New PE Firm Says Sri Lanka Is Cinderella Story Of Asia

By Shasha Dai

Private equity investors wax poetic about Asia, but for the most part, by Asia, they mean established economies like Japan, or up-and-comers like China or India. Sri Lanka tends to be an area that gets a lot less focus, but one firm, Singapore-based Calamander Capital Ltd., hopes to change that. Calamander, headed by Chairman Roman Scott, is looking to raise $150 million to invest in the South Asian island nation. We caught up with Scott to ask him why.

How do you get comfortable with political risk in the country after a three-decade war?
Outsiders, especially Westerners, don’t understand that over the last six years, Sri Lanka has grown faster than all ASEAN (Association of Southeast Asian Nations) countries except Vietnam. Now imagine what you can achieve without the war. The war thing has always been a perception issue. Unlike the situations in Iraq, Afghanistan or Israel, what happened in Sri Lanka over the last two years is that the Tamil Tiger rebels have been largely removed. The political risk is not the resurgence of the Tigers movement, because there are no Tigers to resurge. The risk instead is fighting the economic war, and putting in place the right economic policy.

What kind of investors are you marketing the fund to?
We’d like to have an investor base as mixed as possible and hope to have no more than one-third of investors coming from the U.S. and Europe. But for the majority, our focus is on Asia, particularly Indian institutions and high-net worth individuals, and to a lesser extent, ASEAN and the rest of Asia. That’s because they understand the Sri Lanka story. It’s the Cinderella story of Asia. Like all Cinderellas, Sri Lanka is the prettiest girl although she works in the kitchen infested with rats – and Indians understand that. It’s closely tied to the Indian economy, almost like another province of India.

Why does the fund plan to invest in commodities?
The demand for soft commodities in Sri Lanka is dependent on Asian demand. For example, demand for rubber is tied to Asian growth and future global growth, and is less tied to Wal-Mart. Demand for tea, for example, is more fundamental. If you have a cup of tea in the morning, the demand is resistant to recession and consumption doesn’t change much. Demand for building and construction products remains strong in Asia, especially as much of the Asian governments’ economic stimulus packages goes into construction projects.

How do you plan to create value?
Virtually every company in Sri Lanka is not adequately capitalized and is not efficient. For instance, some tea factories in the country are using machinery that’s 90 to 100 years old, and some are still powered by steam engines. The country has the biggest concentration of low-hanging fruit on the planet. It has been in a war for 25 years, which means no investment for 25 years. We are taking something out of the 19th century and into the 20th century. Accordingly, we will use very limited leverage, no more than one-third of the transaction value. And the leverage will be primarily for working capital needs.

What is your exit strategy?
Exits will rely on trade sales to larger companies from the Asian region that are looking for a foothold in the country or a supply of goods. For example, the Indonesians and the Chinese are interested in rubber assets, and the Singaporeans and the Malaysians are interested in building materials.

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India-Lanka undersea power cable pact soon

India and Sri Lanka are set to energise their relations. Literally. The two neighbours will soon sign an MoU to study the feasibility of laying an undersea cable — which will be one-of-its-kind in Asia when completed — to connect their power networks. Sources said the MEA has approved the draft agreement which is to be signed shortly.

An interlink between India and Sri Lanka will also firm up the idea of establishing a South Asian energy grid being discussed by the Saarc grouping. India already has a heavy-duty power link with Bhutan and connecting Bangladesh and Pakistan will not pose much of a technical problem. Final touches are being given to a study on the South Asian grid.

An undersea link will allow both countries to manage peak demand or at times when hydel capacities in their respective areas run low just as it is doing now in India. The link will help Sri Lanka reduce use of expensive fuels and import cheaper power from India's surplus. For India, the link will open up a new market for its projected surplus.

An initial report prepared by the state-owned transmission utility PowerGrid, which will be the implementing agency from India for the subsea link, has pegged the cost at Rs 2,292 crore and said it could be completed within 42 months of getting investment approvals.

The report said the power supply scenario between India and Sri Lanka will allow them to exchange about 500 mw of electricity in the short term.

Once the two sides settle down with this quantity, power flow can be ramped up to 1,000 mw, roughly one-fourth of Delhi's peak consumption, by 2015-16. These are the time frames when the generation capacities in both countries are projected to improve, with surplus in the Indian southern grid.

PowerGrid and Ceylon Electricity Board will be looking at laying a cable under the Gulf of Mannar between Rameshwaram in Tamil Nadu and Talaimannar on the left flank of the Mannar islands in Sri Lanka. On the Indian side, the cable will be connected to the southern grid at Madurai through an overhead transmission line. On the Sri Lankan side, the underwater cable will be linked to that country's network at Anuradhapura through an overhead line.

The undersea link will be laid on the seabed just as telecom and Internet cables run across ocean beds around the world. It will have safeguards on both sides against electrocution in case of damage from ship anchors or sharks. An optic-fibre cable will also run alongside the main power cable to keep an eye on the link and also provide extra telecom capacity between the two countries.

At present, India is facing a 16% electricity shortage, with a peak demand of 107,000 mw. The government plans to add 78,500 mw capacity by 2012, with more envisaged in the captive and merchant segments by private investors.

Many other proposals are in the pipeline, which, after taking into account the projected growth in load, suggests that there will be surplus of 6,000 mw during peak hours and 12,300 mw during lean periods.

timesofindia

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Pakistan Rail to reconstruct 250km track in Sri Lanka

LAHORE: Pakistan Railways (PR) will rehabilitate 250 km long rail track damaged in civil war in Sri Lanka besides carrying out a project for improving Sri Lankan Railways’ rolling stock.

Presiding a meeting of Pakistan Railways Advisory and Consultancy Services (PRACS) board here Friday, Pakistan Railways Chairman Samiul Haq Khilji said agreement in this regard was reached during his visit to Sri Lanka from June 14 to 21.

Pakistan Railways would also carry out reconstruction and rehabilitation of 600 passenger coaches of Sri Lankan Railways. The meeting was attended by GM Operations Saeed Akhtar, Member Finance Jehangir Aziz and Managing Director, PRACS, Mehmood Rashid.

Giving details of agreements made during his visit to Sri Lanka he said, five hundred 4-wheeler freight coaches would be converted into eight-wheelers besides upgrading 60 diamond style coaches to new standard.

He said Pakistan Railways would also provide spare parts to Sri Lankan Railways besides providing facility of training to its officials at Walton Academy. Earlier, the chairman presiding meeting of RAILCOP’s board directed for continuing work apace on the project for construction of housing flats to be provided to Railways employees on easy instalments.

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Trouble brewing for Sri Lankan tea farmers

June 29, 2009 - 6:55AM

World tea prices have rocketed, but along misty tea-growing mountain slopes in Sri Lanka's central hills, farmers are facing disaster.

