Sri Lanka shares hit 5-month low after govt's retrospective tax plan

Feb 2 (Reuters) - Sri Lankan shares fell to over five-month lows on Monday due to panic selling in blue-chips, led by John Keells Holdings Plc as concerns over future earnings weighed on sentiment after the government raised taxes on cash-rich firms.

The index has fallen 5.10 percent since Sri Lanka's new government on Thursday announced a budget that imposed a one-time 'super gain tax' of 25 percent on companies or individuals who earned over 2 billion rupees profits in 2013/2014.

The main stock index, ended 2.51 percent, or 179.99 points, down at 7,000.06, its lowest since Aug. 28.

The day's fall erased market capitalisation by 76.3 billion rupees ($577.2 million) on Monday after erasing 83.2 billion on Friday. The market is valued at 2.97 trillion rupees as on Monday.

"There was lot of panic selling, Keells is the main reason for today's fall," said Reshan Wediwardana, research analyst at First Capital Equities (Pvt) Ltd.

"Still it's not clear how the super gain tax is going to be charged," he said.

Shares in conglomerate John Keells Holdings Plc fell 6.22 percent, while biggest listed lender Commercial Bank of Ceylon Plc declined 4.34 percent, and Dialog Axiata Plc fell 6.67 percent.

Analysts said the market would continue to fall on 'super gain tax' worries and the reaction of foreign investors would be the key.

Foreign investors were net sellers of 180.4 million rupees worth of shares on Monday, turning the year to date net foreign trade to an outflow of 60.23 million rupees. They bought a net 22.07 billion rupees worth of stocks last year.

Analysts said the market would trade lower in the coming days on selling in top conglomerate John Keells Holdings , Dialog Axiata, Sri Lanka Telecom, Ceylon Tobacco Co and Nestle as they would have to pay the new tax.

After the market closed on Friday John Keells posted a 28 percent gain in its third quarter net profit.

Analysts, however, expect the raft of tax concessions and salary hikes in the budget to increase consumers' disposable income and help the market rally over the long term.

Turnover was 1.3 billion Sri Lankan rupees ($9.83 million), less than last year's daily average of 1.42 billion rupees, exchange data showed.

Markets will be closed for a Buddhist and Independence Day holidays on Tuesday and Wednesday respectively. Normal trading will resume on Thursday. 

($1 = 132.2000 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anand Basu)

Bartleet Finance now Janashakthi subsidiary

Janashakthi Limited has purchased 6,639,998 ordinary voting shares of Bartleet Finance PLC, which is 86.79 per cent of the voting rights held by Bartleets Transcapital Limited, at a total price of Rs. 874,818,419.

Janashakthi Limited already held 993,749 ordinary voting shares of Bartleet Finance PLC (approximately 12.99% voting right) at the time of this acquisition on 22 January 2015.

According to the latest acquisition Janashakthi Limited holds approximately 99.78 per cent voting rights of Bartleet Finance PLC. Thus, Bartleet Finance PLC will be a subsidiary of Janashakthi Limited from 22 January 2015.
www.adaderana.lk

EPF contemplates divesting some capital market investments

By Chandeepa Wettasinghe The Employees’ Provident Fund (EPF), the largest state-run private sector pension fund may divest its holdings in commercial banks and certain other companies trading in the Colombo Stock Exchange, newly appointed Central Bank Governor Arjuna Mahendran told a recent forum. 

“I wouldn’t want to jump the gun and divest these immediately, though it is desirable, because we have to have more liquidity in the public markets for these bank shares, and indeed all the other shares which have been acquired by the government through the EPF in the last few years,” Mahendran t old a Post Budget Seminar organized by Ceylon Chamber of Commerce last week. 

He was responding to criticism leveled by Aitken Spence Director Dr. Parakrama Dissanayake, who was in the audience, of the Central Bank as the regulator, controlling the listed commercial banks through EPF and several other state-run entities. 

Mahendran agreed t hat such investments constitute a blatant conflict of interest, and noted that investigations would be launched into such investments. According to section 2.6.2.2 of the Investment Policy Statement and Standards of Professional Conduct of the EPF, the fund cannot invest in the banking sector and equities of financial nature, while only blue chip companies could be invested in, to minimize risk. 

