Cabinet identifies Tata Project as SDP 16-year tax break as goodwill gesture

By Mario Andree

Ceylon Finance Today: The Cabinet has identified the US$ 430 million mixed development project in Slave Island by India's Tata Housing, as a Strategic Development Project in a new gazette notification granting the company a 16 year tax break for the US$ 130 million foreign direct investment.

Tata housing obtained five acres of land free of charge from the Urban Development Authority, as a goodwill gesture for agreeing to build 562 housing units on three acres of land adjoining the location, to relocate the families who occupied the land previously.

In a new gazette notification the Ministry of Investment Promotion identified Tata's US$ 429.5 million re-development and mixed development project as a Strategic Development Project under the SDP Act.

The gazette highlighted that only US$ 130 million out of the US$ 429.5 million would come in the form of foreign direct investment.

The ministry also has decided to grant the company a 16-year tax break for the project which would be completed within eight years from the May 2014, the date agreements were signed with BOI.

Accordingly, the company will be fully exempted from income tax for the first 10 years, other than sale of apartments which is accepted for six years, followed by 50% exemption of corporate tax for six years.

In addition, no withholding tax would be charged on interest for foreign loans, fees to consultants, management and royalty fees below three per cent of gross revenue and 1.5% of marketing fees and further incentives for management fees below 10%.

The company has been exempted from VAT, PAL, Excise Duty, CESS and NBT during the project implementation period of eight years.

Further, the company has been exempted from the payment of Construction Industry Guarantee Fund Levy to the contractors and subcontractors of the project company.

The project will be carried out by locally incorporated One-Colombo Project (Private) Limited.

At the initial stage the company would construct 562 housing and 100 shopping units to relocate those displaced by the land clearance. The relocation is expected to be completed within two-and-a-half years of commencement, followed by the second phase where the company would develop a mixed development project consisting of a 150-room city hotel, 1.1 million sq. ft. of residential apartments, 530,000 sq. ft. of commercial space and 115,000 sq. ft. of retail space.
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Lanka Rating Agency upgrades Vallibel Finance ratings to BBB-/P3; outlook Stable

Lanka Rating Agency (LRA) has upgraded Vallibel Finance PLC’s long- and short-term financial institution ratings from BB+ and NP to BBB- and P3, respectively.

Concurrently, its issue rating of Rs. 500 million Unsecured Subordinated Redeemable Debentures (2014/2019) is upgraded to BB+ from BB. Meanwhile, both long-term rating outlooks are reaffirmed at Stable.

The upgrade is premised on the increase in market share of Vallibel in the LFC sector as well as its improved core performance indicators and improved franchise. Meanwhile, the ratings are supported by Vallibel’s above average asset quality and performance reflected in indicators that compare better than similar rated industry peers’.

Vallibel was incorporated in 1974 as a small family-owned finance company under the name of The Rupee Finance Company. In 2005, it was acquired by Vallibel Investments Ltd. and renamed Vallibel Finance Company. Following the change in ownership, the company has aggressively increased its credit assets, which made up around 1.84% of industry assets as at end-March 2014.

Vallibel, whose principal lending activities include leasing and hire-purchase facilities, 
operates with 20 branches as at end-June 2014.

Vallibel’s asset quality is viewed as above average supported by asset quality indicators that compare better to similar rated peers’. The company’s credit assets grew a healthy 30.22% y-o-y in fiscal 2014 and 23.56% (annualised) in 1H fiscal 2015, reflective of the expansion in its core lease and hire purchase portfolio supported by expansion in its branch network and improving franchise.

However, Vallibel’s absolute NPLs increased to Rs. 509.59 million as at end-FY March 2014 from Rs. 251.97 million as at end-FY Mar 2013, increasing further to Rs. 727.57 million as at end-1H FY Mar 2015 due to the influx of new NPLs.

The influx of NPLs stemmed from all asset classes as the loan book seasoned amidst a challenging external environment, this was a phenomenon observed across the LFC sector. 

Subsequently, the gross NPL ratio moderated to 5.66% as at end-1H FY Mar 2015 from 2.55% as at end-FY Mar 2013 (end- FY Mar 2012: 1.81%), albeit the ratio compares better than most similar rated peers.