Despite production shortfalls coupled with increased demand making the daily cuppa dearer, the men and women who toil on the land have little reason to cheer, for they must uproot tea bushes desiccated by a severe drought.

Tea farmer N K Atapattu, 42, picked a crop of nearly 2000kg of tea leaves from his small plot last year, but the crop is sharply down in the first quarter of this year.

The tea harvest fell more than 50 per cent in the first three months of the year on the highlands, according to official figures, and Atapattu and his fellow farmers are praying for better weather.

Nalini Aluthgama, 61, says her newly planted home plot at the village of Kotmale, some 170km east of Colombo by road, is devastated.

"I have just removed over 100 dead tea bushes," Aluthgama said as volunteers joined in to uproot the dead wood. "Most of my plants are about three years old and they don't give much of a crop."

The volunteers get a token few dollars a day for working on the tea plots.

Dhammika Manaweera, 42, the secretary of a local tea farming association, says all her 53-strong membership have suffered because of the drought.

The British charity Oxfam has been helping the local community to learn more about new techniques in tea growing and get the maximum from their inputs, but when it comes to weather, they are helpless.

"We have taken these farmers to experts and taught them good agricultural practices, but they don't have income security because of uncertain weather," said Oxfam's Tharanga Godallage.

This is an area where climate change is affecting an entire community uprooted 25 years ago to make way for a hydro-irrigation reservoir which inundated their traditional farmlands.

"We were re-settled here in 1984. We had a drought in 1988, but this time it is worse," Manaweera said. "We have started replacing the dead tea bushes, hoping for rain. We are getting some right now, but if there is too much of rain, it will also ruin us."

Small-time farmers are a vital component in Sri Lanka's tea industry, the country's largest foreign exchange earning commodity, and the authorities are taking their plight seriously.

An hour's drive along a narrow road through hill slopes is Sri Lanka's Tea Research Institute, which is trying to develop new types of drought-resistant tea bushes.

"There was frost damage on the crop earlier this year," said TRI director Sarath Abeysinghe. "It was frosty early in the morning and very dry and hot during the day. It could be attributed to global climate change. We can't predict the weather any more."

The TRI is using artificial pollination to develop cultivars from the tea bush, botanically known as Camellia sinensis, to withstand harsh weather, but coming up with a successful variety could take decades.

He said the distinctive aromatic flavour of tea usually produced in the mountainous regions during February and March had been ruined by the drought.

The teas, known as Dimbula, are hot sellers among buyers in Japan and Germany.

"There have been times when we were not able to get a quality season because of the erratic weather," he said. "But this year has been worse."

The chief plant breeder at the TRI, Kumudini Gunasekare, said drought resistant cultivars are being developed by her team to address the new issue of climate change.

"Earlier we were concentrating mainly on enhancing yields - drought was not an issue then - but we are now focusing on drought-tolerant varieties," Gunasekare said.

World tea prices have risen by about 35 per cent in the past year and supermarket prices are set to rise another 10 per cent in June, but small farmers in Sri Lanka who account for more than two thirds of the country's production have not benefited.

Sri Lanka earned a record $US1.23 billion ($1.53 billion) from tea exports in 2008 thanks to the global commodity boom in the first half of last year, but the party is now over.

The drought means that the subsistence farmers will not benefit from the rising prices, and the troubles ahead are not something they can forget with a refreshing cup of tea.

AFP

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Commercial Bank of Ceylon

Above Research Report was prepared sometime ago. But we consider it to be relevant and useful as Commercial Bank is currently considered and recommended by most equity analyst as a BUY.

"Amidst the broad market rally we believe the banking, conglomerate and hotel sectors to be the key favourites, whilst telecom and manufacturing sectors would become the secondary market movers. Thus the market has become attractive (with the positive macro socio/economic shift) whilst trading on earnings multiples (12.4X) whilst foreign investors are re-entering in to fundamentally strong counters, we see pockets of strong growth in key sectors such as telecommunications (Sri Lanka Telecom), industrial sector (Tokyo Cement, Royal Ceramics, Chevron Lubricants), diversified (John Keells Holdings, Aitken Spence, Distilleries), Hotels (Asian Hotels & Properties, Aitken Spence Hotels)and banking (Commercial Bank, HNB Bank)"- Quoted by Asia Research in their Weekly Report

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Royal Ceramic Lanka

Above Research Report was prepared sometime ago. But we consider it to be relevant and useful as Royal Ceramics is currently considered and recommended by most equity analyst as a BUY.
"Amidst the broad market rally we believe the banking, conglomerate and hotel sectors to be the key favourites, whilst telecom and manufacturing sectors would become the secondary market movers. Thus the market has become attractive (with the positive macro socio/economic shift) whilst trading on earnings multiples (12.4X) whilst foreign investors are re-entering in to fundamentally strong counters, we see pockets of strong growth in key sectors such as telecommunications (Sri Lanka Telecom), industrial sector (Tokyo Cement, Royal Ceramics, Chevron Lubricants), diversified (John Keells Holdings, Aitken Spence, Distilleries), Hotels (Asian Hotels & Properties, Aitken Spence Hotels)and banking (Commercial Bank, HNB Bank)" - Quoted by Asia Research in their Weekly Report

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S.Lanka rupee recovers on exporter demand, remittances

By Shihar Aneez

COLOMBO, June 26 (Reuters) - Sri Lanka's rupee firmed on Friday as dollar inflows from remittances and exporters selling dollars outpaced importer demand, and retail buying drove the stock market higher.

The rupee edged up to 114.90/94 a dollar, from Thursday's close of 114.97/115.00.

'There was dollar liquidity from remittances and exporter conversions,' said a currency dealer. 'Those inflows were more than importer dollar demand by a state bank.'

The rupee hit a record low of 120.80/121.10 on April 23, after the central bank stopped preventing depreciation, amid discussion for a $1.9 billion International Monetary Fund (IMF) loan, which is yet to be approved.

The central bank on Friday said the loan delay is due to the IMF asking for a reassessment of post-war economic projections.


The mood of the investors is wary with the recent shift of the Sri Lankan foreign policy and the lack of openness in the conditions of over 300,000 IDPs. The new block who voted against the War Crime....

Some investors have been cautious because of uncertainty over what effect the loan's conditions could have on the rupee, and consequently, on the value of investments in the bourse.

The bourse closed 1.36 percent or 33.00 points firmer at 2452.01, its second rise in the week.

'There was heavy retail buying,' said Mohandas Thangarajah, a stockbroker at First Guardian Equities. 'But we expect some profit-taking next week as retailers have been driving the market predominantly in the recent days.'

Top conglomerate John Keells Holdings rose 1.87 percent to 136 rupees on a weighted average, while top listed private lender Commercial Bank of Ceylon closed 1.68 percent firmer at 136.25 rupees.

Turnover hit 596.5 million rupees ($5.2 million), about 28 percent more than last year's daily average of 464 million.

The 2009 daily average turnover, which was 260.7 million before the wan-end, has since jumped 63 percent to 425 million.