Apart from the banking sector stocks, EPF made highly controversial investments in companies such as Ceylon Grain Elevators, Bairaha Farms, Galadari Hotel and Light House Hotel, at premium rates, during the past few years. 

“Now that the government holds these shares, which they shouldn’t have in the first place, unravelling that would have to involve institutions like the SEC. Now that Thilak Karunaratne is in the saddle, I’m sure he would do an excellent job in unravelling whatever stuff that went on behind the scenes,” Mahendran said. 

Specially during 2010 to 2012 period, allegations were leveled against certain parties and high net worth investors of dumping pumpedup shares to EPF at premium prices. 

Policy Planning and Economic Development Deputy Minister Dr. Harsha de Silva while in the opposition, in 2011, claimed that over Rs.270 million was lost in just one week from equity dealings. 

Yet, according to a Central Bank statement in November 2014, EPF had accrued Rs.6.7 billion in profits from share dividends, debenture interest and capital gains since January 2014.

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Dhammika, Ravi to close down their casinos in Sri Lanka

With the new government’s interim budget deciding to impose a special tax of Rs. 1,000 million (Rs. 01 billion) from casino owners for each of their gaming centres, Sri Lankan businessmen Dhammika Perera and Ravi Wijeratne who have established several casinos in the island have decided to close down their gaming centres, www.adaderanabiz.lk learns from very reliable sources.

Dhammika Perera, considered the wealthiest person in Sri Lanka who owns three casino licenses has decided to close down two of them and continue with only the casino situated at D.R. Wijewardene Mawatha in Colombo.

Meanwhile, www.adaderanabiz.lk learns that another prominent Sri Lankan businessman Ravi Wijeratne is preparing to close down one of the two casinos owned by him.

According to the interim budget, each casino owner has to pay a special tax of Rs. 1,000 million for each casino license owned on before 15 April this year and the government expects a revenue of Rs. 05 billion through this.

Meanwhile, with the new government blocking casino business activities in Sri Lanka, Australian businessman James Packer too has stopped his hotel project with casinos in Colombo.

According to information, there are around 1,964 persons employed at Dhammika Perera’s casinos.
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JKH, PBT at 5.42bn in 3Q

John Keells Holdings Group posted a profit before tax (PBT) at Rs.5.42 billion in the third quarter of the financial year 2014/15, an increase of 27 per cent over the corresponding Rs.4.27 billion recorded in the previous financial year.

The PBT for the first nine months of the financial year 2014/15 at Rs.12.16 billion is an increase of 33 per cent over the Rs.9.11 billion recorded in the corresponding period of the last financial year said Chairman Susantha Ratnayake.

The profit attributable to equity holders for the third quarter at Rs.4.33 billion reflects an increase of 28 per cent over the corresponding Rs.3.39 billion in the previous year, while the performance for the first nine month at Rs.9.13 billion reflects an increase of 30 per cent over the corresponding Rs.7.04 billion recorded in the last financial year.

The revenue at Rs.25.47 billion in the third quarter of the financial year 2014/15 is an increase of 9 per cent over the corresponding Rs.23.47 billion recorded in the previous financial year. The revenue for the first nine months of the financial year 2014/15 at Rs.68.92 billion is an increase of 7 per cent over the Rs.64.21 billion recorded in the corresponding period of the last financial year.

The Company PBT for the third quarter of the financial year 2014/15 at Rs.2.33 billion is an increase of 8 per cent over the corresponding Rs.2.17 billion recorded in the previous financial year, while the PBT for the first nine months of the financial year at Rs.6.39 billion is an increase of 38 per cent over the corresponding Rs.4.62 billion recorded in the financial year 2013/14. The Transportation industry group PBT of Rs.727 million in the third quarter of 2014/15 is an increase of 35 per cent over the third quarter of the previous financial year.

The Leisure industry group PBT of Rs.1.40 billion in the third quarter of 2014/15 is a decrease of 9 per cent over the third quarter of the previous financial year.