While Lanka Rating Agency’s concerns hinge on the lack of seasoning in Vallibel’s loan book following robust credit asset growth and the increase in trend of NPLs, it expects this trend to reverse gradually going forward with the improving macroeconomic environment taking effect. Elsewhere, despite the influx in gross NPLs, the company’s NPL coverage ratio improved to 71.43% as at end-1H FY Mar 2015 (end-FY Mar 2013: 56.36%) comparing better than similar rated peers’, reflective of the increase in provisioning made during the same period.

Vallibel’s performance is deemed above average, supported by performance indicators that compare better than similar rated peers’.

The company’s net interest income grew 41.92% y-o-y to Rs. 1,111.34 million in FY-Mar 2014, recording a further growth of 27.76% (annualised) during 1H-FY Mar 2015, largely reflective of the expansion in credit assets. Meanwhile, as expected, Vallibel’s NIM improved to 11.06% in 1H FY Mar 2015 from 10.16% in FY Mar 2013 as funding costs eased amidst deposits re-pricing faster than loans in a receding interest rate environment.

Further Lanka Rating Agency notes that Vallibel’s NIM compares better to that of similar rated LFC sector peers’ engaged in similar lending segments. The company’s overhead costs increased 47.94% y-o-y in fiscal 2014 and a further 19.36% (annualised) in 1H fiscal 2015 in view of branch expansion expenses, higher advertising expenses and increase in personnel costs stemming from higher staff force.

Despite the increase in overhead costs, as expected, Vallibel’s cost-to-income ratio remained relatively stable clocking 46.18% in 1H fiscal 2015 (fiscal 2013: 44.76%) reflective of the increase in earnings levels in line with the broadening of NIM as well as new branches opened during 1H fiscal 2014 breaking even during the review period. 

Despite the slight increase in pre-tax profits, Vallibel’s Return on Assets (ROA) declined to 4.05% in fiscal 2014 from 5.37% in fiscal 2013, mainly due to the increase in overhead costs and higher impairment charges. Nevertheless, the ratio continues to be better than similar rated industry peers’.

Vallibel’s funding composition is dominated by public deposits, accounting for 76.51% of the funding mix as at end-FY Mar 2014 (end-FY Mar 2013: 70.30%). Customer deposits grew a robust 48.37% y-o-y in fiscal 2014 supported by Vallibel’s extended branch reach as well as its improving franchise.

Lanka Rating Agency opines that Vallibel’s capitalisation levels are Average. Its tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) clocked in at 10.11% and 15.16% as at end-March 2014 (end-March 2013: 10.28% & 14.25%) comparing in line with its industry peers’; the improvement in Vallibel’s overall-RWCAR in fiscal 2014 was supported by the issuance of Rs. 500 million subordinate debentures in February 2014.

Going forward the management expects to issue another Rs. 1.50 billion subordinate debentures in FY Mar 2015. This issuance is expected to strengthen Vallibel’s tier-2 capital supporting its growth plans.
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Nimal says continuity is crucial

With political battle lines drawn following the announcement of key candidates for the presidential poll, the stand the private sector will take is being closely watched.

Though not many will come out in public, drawing first blood however on Saturday was Royal Ceramics Plc Managing Director Nimal Perera, who is also a high net worth investor.

During his address at the well-patronsied annual dinner dance of the company, Nimal, who has risen to be a business leader in his usual unconventional style, said with the crucial presidential election around the corner, continuity was key. The basis for his position was that the post-war environment has been beneficial for businesses.

Citing an example, he said Royal Ceramics has made a strong turnaround in the current financial year. He said Royal Ceramics had posted a Group pre-tax profit of Rs. 1.26 billion in the first half of FY15 up by 210% from a year earlier. The figure in the second quarter had nearly doubled to Rs. 864 million from the corresponding period of FY14. 

Apart from the improved business environment, the consolidation of Lanka Ceramics Group has been a key contributor as well.