The bourse is still up 63.1 percent in 2009 and 28.5 percent since the government declared victory in the war on May 18.

Analysts say though institutional and foreign investors are interested in post-war Sri Lanka's prospects, they are waiting for real growth to take place while investing in bluechips in low volumes.

Net foreign inflows, which were at 1.4 billion rupees before the war's end, have now turned to a net outflow of 372.2 million so far for the year, a bourse official said.

Sri Lanka's central bank will ease monetary policy further to get market interest rates down if banks do not lower their lending rates to boost credit to the private sector, its chief economist told Reuters on Friday.

The interbank lending rate or call money rate edged up to 9.478 percent from Wednesday's 9.470 percent.

For secondary market rates, please see.

($1=114.92 rupees)

(Editing by Bryson Hull) (If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com) Keywords: MARKETS SRILANKA/

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Lanka IOC to Spend $30 Million on Outlets as Civil War Ends

By Anusha Ondaatjie

June 25 (Bloomberg) -- Lanka IOC Plc, a unit of India’s largest oil refiner, plans to spend $30 million to double the number of its retail outlets and benefit from a revival in the South Asian island’s economy after the end of the civil war.

The Indian Oil Corp. unit aims to add 35 to 40 fuel stations annually over four years to cater to an expected rise in diesel and gasoline demand after the government declared victory over rebels of the Liberation Tigers of Tamil Eelam, Lanka IOC Managing Director Suresh Kumar said in an interview.

Central bank Governor Nivard Cabraal may double the nation’s growth forecast for 2009 to 5 percent on expectations of improved business confidence and investment and farm output. The Indian company’s expansion will go ahead as it expects to make a profit this year after hedging and slower currency depreciation help to offset losses from selling fuels below cost.

“Our short-term scenario won’t cloud my thinking on expansion,” Kumar said in his Colombo-based office yesterday. “Now that the war is over, the focus is on economic prosperity and growth.”

President Mahinda Rajapaksa, who declared victory over the LTTE May 16, is seeking aid and investment to help turn the war- ravaged east and north of the island into productive parts of the economy. The International Monetary Fund said on May 21 it is near an agreement to lend Sri Lanka almost $2 billion to repay debt and rebuild the economy.

Offshore Funding

Lanka IOC has risen 15 percent this year on the Colombo Stock Exchange, compared with a 62 percent gain in the benchmark Colombo All-Share Index.

Lanka IOC, which reported a loss of 1.24 billion rupees ($11 million) in the year to March 31, will fund the expansion through offshore borrowings and loans from development banks in Sri Lanka.

Lanka IOC currently loses 24 rupees on a liter of gasoline and 24.30 rupees on a liter of diesel, Kumar said. Lanka IOC is seeking its first price increase for the year and has requested the government to scale back duties on oil imports.

“This year, we definitely won’t be at a loss,” Kumar said, amid earnings from hedging and a slower depreciation of the Sri Lankan rupee. “Dollars have been made available at a cheaper cost and will facilitate smooth operations and supplies.”

Lanka IOC borrowed $50 million from ICICI Bank Ltd. in Singapore this quarter to fund day-to-day expenses, Kumar said. Lanka IOC won’t borrow from its parent company.

Oil companies in Sri Lanka have been free to set prices since June 2006, although Lanka IOC sells fuel below cost to retain market share because state-owned Ceylon Petroleum Corp., or Ceypetco, caps prices to help the government control inflation.

Lanka IOC, which runs a third of the island’s retail network, was ordered by Petroleum Minister A.H.M. Fowzie in June 2008 to match prices or risk having its 150 gas stations being taken over.

Fowzie said yesterday the government had no plans to revise fuel prices.

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‘Sri Lanka Rising’ - to attract export, expand market

The country will be projected under a new theme “Sri Lanka Rising” to the international market in attracting exports and expanding our markets, President, National Chamber of Exporters Sri Lanka (NCESL) Rohan Fernando said. The Chamber is working towards disseminating this simple message through our products, he said.

He called for an urgent national policy on development, energy and water emphasizing the need to conserve water and energy and to make maximum use. “We have the potential and we work with Government institutions to create a positive frame of mind. This is what we try to inculcate in our members as a business community”, he said.

Under the current economic environment we stood up to a worldwide recession and fought a war which was the worst in the world. We overcame these challenges successfully. The country was not badly affected by recession due to the stringent financial regulations. Firstly, as a Sri Lankan and as business community we congratulate the correct political leadership, armed forces and others involved in the successful role against the war, he said.

There is a saying that “when one door closes at least another door opens” and we need to concentrate on the avenues available for development.

The upbeat about the future and achieving the goals is not a difficult task, Fernando said. We need to strive to look at other openings.

Sri Lanka’s economy is resilient to the point that there is an abundance of natural strengths and resources. These natural strengths including military expertise could be made use of in international wars.

The natural resources such as marine, water, wind and solar are not exploited fully. Steps are needed to extend our maritime economic zone to broaden our boundaries. The sea contains natural resources including fish, minerals, carbon resources and power generation capacity by way of geo- thermal.

It’s our responsibility to harness all these resources. We are an island nation. The Government needs to have a timeframe to stop importing fish, he said.

“This is a time that we can set up our basic infrastructure and ground work. After the recession there will be a boom point. This could propel so many other silent dormant activities. We should be prepared to take full use of the world economic expansion”, he said.

Sri Lanka has a vast potential in converting many areas of food production in to consumer ready items.

Tea recorded a one billion dollar turnover two years ago. It has the potential to be a five billion industry and 3.5 billion kilograms of tea are consumed annually. Tea is no more a poor man’s beverage. It is a health related product and tea could also produce a range of by-products which are health supportive and aimed at life support.

We can expand our tea export industry to make Sri Lanka a tea export nation. This would facilitate national economic growth, Fernando said.

Regarding milk production, it is far from satisfactory. We are confident that with a proper strategy we could improve liquid milk production. Our garment industry should aim at high end products and value addition.

The North and East development is vital in our economy. These provinces need to produce food items such as fish, onions, potatoes and chillies not only for local consumption, but should be also export oriented.

There is a greater demand for foods and also for natural food and we need to capitalize on this situation, Fernando said. We should encourage local production and this in turn will benefit our farmers. It will also help to save billions of rupees of valuable foreign exchange on food imports, he said.

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Hasty climb

The All Share Price Index (ASPI) gained an outstanding 202.3 points to close at 2,456.9 points (+9.0% WoW) whilst the Milanka Price Index also gained 240.0 points to close at 2,764.8 points (+18.9% WoW).

Indices gained predominantly on the back of gains made in heavyweight John Keells Holdings(+18.9% WoW), Sri Lanka Telecom (15.1% WoW), Commercial Bank (+11.4% WoW), DFCC Bank(+18.1% WoW) and NDB Bank (+20.6% WoW) and second liners led by; Chemical Industries Colombo (Voting) (+26.7% WoW), Lanka Cement (+14.9% WoW), Sierra Cables (+20.0% WoW) and John Keells Hotels (+19.0% WoW).