The Sri Lankan Resorts sector, recorded an increase in profitability, aided by the growth in tourist arrivals. The Consumer Foods and Retail industry group PBT of Rs.583 million in the third quarter of 2014/15 is an increase of 156 per cent over the third quarter of the previous financial year

The Property industry group PBT of Rs.376 million in the third quarter of 2014/15 is an increase of 8 per cent over the third quarter of the previous financial year.

Ceylon Cold Stores witnessed an increase in profitability, aided by its evolving product mix amidst improving consumer sentiment and changing consumption patterns. The Information Technology industry group PBT of Rs.120 million in the third quarter of 2014/15 is an increase of 38 per cent over the third quarter of the previous financial year.
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Inflation up 3.2% in January

The Central Bank on Friday said inflation in January 2015 as measured by the change in the Colombo Consumers’ Price Index (CCPI) (2006/07=100), which is computed by the Department of Census and Statistics, increased to 3.2% in January 2015 from 2.1% in December 2014, on a year-on year basis, as a result of the increase in food prices.
Annual average inflation declined marginally from 3.3% recorded in December 2014 to 3.2% in January 2015.

The monthly change in CCPI in January 2015 was 1.7%, mainly due to the increase in fresh food items. Particularly, prices of all vegetable varieties, green chilies, big onions, red onions, potatoes, eggs and coconuts increased during the month.

The Non-food category, Clothing and Footwear, Recreation and Culture, Education and Miscellaneous Goods and Services sub groups recorded increases in average prices, while Furnishings, Household Equipment and Routine Household Maintenance; Health and Communication sub groups remained unchanged during the month.

Nevertheless, reflecting the downward revision of fuel prices, average prices in housing, water, electricity, gas and other fuels and transport sub groups declined. As a result of these developments, average prices in the Non-food category declined on an overall basis.

Core inflation, which reflects the underlying inflation in the economy, declined from 3.2% in December 2014 to 2.1% in January 2015 on a year-on-year basis. Annual average core inflation during January 2015 was 3.4%, compared to 3.5% recorded in December 2014.

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NDB Equities on Interim Budget – 2015

• NDB Securities Ltd., on Friday released its initial commentary and analysis on the new Government’s interim Budget 2015. Here are excerpts

The Interim Budget presented by the new regime under the 100-day program targets a 4.4% fiscal deficit to GDP compared to 4.6% estimated in the previous Budget. Furthermore, a significant number of concessions to the general public were evident while imposing certain taxes on the corporate sector.

Budget Highlights – General

• The salary increase of Rs. 10,000 per month for state sector employees – Rs. 5,000 will be increased from February 2015 and the balance by June 2015. This will be in addition to the Rs. 3,000 added since January 2015. The private sector was requested to increase the salary by Rs. 2,500 per month.
• Increase of monthly pension by Rs. 1,000 from April 2015 onwards.
•  Under the decentralised budget the amount provided to each member of the parliament will be doubled from Rs. five million to Rs. 10 million which would facilitate development of remote areas.
• Healthcare expenditure to increase to 3% of GDP from previous budget allocation of 1.4%.
• Education expenditure to increase to 6% of GDP from previous budget allocation of 2.0%.
•  Rs. 1 billion levy imposed immediately on all the casino operators (currently five casinos in operation) which has to be paid before 15 April 2015 as a one off special levy. The annual levy payable under the Betting and Gaming Levy Act will be doubled.
•  SriLankan Airlines and Mihin Lanka are to be merged in order to improve operational efficiencies and reduce losses.
• The new Government will continue to pursue the GSP+ concession which will benefit the apparel industry. In addition, the Government is also seeking removal of the European Union’s ban on fishing (effective 15 January 2015) and resume fish exports to the European Union.
•  Mansion Tax of Rs. 1 million will be levied on owners of all houses valued at Rs. 100 million or more, or on houses above 5000 sq. ft. on an annual basis commencing from 2015.
•  The employment income exempted for the Pay-As-You-Earn (PAYE) tax was increased from Rs. 600,000 to Rs. 750,000, effective from 1 April 2015

Budget Highlights – CSE related

• In order to boost the agricultural sector,
• Fertilizer subsidy would continue whereby fertilizer would continue to be provided at Rs. 350 per 50 kg.
• 50% waiver to be provided for a maximum loan capital of Rs. 100,000 advanced to farmers by commercial banks which are presently overdue.
•  Guaranteed purchase price of paddy, potatoes, tea and rubber to be increased.
• Taxes on thirteen essential goods were reduced (estimated per capita saving from sugar, bread, wheat flour, LPG, kerosene, petrol and diesel is around Rs. 3,389 p.a.).
• Price of 12.5 kg gas cylinder was reduced by Rs. 300 to Rs. 1,596 (effective from midnight 29 January 2015).