Net profit attributable to ordinary shareholders of RCL was up 1,726% to Rs. 596.7 million in the first half, whilst it more tripled in the second quarter to Rs. 435.6 million. Group turnover grew by 21% to Rs. 10.6 billion in the first half whilst for 2Q it improved to Rs. 5.7 billion from Rs. 5.4 billion a year earlier. At Company level, RCL saw top line rise by 23% to Rs. 1.2 billion from 0.97 billion in the first half and to Rs. 704 million from Rs. 598 million in 2Q of FY14.
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Singer achieves Rs. 20.8 billion revenue in first nine months

Singer Sri Lanka, the country’s consumer durables giant, capped a strong third quarter by announcing group revenues of Rs. 20.8 billion in the year to date, a growth of 12% over the prior year. Revenue growth was driven primarily by significant gains in the retailer’s Communication and Digital Media segment, as well as improvements in the country’s business conditions.

The Company’s Communication and Digital Media segment expanded by 31%, when compared to the same period of the previous year. Every other segment in the retailer’s business portfolio, with the sole exception of the Transportation segment, notched substantial gains: the Agro segment grew by 19%, while sewing products grew by 15%, furniture grew by 13%, white goods grew by 12%, kitchen-related products grew by 11%, and consumer electronics grew by 6%.

The Company’s revenue growth boosted its bottom line, with gross profit increasing by 10%. Although selling and administration expenses increased by 12%, due to inflation and an increase in rents and electricity, other operating expenses declined by 8%. The net finance cost decreased by 11% due to a decline in interest rates and a tight control of borrowings.

As a result, Singer Sri Lanka’s net profit increased by a robust 29%. The Company’s subsidiary, Singer Finance (Lanka) PLC, also recorded steady growth, with revenue increasing by 6% and net profit increasing by 3%. The Group’s overall net profit, in the year to date, rose by 23%.

The Group continues to solidify its position as the country’s leader in the retail of consumer durables. Singer (Sri Lanka) is continually strengthening its industry-best retail and service networks and enhancing its portfolio of world-class brands and products. For example, during the nine months under review, Singer (Sri Lanka) was appointed the distributor for three of the world’s most renowned brands: Sony and Sharp, from Japan; and the American computer technology brand, Dell.

By continually enriching its value proposition, Singer is certain that it will continue to set the benchmark for ‘trusted excellence’ in Sri Lanka.
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Govt. split could impact on foreign investment

By Feizal Samath, Business Editor

Economists now have an opportunity to give true picture of the ‘state of the nation’

While Sri Lanka’s business community reacted cautiously to Friday’s stunning split in Government ranks, economists, speaking mostly off the record, said political stability has become an issue for foreign investors while academia and chambers now have an opportunity to speak about the ‘real’ economic statistics.

“The people cannot be fooled by rosy statistics all the time; the facts speak for themselves and people are more intelligent to see through what some top officials always keep saying to please their political masters,” one economist said, referring to the ‘always positive’ economic data on GDP growth and inflation trotted out by the Central Bank and the Treasury.
On Friday, senior Minister Maithripala Sirisena quit the Government with Minister Rajitha Senaratne and more than 20 other UPFA MPs. He later announced that he would be the common opposition Presidential candidate, endorsed by the United National Party, and resulting in the return of former President Chandrika Kumaratunga to the political stage.

Tourism, the first industry to feel the impact of political instability, is however unlikely to get affected unless there is violence and unrest, according to a cross section of industry. “Most people do not know or care about what is happening in another country unless there is a threat to their security. But we need to keep an eye is how travel advisories will be worded,” one veteran hotelier said, noting however that Sri Lanka’s biggest source market, India and emerging market, China don’t issue travel advisories unlike western nations.
Sri Lanka is targetting 1.4 million tourists in 2015 with the November-February period being the peak season for visitors.

The developments rocked the Colombo stock market as rumours and speculation spread across Friday leading to panic selling and erratic decision-making. “Traders were blindsided,” one broker said, adding that investors were weighing options. “There are questions about President Mahinda Rajapaksa’s next move. What will he do, will he postpone the elections, was a common question,” he said.