Average daily turnover surged to LKR1,354.2 mn (vs LKR440.8 mn) mainly on account of the predominant foreign, local high networth and retail buying interest on John Keells Holdings. Turnover was also supported by buying interest in Chemical Industries Colombo and NDB Bank whilst institutional buying took place in Ceylon Theatres. Further, buying interest was witnessed in banking sector counters whilst profit taking in plantation sector stocks resulted in them losing earlier gains on Tuesday. Additionally, speculative buying continued in Lanka Cement throughout the week.

Investors remained exceptionally active during the week due to positive investor sentiment on the better future business prospects with the support of foreign aids and direct investments. Central Bank slashed it’s key official policy rates once again last week (by 50 basis points where Repurchase rate is 8.5% and the Reverse Repurchase rate is 11.0%) and injected further momentum to the trend. Foreign purchases for the week amounted to LKR2,488.2 mn whilst foreign sales amounted to LKR2,496.4 mn.



Trade deficit contracts for the fourth consecutive month in April 2009 by 75.9% to USD167 million

Sri Lanka’s trade deficit contracted 75.9% YoY to USD167 mn in April ’09, with imports decreasing at a faster rate than the reduction in exports during the period under review. Accordingly, earnings from exports have reduced 28.2% YoY to USD438 mn during the month, mainly on account of agricultural exports whilst expenditure on imports declined by 53.5% to USD604 mn due to reduced demand for imports of consumer, investments goods and intermediate goods where consumer goods declined by 48.2% and expenditure on intermediate goods dropped by 58.2% USD349 mn, led by lower petroleum and fertilizer imports (as crude oil prices hovered around USD54 per barrel).

Private remittances reached USD1,033.9 mn during the first four months compared to USD1047.5 mn in the corresponding period of 2008, USD260.2 mn in excess of the trade deficit. Gross official reserves amounted to USD1,296 mn, sufficient to finance around 1.2 months of imports by April ’09.



Sri Lanka records GDP growth of 1.5% in 1Q2009

Sri Lanka’s Gross Domestic Product (GDP) grew by 1.5% in 1Q2009. Accordingly, the three main sectors of the economy have demonstrated moderate growth during 1Q09, with the Agriculture sector growing by 3.0%, Industry sector expanding 1.9% and Services sector increasing by a marginal 1.0% during the period under review.

Agricultural growth during the period has been driven by improved performance in coconut (up 15.1% YoY),rubber (up 2.6% YoY), paddy production (up 10.1% YoY) and fish production (up 6.0% YoY) where there has been a 40.9% drop in tea production. Industrial growth during the year slowed down to 1.9% in 1Q2009 (vs 6.0% in 1Q08) with the manufacturing sector indicating a growth of 2.7%. Further, the Services sector which is 55.3% share of total GDP, grew by a marginal 1.0% in 1Q2009 where Wholesale and Retail trade (down 2.5% YoY) and Transport & Communication (up 3.9% YoY).

Tea prices on the rise

At the tea auction held on 15th/16th of June, the trend of improving tea prices continued with strong buying from Iran, Turkey, Libya and Iraq supported by Russia, Dubai, Syria, Saudi Arabia and other Middle Eastern markets. High and low grown tea prices rose to record a near LKR270/kg and LKR390/kg respectively. Low grown tea enjoyed an excellent demand which made the prices appreciate significantly while the leafy and semi leafy liquoring teas too continued its upward trend. Going forward we believe tea prices would continue to improve with the strong buying interest from Gulf region and the current low crops from local plantations.

A consolidating act

We believe the market has re rated following the military victory and performed outstandingly during the past weeks. Though the Colombo bourse has only yet reached near 81% of the all time high All Share Price Index value we believe the growth is sustainable with macro factors moving favourably. However, due to the hasty climb of shares investors could book their profits in the coming week. Interest rates have fallen sharply from 17.33% to 12.04% YTD 2009 whilst inflation already eased off and at mid single digit levels the platform has been set for equity market gains.

Furthermore with the applied IMF loan expected to fall through, the currency would also stabilize and attract more foreign investment to the equity market whilst collateral lending, aid inflows and foreign remittances would stabilize and/or possibly strengthen the SL Rupee during the medium term.

Amidst the broad market rally we believe the banking, conglomerate and hotel sectors to be the key favourites, whilst telecom and manufacturing sectors would become the secondary market movers. Thus the market has become attractive (with the positive macro socio/economic shift) whilst trading on earnings multiples (12.4X) whilst foreign investors are re-entering in to fundamentally strong counters, we see pockets of strong growth in key sectors such as telecommunications (Sri Lanka Telecom), industrial sector (Tokyo Cement, Royal Ceramics, Chevron Lubricants), diversified (John Keells Holdings, Aitken Spence, Distilleries), Hotels (Asian Hotels & Properties, Aitken Spence Hotels)and banking (Commercial Bank, HNB Bank).

Source: Asia Securities

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Sri Lanka: Can The Peace Be Won?

Now that Sri Lanka’s civil war is over and the Tamil Tigers’ leaders have been eliminated, President Percy Mahinda Rajapaksa will have to turn his attention to winning the peace. This may actually be harder than winning the war. For a start, the government will need to reintegrate the Tamil minority – of which more than 20,000 civilians may have been killed in the final phase of the war – and re-house hundreds of thousands of displaced people. But even excluding the war’s aftermath, Sri Lanka has been grappling with some of the most severe economic imbalances of any economy in Asia.

• Firstly, Sri Lanka’s budget deficit has been above 7% of GDP for most of its post-independence history. Anyone doubting the sustainability of widening budget deficits in the Western world would be advised to look at Sri Lanka for proof that this is possible. But this requires more foreign financing.

• Secondly, Sri Lanka maintains severe trade and current account deficits (exacerbated by high oil prices in recent years) which look set to persist for many years to come. These deficits make it difficult to stabilise the Sri Lankan rupee (LKR), which has been depreciating steadily for many years.

• Thirdly, while Sri Lanka has seen its inflation fall from a record high of 28% last year, it remains very high – 14.7% on a 12-month moving average basis – by Asian standards. This is a reflection of a combination of printing money to finance the deficit (including higher defence spending in recent years) and the oil import factor.

As a result of the above, and because of rising risk aversion late last year as the global economy went into meltdown, Sri Lanka only narrowly avoided a balance of payments crisis, and only thanks to promises of a US$1.9 billion IMF loan. At one stage, Sri Lanka’s foreign reserves had fallen to around US$1 billion, or less than a month’s worth of imports (three months’ worth is generally considered the critical level). But the IMF loan is not yet home, with the US seemingly delaying its disbursal due to outrage over civilian deaths in the final phase of the war.

