this year with the removal of the credit ceiling in December 2012 and we anticipate the banking sector to continue to post robust profits.

Beverage, food and tobacco sector recorded a profit growth of 18 per cent for the period while the growth excluding exceptional items was 12 per cent.

“Distilleries achieved a growth of 46 per cent on a non recurring basis although from a lower base while counters such as Lion Brewery, Bairaha Farms, Cargills and Ceylon Cold Stores saw their earnings dropping.” The report noted that this was partly due to increased costs from the rupee depreciation and energy price increases while lower demand conditions due to tighter disposable income levels affected volume growth.

Cargills Ceylon saw its profits drop due to higher finance costs stemming from fast-paced inorganic growth, it said, adding that higher profit growth through increased consumption in the medium term.

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