* Loan interest payments on gold backed loans value to a maximum of Rs. 200,000 held at state banks to be waived off.

•  Super Gain Tax of 25% on profits is imposed on companies or individuals earning profits of more than Rs. 2 billion in the tax year 2013/14 as a one off payment. Approximately 24 companies in the listed space are expected to be affected by this proposal and the estimated tax collection from them is around Rs. 27 Bn.
•  Tax on motor cars with engine capacity of less than 1,000cc will be reduced to around 15%.
•  Excise taxes applicable on hybrid vehicles will be revised and the depreciation table to be removed effective from mid night 29 January 2015.
•  One-off Rs. 1 billion levy imposed on companies engaged in commercial operations of the Direct-to-Home via satellite operators having more than 50,000 subscribers. A special levy of Rs. 1 billion was also imposed on satellite owners who utilize the location reserved for Sri Lankan satellite.
•  An interest rate cap was imposed on credit card lending, subject to a maximum of 8% over and above the normal lending rates.
•  All liquor and beer manufacturing companies will be liable to pay a minimum of Rs. 200 million per month. Current Government debt
• The estimated outstanding Government debt is Rs. 7,373 billion as at end 2014, reflecting per capita debt of Rs. 357,233. Considering the off balance sheet items with regards to debt, the Government expects per capita debt to increase to Rs. 427,220. As a result, the total debt to GDP of 74.4% as at end 2014 is expected to increase to 88.9%.

Impact analysisSuper Gain Tax Budget proposal
Super Gain Tax of 25% on profits is imposed on companies or individuals earning profits of more than Rs. 2 billion in the tax year 2013/14 as a one off payment. The tax will be paid at the company level.