Signs Of Stability Emerging
Nonetheless, there have been positive signs in Sri Lanka’s financial markets of late, suggesting renewed investor confidence.

The rupee has stabilised at LKR114.80/US$ after hitting a record low of LKR120.80/US$ in late April. As the chart below shows, it has returned to a long-term depreciation channel. It might even rise to the upper (i.e. stronger) range of this channel if long-awaited donor aid pours in.



Exchange Rate, LKR/US$
The Colombo Stock Exchange (CSE) index has also rallied sharply (by around 37%) over the past two months, as seen in the chart below. That said, I am not convinced that this is entirely based on peace dividend hopes. Indeed, the CSE’s 37% gain is more or less in line with other Asian equity rallies over the same period, and global equities look strong in general. In fact, the CSE has underperformed many stock markets in Asia and globally.




Colombo Stock Exchange Index
Going forward, it is difficult to say how durable the CSE’s rally will prove. As the chart shows, the index surged by more than 400% from 2002 – when a ceasefire between the government and Tamil Tigers was signed – to a peak of more than 3,000 points in 2007. Significantly, the rally continued even after the ceasefire broke down in 2006, although the CSE later stabilised at 2,500 points. However, keep in mind that the 2002-07 rally coincided with a period of strong global economic growth, which also benefited Sri Lanka. This time round, the global economic outlook is bleak, and although Sri Lanka is less dependent on external trade than many Asian nations, it will still struggle to achieve 3% growth this year.




Tourism Arrivals (% change, year-on-year)
Then there is the question of when tourists will return. Tourism is a major earner of foreign exchange (although behind tea and remittances) and indirectly assists other sectors of the economy. Visitor numbers understandably plummeted as the civil war intensified in 2007-09 (the surge in the chart in late 2007 reflected a major cricket event, and is thus an aberration). Yet Sri Lanka has a rich cultural heritage, and in fact two couples I know honeymooned there in 2004-05. Film buffs will also know that Indiana Jones And The Temple of Doom was filmed there, for its exotic scenery. Nonetheless, the association of war and death, combined with the global recession, leads me to believe that a tourist boom is not imminent.

‘Strategic Importance’
Over the long term, Sri Lanka – or at least Colombo – hopes to become the ‘Singapore of South Asia’, counting on its strategic location astride the crucial east-west sea lanes linking Europe and the Middle East with the rising economies East Asia. Indeed, China, India, Japan and even Iran are all bidding for influence there, with Beijing viewing the island as a possible pearl in a ‘string of pearl’ network of regional naval facilities. As geopolitical competition in the Indian Ocean increases, Sri Lanka will in my opinion probably seek to maximise economic assistance from the Great Powers.

But that may not be enough. There are many ‘strategically important’ countries that receive foreign aid and investment yet remain underdeveloped. President Rajapaksa will need to do a lot more to improve governance and create an environment more conducive to foreign investment. His nationalist administration has been less business-friendly than its predecessor, and this could stunt Sri Lanka’s recovery.

Source : www.riskwatchdog.com

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Sri Lanka May Become ‘Hong Kong of India’ After War, HSBC Says

By Cherian Thomas

June 18 (Bloomberg) -- Sri Lanka’s economy can bounce back from its weakest growth in six years and become the “Hong Kong of India” as the end of almost three decades of civil war boosts business opportunities, HSBC Private Bank said.

Decades of fighting on the Indian Ocean island shackled its $32 billion economy, which according to figures released yesterday expanded 1.5 percent last quarter from a year earlier as the global recession intensified the slowdown. Ports, retailers, apparel and tea exporters could lead a recovery after the Tamil Tiger rebels were defeated last month.

“The rebound will be spectacular,” said Arjuna Mahendran, the Singapore-based chief investment strategist for Asia at HSBC Private Bank, which oversees $494 billion in assets. “To start with, Sri Lanka’s location gives its port a natural advantage.”

Sri Lanka could benefit from its proximity to India, just as Hong Kong profits from being a trade hub to China. Sri Lanka lies just 31 kilometers (19 miles) south east of India, the world’s second-fastest-growing major economy.

Seventy percent of the volume handled by the Colombo port is trans-shipment of goods imported by India and this could be increased because Indian ports don’t have adequate depth, Mahendran said. Sri Lanka has embarked upon a plan to quadruple capacity at the Colombo port in three years.

The Liberation Tigers of Tamil Eelam were defeated on May 16, ending their 26-year struggle for a separate homeland in Sri Lanka. The Tigers, who controlled a third of the country at one point, fell swiftly since January as the Sri Lankan military launched an unprecedented offensive to wipe them out.

‘Lot of Potential’

“It’s something you never expected to happen when you have lived most of your life under the specter of war,” said Otara Gunewardene, who runs Odel, Sri Lanka’s biggest department store. “It’s unbelievable. I see things differently now and see a lot of potential for growth.”

Odel plans to sell a stake in the company to overseas investors and spend $20 million to add another 70,000 square feet to its flagship store in Colombo and open new outlets in other cities in the country.

“We fought terrorism and now the economic war has to be fought,” said Malik Fernando, whose family owns Dilmah Tea Co., among the best-known Ceylon tea brands in the world. “For manufacturers, the cost of doing business is very high because infrastructure, like roads and power, was neglected because of the war.”

Small Economy

Dilmah, for example, operates a bus service in Colombo to pick up their workers from home because “we know that if they use the public transport, they are going to be late, fagged out and stressed,” Fernando said.

Still, Sri Lanka can be turned around quickly as it is a small economy and Dilmah is exploring options to expand in the hotels and tourism business, Fernando added. John Keells Holdings Ltd., the island’s biggest diversified company, said it sees opportunities to grow in all its businesses from property development to banking and insurance.

Tea exporters could also benefit from a 30 percent surge in prices this year while the worldwide recession hasn’t sapped demand for the high-end lingerie and apparels the nation sells overseas, HSBC’s Mahendran said.

Sri Lanka, which receives about 500,000 tourists each year, aims to increase that number by at least 20 percent annually through a global campaign entitled “Small Miracle,” said Dileep Mudadeniya, managing director of the Sri Lanka Tourism Promotion Bureau.

More Tourists

The war discouraged travelers from the U.S. and Europe for years from visiting the teardrop-shaped tropical island.

Occupancy rates have been 40 percent in the past two years in Colombo’s five-star hotels, which have a combined capacity of 2,000 rooms, said Jerome Auvity, general manager at Hilton Colombo. As a result, the average room tariff is about $62 a night, he said.

“There is no immediate reaction suggesting business is rising,” Auvity said. “Give it another six months to see whether confidence returns to Sri Lanka’s leisure market. There is still this dark cloud, this debate and issue regarding the displaced people.”

The final battles have left about 300,000 people displaced and living in more than 40 camps across the northern part of the country. President Mahinda Rajapaksa said last month he intends to resettle them in the region within 180 days.