The main All Share Index fell by 128.7 points and analysts predicted the week ahead would be ‘extremely’ volatile. While business leaders were cautious and unwilling to comment, economists said political stability – a key indicator for foreign investors – was fragile at the moment with the Government losing its 2/3rds control of Parliament. “Foreign investors have sniffed this in the past five years too and that is why FDI never exceeded 1.5 per cent,” an economist attached to local stock brokerage, said.

The crisis in Government was also reflected in the budget process where several factual errors, correction of figures and implementing proposals even before the Budget is passed, has been the hallmark of the 2015 Budget. (See Business Times) A university economist said the Government has been drifting towards handouts and subsidies possibly realising the undercurrents within the government ranks. “This resulted in a reversal of market-led growth towards Government expenditure-led growth undermining the private sector,” he said, adding that in his own estimation, “the split was the culmination of accumulated economic ills plus weak governance”.

He said the failure in attracting high levels of foreign investment was due to the lack of political freedom, good governance and a corruption-free society.
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SL senior citizens have bank deposits worth Rs.750 bln

By Duruthu Edirimuni Chandrasekera

Some 750,000 senior citizens hold accounts in 33 banks worth Rs. 750 billion, data by Sri Lanka Banks’ Association (SLBA) shows. A senior citizen is defined as one who is 59 + years.

This data collected at the request of the Central Bank (CB) on the back of the SLBA urging the CB and the Treasury to extend a scheme in the proposed 2015 budget applicable to state banks to pay 12 per cent interest rates to senior citizens – to cover losses for banks. “We’ll present this data to the CB this week,” Upali de Silva, President SLBA told the Business Times. S.R. Attygalle, Deputy Secretary to the Treasury confirmed, saying that Treasury officials will also attend this meeting.

The state banks are also awaiting Treasury and CB direction to offer a 12 per cent annual interest rate for deposits of pensioners and elders as instructed in this year’s budget, according to officials of these banks. Currently interest rates on deposits are around 7-8 per cent maximum on par with lending rates which are higher. But banks would lose if forced to offer 12 per cent deposit rates as lending cannot be raised to 4-5 per cent more than current rates. Furthermore even the currently, low lending rates is not attracting interest from the corporate sector.

To cover any deficit between lending and borrowing rates, the Treasury is to float a $30 billion bond issue at 12 per cent interest in which state banks can invest.

CB sources said that implementation of this proposal is that an upper limit will be slapped on deposits which will be offered a 12 per cent annual interest rate. “As an example, those deposits below Rs.1 million will be granted this 12 per cent annual interest rate,” a Treasury source said.
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Sri Lankan stocks fall to over two-week low on political uncertainty

Nov 21 (Reuters) - Sri Lankan stocks fell sharply on Friday to a more than two-week low on political concerns, a day after President Mahinda Rajapaksa declared he would seek an unprecedented third term, prompting defections from his ruling coalition.

After the market closed on Friday, Health Minister Mithripala Sirisena resigned from the government and said he would run as an opposition candidate against Rajapaksa in the snap election in January. Since the poll announcement six legislators have defected.

The main stock index fell 1.71 percent, or 128.71 points, to close at 7,401.62, its lowest close since Nov. 5.

"Lot of selling pressure was there with the political uncertainty," said Dimantha Mathew, manager-research at First Capital Equities (Pvt) Ltd.

Continued foreign buying, low interest rates and hopes of better corporate earnings pushed the bourse into an overbought zone by Nov. 18, before it started sliding back on the political developments.

Analysts said they expect the market to be volatile until the presidential election is over.

Friday's turnover was 2.14 billion rupees ($16.3 million), exchange data showed, well above this year's daily average of 1.44 billion rupees.

Foreign investors net bought shares worth 357.53 million rupees, extending foreign buying for this year to 18.94 billion rupees, exchange data showed.

Dialog Axiata Plc fell 5.1 percent, leading the overall fall, while biggest listed lender Commercial Bank of Ceylon Plc fell 1.6 percent.

($1 = 131.0000 Sri Lankan rupee) 

(Reporting by Ranga Sirilal; Editing by Prateek Chatterjee)