Key counters affected
JKH, COMB, CTC, HNB, DIST, SLTL, DIAL, LIOC, CARS, SPEN, SAMP, PLC, NEST, CFIN, BUKI, DFCC, AEL, NDB, CINS, LLUB, OSEA, AHPL, SEYB, NTB
Banking, Finance and Insurance
Budget proposal: Concessions given to boost the agricultural sector.
Impact on Sector: This would lead to an increase in micro and SME (Small and Medium Enterprises) lending. The concession will also help improve credit quality of the loans.
Key counters affected: All listed banks and finance companies. HNB, NDB, DFCC, NTB, SEYB and UBC would be mainly affected due to their relatively high exposure on SME.
Budget proposal: Provide 50% tax reduction for the entrepreneurs who commence businesses in vegetable and food processing Industry.
Impact on sector: Currently the outstanding micro loan portfolio of major microfinance institutions and formal banks is Rs. 194 billion and Rs. 39 billion respectively. The SME sector contribution to GDP3 is 30%.
Budget proposal: Cap on the effective annual interest rate on micro finance lending to be 40% p.a.
Impact on sector: The interest income earned by micro finance institutions will be impacted.
Key counters affected: HNB may be affected through Prime Grameen
Budget proposal: Special endeavour to assist SME sector organisation restructuring
Assistance to SME sector industrialists and credit card holders in difficulties listed under CRIB (People with outstanding of Rs. 250,000 or less will be assisted with a repayment plan within six months).
Impact on sector: Finance Ministry in tandem with the banking sector will provide assistance to SMEs to restructure operations. This will improve credit quality of SME loans.
Key counters affected: Listed banks and finance companies may be impacted.
Budget proposal: Age limit of imported passenger buses to be increased from five to 10 years
Impact on sector: Since longer age limit buses will be less expensive, we expect the demand for buses for transport service to increase. Hence, finance company leasing and hire purchase portfolio is expected to grow.
Key counters affected: PLC
Budget proposal: Every citizen to have a bank account
Impact on sector: The deposit base of the banking system will increase with CASA ratio. The larger banks with branches located outside Western province are expected to benefit.
Key counters affected: All banks in the listed space, mainly HNB, COMB and SAMP with a wider branch network.
Budget proposal: Reduction in taxes for cars with engine capacity less than 1,000cc. However, excise taxes applicable on hybrid vehicles will be revised and the depreciation table will be removed
Impact on sector: Leasing and hire purchase opportunities for small motor cars.
Demand for hybrid vehicles may marginally decrease.
Key counters affected: All banks, finance and leasing companies
Budget proposal: Interest rate on NRFC accounts to increase from 3% to 5%.
Impact on sector: We expect minimal impact on the interest expense of banks on the listed space.
Key counters affected: COMB and HNB have relatively higher exposure than the other listed banks.
Budget proposal: Senior citizen deposit interest rate floor increased from 12% to 15% up to Rs. 1 million.
Impact on sector: We expect this to be applicable to both state and private commercial banks.
Further we expect a flight of deposits from finance companies to banks which would negatively affect the funding of finance companies and benefit the banks deposit base.
Key counters affected: Listed banks may benefit positively.
Budget proposal: An interest rate cap was imposed on credit card lending subject to a maximum of 8% over and above the normal lending rates.
Impact on sector: Lower margins to the banks may be negated by the higher volumes due to increased consumer usage of credit cards.
Key counters affected: NTB and SAMP with significant exposure to credit cards while other banks will also benefit
Beverage, Food and Tobacco sectors
Budget proposal: Guaranteed price for procurement of a litre of milk will be increased from Rs. 60 to Rs. 70.
Impact on sector: Negative impact on cost of goods sold.
Key counters affected: NEST, COCO, LMF, LAMB
Budget proposal: Maximum retail price of milk powder to reduce by Rs. 61 to Rs. 325 per 400g.
Impact on sector: Negative impact on margins
Key counters affected: NEST, LMF
Budget proposal: All liquor manufacturing and beer manufacturing companies will be liable to pay a minimum of Rs. 200 million per month.
Impact on sector: It is not clear whether this is a new levy or a minimum payment for all taxes paid by the existing players.
Key counters affected: If it is a new levy, DIST and LION will be negatively impacted.
Chemicals and Pharmaceuticals sectors
Budget proposals:
The guaranteed purchase price of paddy will be increased to Rs. 50 per kg.
Hand tractors price to be reduced for the use of farming community.
50% waiver will be provided for a maximum loan capital of Rs. . 100,000 on overdue loans advanced to farmers by commercial banks.
Impact on sector: The agricultural sector would be revitalised as a result of the given proposals, resulting in more demand being created for fertilizer and other related products.
Key counters affected: Positive impact on LCEY and CIC.