Still, the Board of Investment of Sri Lanka expects foreign direct investments to quadruple to $4 billion by 2012, led by investments in ports, tourism, telecommunication and textiles.

Foreign Investment

“We have been getting encouraging responses from foreign investors,” said Dhammika Perera, chairman of the Board. “We expect three leading hotel chains to sign an investment agreement with us in about three months.”

Sri Lanka’s benchmark stock index, the Colombo All-Share Index, has climbed 20 percent since the Tamil Tigers were defeated, taking its gains this year to 50 percent as local investors snapped up shares.

The Securities and Exchange Commission is now keen for the likes of George Soros, Mark Mobius and other top fund managers to invest in the country and help the Colombo Stock Exchange double its capitalization to $14 billion in a year.

“It will take a while for people to realize that a 30-year war has ended and the dividends it can bring,” said Channa de Silva, director general of the Commission. “Sri Lanka is a country waiting to unfold and we are confident there will be a lot of interest internationally.”

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Sri Lanka, adventurous tropical island getaway beckons summer fun seekers

This summer Sri Lanka offers the adventurous holiday maker an exciting array of options.

• United Arab Emirates: 1 hour, 29 minutes ago
• PRESS RELEASE

+ Enlarge Heba Al Ghais Al Mansoori, Middle East Director of Sri Lanka Tourism Promotion Bureau.

related stories SLTPB RSS feed Sri Lanka, a safer destination for tourists - Faiszer Musthapha Sri Lanka Tourism launches a new communication campaign ME traffic to Sri Lanka surges by 24% 100-strong travel delegation from Sri Lanka to participate at ATM Sri Lanka offers unbeatable value this summer » more SLTPB news

The Indian Ocean island is rapidly becoming a destination of choice for those who want a stimulating vacation to recharge their batteries and energise their outlook.

Whether it's wandering calmly over the lush central highlands, hanging in a wicker basket as you gaze over the breathtaking views passing lazily beneath you, or the more high-octane thrills of crashing down tumbling river flows in a white water raft, Sri Lanka promises experiences that will persist in the memory long after the thrill of the activity has subsided.

Heba Al Ghais Al Mansoori, Middle East Director of Sri Lanka Tourism Promotion Bureau, said:

'With peace finally prevailing after almost three decades of strife, Sri Lanka is an ideal getaway for regional travellers being only three and a half hours flying time away from the Gulf.'

'It's not all necessarily adrenalin pumping stuff as for the more leisurely inclined explorer, there are pastimes that will allow you to experience the wonders of this tropical isle without so much as breaking into a sweat including hiking tours that take in the varied landscapes of the island and can be conducted at a gentle pace opening up the colourful and abundant array of plants, bird species and other wildlife to be found across the countryside,' remarked Ms. Al Mansoori.

Cycling and mountain biking are another way to get about, with undemanding trips available for those who wish to visit the ancient ruins and temples of a country whose history and heritage stretches back thousands of years. Pedalling unhurriedly through the country lanes, you can hear the rustle of the forest come alive and enjoy the whiff and heady scent of flowers in bloom. For those who prefer a greater exercise challenge, the undulating roads of the hill country make for a more intense cycling workout.

If heights are your thing, you can spend some time around the central highlands, home to Mount Pidurutalagala, Sri Lanka's tallest mountain. Here you can paraglide, flying over the forests and lakes like a bird, or indulge in rope sports, abseiling down sheer cliff faces close to magnificent waterfalls.

Hot air ballooning is also an extremely popular activity in this part of the island and offers a unique way to explore the country as you silently float over the lakes and forests, you can spy deer and elephants who are oblivious to your presence, along with the occasional bemused farmer who has happened to glance upwards!

Water features as a significant part of Sri Lanka's inland landscape, with turbulent rivers, spectacular falls and calm lagoons for the intrepid enthusiast to enjoy. White water rafting is one of the longest established adventure sports on the island, with rivers providing thrills, glorious scenery and the chance to view life in the villages en route.

The most popular area for rafting is along the Kelani River in Kitulgala, close to where the classic film 'Bridge on the River Kwai' was shot. Canoeists and kayakers can also explore the various waterways, with professionals able to run some extremely challenging rivers that run through the forests.

With all this activity available inland, it's easy to forget that Sri Lanka also has some magnificent beaches, with one at Unawatuna being acclaimed as one of the world's top 10. Being a relatively small island, you will never be far from the azure waters and bronze sands of the coast and if lying down and absorbing the rays isn't for you, you can try your hand at surfing in waters that average a blissfully warm 27°c. Arugam Bay, on the east coast, has long been established as a surfing hotspot, with sufficiently high waves to attract international contests. When conditions are ideal, it is possible to catch a wave that will carry an experienced board rider 800 metres.

When the season finishes at Arugam Bay, it's just opening up at Hikkaduwa, on the west coast, about 100km from Colombo. The waves here are around 2 metres high and of sufficient interest to attract international surfers during the season. If your interests lie under the water, you can scuba dive and snorkel at a number of resorts, exploring coral reefs and old Dutch shipwrecks that are home to vividly coloured tropical fish and other aquatic life. If it's faster paced water sports that you want, you can hire out jet skis, learn to wind surf or try your hand at water skiing.

Taking a break from all these sporting activities, the capital Colombo offers all the attractions of a busy city, with star-rated hotels, shopping malls and a vast array of restaurants and clubs that cater for all tastes. A relaxing day can be had at the renowned Hakgala Botanical Gardens, with 27 acres overflowing with roses and ferns and at the Peradeniya Gardens in the city of Kandy, where you will also find the ancient Temple of the Tooth. If you are keen to discover the origins of your morning cuppa, the central highlands feature tea estates where you can learn how the world's most popular brew travels from luxuriant bush to your breakfast table.

Regardless of whether it's excitement or relaxation that you crave, Sri Lanka's rich cultural heritage and history is sure to leave you as captivated and charmed as the countless travellers who have visited throughout the ages. The island is only four hours flying time from theUAE and travelling there is easy with SriLankan Airlines. The operator flies to Colombo from Dubai ten times a week and runs a daily service from Abu Dhabi. The operator has been voted Central Asia's Airline of the Year for two consecutive years.

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Q+A-Post-war foreign investment in Sri Lanka's bourse

By Shihar Aneez

COLOMBO, June 12 (Reuters) - Sri Lanka's share market .CSE has seen a net foreign outflow since the government declared victory in a nearly 26-year war on May 18, contrary to analysts' expectations of foreign interest.

Here are some questions and answers about why that has happened, and what clues that may hold for the bourse's future:

WHAT IS HAPPENING WITH FOREIGN BOURSE INVESTMENT NOW?

Immediately after the war ended, analysts predicted a boom in the undervalued bourse, which has an overall capitalisation of about $6 billion. Last year, the Colombo Stock Exchange had a record net foreign inflow of 13.9 billion Sri Lankan rupees ($121 million), despite the intensifying war at that time. But this year, with a government victory apparent, net foreign inflow was 1.4 billion rupees until the war ended, and since has turned to a net outflow of 258.6 million rupees as of June 11. Bourse data shows foreign sales were dominated by conglomerate John Keells Holdings JKH.CM and National Development Bank NDB.CM. WHY FOREIGN FUNDS ARE LEAVING?

Underscoring the outsized effect a single large investor can have in the small bourse, nine market players said the overall outflow is mainly because of one U.S.-based hedge fund run by a Sri Lankan. Analysts say the fund may be reallocating capital elsewhere or may be moving funds for personal reasons after the war.

ARE FOREIGN FUNDS SET TO ENTER POST-WAR SRI LANKA?

Yes. Analysts say they have seen a 20 percent increase in the number of foreign funds in the market, including some which left the Colombo Stock Exchange in 1992 due to the war. However, the amount of money they are investing is nominal despite the fact the market has risen around 48 percent so far for this year and is one of Asia's most promising bourses.

WHY AREN'T FOREIGN INVESTORS COMING AS FAST AS EXPECTED?

The main reason is exchange rate risk. Sri Lanka's request for a $1.9 billion IMF loan has not yet been approved, and investors are waiting to see what effect that will have on the rupee's exchange rate, which the central bank has actively managed. The bourse is also limited in terms of the number of companies and its market capitalisation. Besides, lowering interest rates have not yet sparked new corporate investment and so profits have not seen a rebound. Then there are people who are waiting for the post-war security environment to settle further. (Editing by Bryson Hull and Kazunori Takada)

© Thomson Reuters 2009 All rights reserved

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Sri Lanka won't beg for aid: central bank chief

COLOMBO (AFP) — War ravaged Sri Lanka will not beg for foreign aid even as a 1.9 billion dollar bailout from the IMF has been delayed, the island's central bank chief said.

"We will never go after donors or lending agencies with a begging bowl. We are capable of standing on our own and raise funds through capital markets," Central Bank of Sri Lanka Governor, Nivard Cabraal, told AFP.

Sri Lanka tapped the International Monetary Fund in March in a bid to stave off its first balance of payment deficit in four years after the island's foreign currency reserves fell to around six weeks worth of imports.

The loan has been put off due to political pressure from the US, Britain and other Western nations over Colombo's handling of the final stages of the battle against Tamil separatists and charges that thousands of civilians were killed.

The United States is the main shareholder in the IMF and its approval is key to the release of the money. But the US has supported calls for a probe into alleged war crimes committed by Sri Lankan government troops.

Despite pressure from the West, Cabraal said he was confident the rescue package would be approved.

The island's 37-billion-dollar economy was caught up in the global economic crisis last year, with exports of garments and tea affected and foreign remittances slowed. "We have dignity and our own identity in the international community. Sri Lanka does not want to go after anyone for aid with bended knees," Cabraal said.

He added that foreign reserves have picked up in the past several weeks, with money coming from aid flows to meet the humanitarian needs of nearly 300,000 displaced people in the north remittances and foreign investments.

The central bank was also negotiating a 500 million dollar loan from Libya and another 500 million dollars from an unnamed "friendly country" to help with post-war reconstruction, he said.

"Little by little, the urgency of the IMF loan is easing. I am not saying that we don't need it. The threat of a downturn is receding and Sri Lanka is getting some inflows after the end of the war," Cabraal said.

"The future scenario is very comforting to our foreign exchange situation," he said.

The central bank plans to revise upwards the island's economic forecast for 2009 to between four to five percent, from 2.5 percent to 3.0 percent announced earlier this year.

Sri Lanka's economy posted 6.0 percent growth in 2008, down from 6.8 percent in 2007.

"For a very long time, every time someone spoke about Sri Lanka's economy, they responded saying if not for this war things would be better. Now the war is over and we have a tremendous scope for economic development," Cabraal said.

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Reversed

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Todays Market Highlights

11th June 2009

• The All Share Price Index gained 17.7 points to close at 2,220.1 points (+0.8%) whilst the Milanka Price Index

also gained 13.7 points to close at 2,482.6 points (+0.6%)

• The total turnover was LKR523 mn (USD4,548k) vs. 12-months average daily turnover of LKR311.9 mn

(USD2,712) whilst the volume traded was 10,805k against the 12-months average daily volume of 10,730k

• Top traded counters were John Keells Holdings LKR215.1 mn (USD1,871, +1.8%), National Development

Bank LKR21.0 mn (USD183k, +1.9%), Environmental Resources Investment LKR19.5 mn (USD170k, +2.5%),

Chevron Lubricants LKR16.8 mn (USD146k, +2.3%) and Sampath Bank LKR16.4 mn (USD143k, +2.1%)

• The market witnessed strong buying today with interest mainly seen on the blue chips and plantations sector.

Strong buying in John Keells Holdings resulted in the counter contributing around 41% to the day's turnover

whilst High networth and Institutional activity was seen in Chevron Lubricants and Asian Hotels & Properties.

• Foreign purchases amounted to LKR129.6 mn (USD1,127k) whilst foreign sales amounted to LKR158.2 mn

(USD1,376k).

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S.Lanka shares up on Spence buying, rupee steady

Wed Jun 10, 2009 8:19am EDT

By Shihar Aneez

COLOMBO, June 10 (Reuters) - Sri Lankan shares .CSE rose on Wednesday as conglomerate Aitken Spence hit a record high after a court-imposed change in ownership, while the central bank held the rupee steady to avoid appreciation, dealers said.

Aitken Spence SPEN.CM jumped 10.8 percent to hit a record close of 663.75 rupees, calculated on a weighted average.

"A high net-worth individual investor is buying the shares," said Hussain Gani, associate director at Asia Securities. Traders said a court ruling last week had a knock-on effect on the controlling stake in Aitken Spence, which prompted the individual investor to buy shares at a premium to regain the overall control of the island's second-biggest conglomerate.

Sri Lanka's supreme court on June 4 annulled the 2003 sale of state-owned Sri Lanka Insurance Corp. to privately-held Distilleries Company of Sri Lanka DIST.CM and ordered the insurance firm to be returned to the government. [ID:nCOL385952]

The ruling resulted in the transferring of a 10.85 percent stake in Aitken Spence, owned by Sri Lanka Insurance Corp. and controlled by Distilleries Company, to the government.

The bourse gained 9.64 points to 2202.43.

"Overall, the market has slowed down with waiting for the pending IMF loan after the war victory," Gani said.

The central bank on Wednesday said Sri Lanka's request for a $1.9 billion International Monetary Fund (IMF) loan is expected to be approved by the end of June. [ID:nCOL430797]

Analysts said the news could boost the market on Thursday.

The bourse has risen 15.5 percent since the government declared end of a 25-year war on May 18 and is up 46.6 percent so far this year on war-end hopes and optimism.