Construction Sector
Budget proposal: Removal of customs duty applicable on cement and steel billets. Additionally, an initiative was proposed to ensure that sand is mined without harming the environment.
Impact on sector: Falling prices of cement and steel billets would reduce the costs of construction significantly, thus enhancing the demand for construction.
Stringent environment laws related to sand mining may have a negative impact. However, this may not overweigh the above mention positive development.
Key counters affected: AEL, KAPI
Diversified Sector
Budget proposal: Reduction of taxes on essential goods, fuel, kerosene and gas prices.
Impact on sector: Increased disposable income of the population which in return impact positively retail business and supermarket chains in general
Key counters affected: JKH, RICH, CTHR,SHL, HAYL, SUN
Budget proposal: An interest rate cap was imposed on credit card lending, subject to a maximum of 8% over and above the normal lending rates.
Impact on Sector: Increased consumer spending
Key counters affected: JKH, RICH, CTHR,SHL, HAYL, SUN
Budget proposal: Guaranteed purchase price on rubber increased to Rs. 350 per kg from Rs. 300 per kg.
Impact on sector: Rubber related manufacturing products may adversely get affected by the proposed guaranteed price.
Key counters affected: HAYL, RICH
Manufacturing Sector
Budget proposal: Reduction in fuel prices and taxes applicable on vehicles with engine capacity of less than 1,000cc by approximately 15%.
Impact on sector: Positive impact on the cost structure and higher demand for complimentary products.
Key counters affected: CERA, LWL, RCL, TKYO, GLAS, ACL, KCAB, DIPD, TJL, LLUB, TYRE
Budget proposal: Removal of customs duty applicable on cement
Impact on sector: The demand for imported cement will increase. This will negatively impact listed counters with domestic production.
A boost in the construction sector would also positively impact the demand for cables required for wiring of buildings, driving the top line.
Key counters affected: TKYO and LCEM, and ACL, SIRA and KCAB
Budget proposal: 30% of EPF balances would be withdrawn to purchase land or build houses.
Impact on sector: Demand will increase for the individual house building segment. Therefore, demand for cement is expected to increase.
Key counters affected: TKYO and LCEM
Budget proposal: The guaranteed purchase price for rubber will be increased to Rs. 350 per kg.
Impact on sector: Companies that source raw material such as rubber are expected to be adversely impacted as a result of higher input cost.
Key counters affected: DIPD and REXP
Motor Sector
Budget proposal: It was proposed to reduce taxes applicable on vehicles with engine capacity of less than 1,000 cc by approximately 15%.
Impact on sector: Increase in number of vehicles sold, driving revenue generated. (E.g. DIMO Batta)
Key counters affected: DIMO
Budget proposal: Reduction in the price of fuel.
Impact on Sector: The lower fuel prices are expected to encourage the use of vehicles, thereby increasing vehicle sales and the number of first time vehicle owners.
Key counters affected: SMOT, DIMO and UML
Budget proposal: Introduction of an annual license fee of Rs. 1.5 million for importers of brand new or used vehicles.
Impact on sector: The present practice of individuals importing vehicles would decrease as the cost would be significant to individuals and smaller scale importers Elimination of competition from smaller players would be beneficial to the larger players.
Key counters affected: SMOT, DIMO and UML
Plantations
Budget proposal: The guaranteed price of rubber will be increased to Rs. 350 per kg.
Impact on the sector: The impact of this proposal is expected to be minimal for listed entities with high exposure to rubber as they will not be able to obtain a price benefit due to their integrated nature of operations.
Key counters affected: KOTA, KGAL and AGAL
Power and Energy Sector
Budget proposal: Reduction in fuel prices and taxes applicable on vehicles with engine capacity of less than 1,000cc by approximately 15%.
Impact on the sector: Since fuel reduction was through the reduction of tax, the estimated margin impact will be minimal. In addition, we expect a positive impact on the increase in average number of trips by motorists due to low fuel costs. New car registration under small car category will also have a positive impact on fuel demand.
Key counters affected: LIOC
Budget proposal: Reduction in LP gas prices by Rs. 300 to Rs. 1,596 per 12.5 kg cylinder.
Impact on the sector: It is unclear as to whether the price decrease is as a result of lower tax or simply due to the reduction of the maximum retail price. If the price decrease is not due to a reduction in tax, LGL will be negatively affected.
Key counters affected: LGL
Telecommunications
Budget proposal: One off levy of Rs. 250 million to be imposed on all licensed mobile telephone operators.
Impact on the sector: This would reduce profits in the listed space in the telecommunications sector by approximately Rs. 500 million. However this is a one-off levy and hence is not expected to impact the long term viability of the industry.
Key counters affected: DIAL and SLTL
Budget proposal: Mobile operators should avoid passing the tax of 25% payable on reloads to the consumer. The company has to bear this cost on behalf of the client.
Impact on the sector: This would impact industry profits since entities would have to bear the tax burden on pre-paid reloads. However, at the same time, usage may increase due to lower pricing, which in turn may result in a volume increase.
As at 30 September 2014, DIAL had approximately 8.3 million pre-paid subscribers, out of a total subscriber base of approximately 9.3 million (89.0%).
Key counters affected: DIAL and SLTL
Budget proposal: Outsourced workers who have been working at Sri Lanka Telecom for more than seven years to be absorbed to the regular workforce.
Impact on the sector: Salaries and wages will increase
Key counters affected: SLT

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