However, foreign investors have been on the selling side with the bourse recording a net outflow since the war ended.

Nandalal Weerasinghe, the chief economist at the central bank said foreign buying will rise once the IMF loan comes through.

"Most of the foreign investors think that there is some kind of exchange rate target attached to the IMF loan and the rupee may be depreciated further. Once IMF loan comes, they will get to know that there are no such conditions of depreciation," he said. Shares in John Kells Holdings JKH.CM rose 0.89 percent to 113 rupees, while top listed private lender Commercial Bank of Ceylon COMB.CM closed 2.03 percent firmer at 125.50 rupees.

Shares in Distilleries fell 1.28 percent to 77 rupees.

The turnover was 368.4 billion rupees (3.2 million), less than last year's daily average of 464 million rupees.

The rupee closed flat at 114.90/95 a dollar as a state bank bought dollars at flat rate of 114.90 rupees, dealers said.

Central Bank Governor Ajith Nivard Cabraal on Wednesday said the central bank had absorbed around $110 million in June so far and $230 million since the war ended at 114.90 rupees to prevent rupee appreciation and help exporters.

The rupee hit a record low of 120.80/121.10 on April 23, as the central bank stopped preventing depreciation amid discussions on the IMF loan.

The interbank lending rate or call money rate CLIBOR edged down to 10.070 percent from Tuesday's 10.089 percent.

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Steered by court ruling

Impact on Distilleries in the event of losing SLIC

The issue

When the government entered into an agreement with a consortium of companies for the sale of the entire issued share capital of the Sri Lanka Insurance Corporation (SLIC) on April 11, 2003 Distilleries Consortium with a bid of LKR6,050 million at LKR134.44 per share secured the privatization deal of the Sri LankaInsurance Corporation (SLIC). COPE has estimated that SLIC should have been valued at LKR15 billion. Theargument is that the Life fund was not included in the valuation.

Judgment

• Fundamental Rights violated. Shares deemed never to have been transferred.

• Sale of shares 'was and is' null & void ab initio.

• Clear that system was manipulated to help Distilleries (DCSL) enter privatization process throughbackdoor. Privatization granted to entities who were not approved by Cabinet. SLIC assetsundervalued by PWC. Market Values avoided & Book Values wrongfully adopted. Objectives ofprivatization not achieved.

• Court ordered the government to repay 6.0 billion rupees paid to gain control of SLIC.

• Court said Milford, a special purpose company incorporated by the Distilleries group to purchaseSLIC, could keep the profits earned during the time they ran the firm.

Effective holding Net Profit (LKR mn)

2008 2009E

SLIC 83.30% 237.0 550.0

LHCL 45.53% -130.2 28.9

SPEN 9% 165.7 175.4

272.5 754.3

• Since Distilleries Annual Report 2008/09 is not yet released to the market we are not aware of the

exact contribution made by SLIC and SPEN to the bottom line of DIST.

• Distilleries would lose the 83.3% stake on SLIC and a near LKR550 mn in its net earnings for FY09.

• DIST would lose its effective control over Lanka Hospital Corporation and would treat it as an

associate with its 28.8% direct holding here after.

• Aitken Spence was treated as an equity accounted investee of DIST and with DIST losing its 9%effecting holding, its share of SPEN’s future earnings would not be taken into the consolidated incomestatement other than any dividend payments generated.

• The court ruling leaves an impact on DIST in terms of the loss of SLIC which has a market share

(combined) of 24% from a sector with potential to grow. This leaves DIST at a disadvantage and it

should look to invest in businesses with growth potential in future.

• With the company being able to keep the profits earned during the period they ran the firm and thegovernment having to pay LKR6 bn to the company would have the firm’s wealth is intact. However,the company would not be able to utilize the cash since it is to be paid in the form of Treasury bondsmaturing in 5 years time. However, the yield of the bond and other information are not yet publiclyavailable.

• Excluding SLIC’s investment, we believe DIST’s consolidated profits for FY10 would be a near

LKR4.4 bn (subject to vary with the bond’s yield) refining the EPS to LKR13.1. The counter trades at aPE of 6.1XForecast FY10 net earnings.

Chemical Industries (CIC.N, CIC.X)

• Chemical Industries (Colombo) commenced business operations as a chemical manufacturer, andhas since then expanded its product portfolio to diverse areas including agribusiness, paints, consumerproducts, industry raw materials and packaging whilst also having exposure in other broad industrysectors.

• With the victorious ending of military operations, we believe the company is strongly positioned tobenefit from an anticipated revival in agribusiness sector, whilst with its key products classified asessential food items, demand is expected to witness steady growth.

• In view of the substantial earnings expected from the agribusiness sector coupled with the higherresults expected from the consumer and industrial raw material sectors followed by the share of netprofit expected from CIC paints to be recognized, we forecast FY09 net profit to reach LKR554 mn(+8.6%YoY) whilst projected FY10 earnings is expected to be to reach LKR674 mn (+21.6% YoY)

• From FY06 to FY08 the revenue has grown at a CAGR of 4.6% (This is excluding the revenue fromCIC paints which is an associate from 30th Sep 2007). We expect CIC’s revenue to grow at a 3 yearCAGR of 12% and net earnings at 21% CAGR from FY08 with agriculture sector contributing toapproximately 65% of the total turnover

• We expect CIC to make LKR524 mn for FY10 and LKR681 mn for FY11. At 8.9x FY10E earnings thecounter trades at a discount of 29.5% (At 5.4xFY10E earnings the non-voting share trades at adiscount of 54%).

• Both CIC.N and CIC.X trading on 8.9X and 5.4X forecast FY10 net profit remain attractive. Further,with the voting share trading at 40% discount to net assets and the non-voting share trading at a 60%discount to net assets, CIC remains upbeat due to the growth prospects of the key sectors. Maintain -BUY.

We believe the market has re rated following the military victory and currently consolidating at the new levels.Though the Colombo bourse has only yet reached near 75% of the all time high All Share Price Index valuewe believe the growth is sustainable with macro factors moving favourably. Interest rates have fallen sharply from 17.33% to 12.04% YTD 2009 whilst inflation also has continued its decent.Further retail interest has been buoyant whilst both foreign and local interest is on the rise expecting a market upswing.

Amidst the broad market rally we believe the banking, conglomerate and hotel sectors to be the key favorites,whilst telecom and manufacturing sectors would become the secondary market movers. Thus the market has become overly attractive (with the positive macro socio/economic shift) whilst trading on earnings multiples

(10.8X) whilst foreign investors are expected to re-enter fundamentally strong counters in the medium termand we see pockets of strong growth in key sectors such as telecommunications (Sri Lanka Telecom),industrial sector (Tokyo Cement, Royal Ceramics, Chevron Lubricants), diversified (John Keells Holdings, Aitken Spence, Distilleries) and banking (Commercial Bank, HNB

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