CORPORATE

Walltile Group gross profit up 42.5% in 1H

Capping the first six months of the 2010 financial year, Lanka Walltile Group recently announced buoyant first half results that clearly validated its commitment to prudent management practices and clear strategic vision.

Making the most out of a positive Sri Lankan business environment, the Group's three main sectors - Ceramic tile, Plantation, and Packaging - recorded a 19.1 percent increase in turnover and a 42.5 percent surge in gross profit compared with the same period in 2009.

The Group's achievement is impressive considering that its foreign markets are still recovering from the lingering effects of the global financial crisis.

Although these difficult global conditions contributed to the closure of the Group's export-oriented Balangoda tile factory, Lanka Walltile went beyond its statutory obligations to its employees, paying more than Rs. 211 million to affected workers as compensation, an amount that was significantly more than that stipulated by the government under the TEWA scheme.

Even with this substantial charge, the Group's net profit after tax was almost the same as that of the corresponding period in 2009, an affirmation of Lanka Walltile's tireless efforts.

The Group's profit before tax during the first half of the 2010 financial year rose 22 percent to Rs. 315.98 million compared with the same period in 2009, spurred largely by an increase in domestic demand, especially in the construction sector.

In order to meet the increased demand for large tiles, Lanka Walltile is investing Rs. 700 million during the current financial year to expand production capacity in the Meepe factory.

With civil construction nearing completion and premium Italian machinery due to arrive in this month, production capacity at the newly expanded Meepe factory will increase by 3,600 square metres per day.

With the upgraded production capacity and capability of the Meepe factory, the Group will introduce a range of larger format tiles that are bound to be a hit with customers.

The Group will also be exploring new overseas markets for these new product offerings and is excited about the prospect of introducing an array of sophisticated new designs.

The Group's commitment to maximising operational efficiency led it to combine the marketing activities of Lanka Walltile PLC and Lanka Tiles PLC.

With 17 franchise shops now in operation nationwide, this merger has further elevated the Group's overall domestic sales performance and promises to deliver sales and efficiency gains in the second half of the financial year.

The Group has made significant investments in employee training, which includes in-house, local external and foreign programs.

These training programs range from courses focused on technical and technological aspects to those revolving around administrative and marketing expertise.

The budget has further enhanced the Group's prospects, with incentives for construction spending ensuring that demand for Lanka Walltile products will continue to grow.

The Group's dedication to continual improvement has put it in a strong position to take advantage of the post-war economic boom, allowing the Group to continue its success into the future.

Vidullanka's long-term rating upgraded to A- by RAM

RAM Ratings Lanka has upgraded Vidullanka PLC's long-term corporate credit ratings to A-while its short-term rating has been reaffirmed at P2. The outlook on the long-term rating remains stable.

Vidullanka operates two mini-hydro power plants (MHPPs) with a combined capacity of 5.2MW, and has further invested in a joint venture MHPP with a capacity of 1.2MW.

The Company offloads the electricity generated to the Ceylon Electricity Board (CEB), a state utility company which is the sole customer.

The upgrade reflects the Company's improving financial profile and conservative funding strategy. Steady income and conservative strategy helped Vidullanka ease its debt levels, as the Company's gearing ratio ameliorated from 0.32 times in FYE March 31, 2009 to 0.24 times in FY Mar 2010 (end-September 2010: 0.17 times). Over the short-term, the Company's debt levels are expected to recede further as long-term borrowings pared down using proceeds from a rights issue completed in November 2010.

Going forward, it is envisaged that the Company's gearing levels remain below 0.45 times, even after factoring additional borrowings for new projects.

The upgrade also takes into consideration the Company's efforts to mitigate its dependence on its two main power plants.

With regard to the new projects, the Company would only fund up to 60 percent of project cost with borrowings; the management's conservative financial policy is viewed positively.

The Company's ratings are supported by its sturdy financial profile, established track record, and favourable contract terms. Vidullanka's operating profit before interest and tax (OPBIT) margins improved over the period to 52.22 percent by FY Mar 2010 (FY Mar 2009: 49.47 percent) and further to 69.39 percent by end-September 2010.

The wider margins were supported by greater power generation.

This translated to better return on capital, which augmented to 30.33 percent and 21.04 percent over the same period (FY Mar 2009: 15.70 percent).

With the Company also retiring debts using internally-generated capital, its fund from operations (FFO) debt coverage ratio has strengthened from 0.73 times to 1.29 times.

Moreover, with easing debt levels, the Company's gearing ameliorated to 0.17 times by end-September 2010 from 0.32 times as at end-FY Mar 2010.

Vidullanka is an experienced player in the renewable energy sector, having built and commissioned four MHPPs.

Moreover, none of the power plants have to-date not suffered any major internal outrages.

In addition, the Company's subsidiary, Vidul Construction Limited (VCL) successfully completed the joint venture project on time.

VCL is specialised in feasibility studies, designing, building, operating and maintaining power plants.

Under power purchase agreements (PPA) signed with the CEB, which is the Company's sole customer, CEB is obliged to purchase all electricity generated by the MHPPs over the tenure of the contracts; these PPAs have tenures of 15 years.

The CEB has recently become profitable and we envisage that state support would be forthcoming given its systemic importance. Moreover, CEB has been maintaining a good payment track record with the Company.

On the other hand, the ratings are constrained by Vidullanka's dependence on weather patterns for revenue generation and renewal risks associated with its PPAs.

Although all electricity generated by Vidullanka is offloaded to CEB, the Company's revenue is dependant on rainfall in the region.

Moreover, Vidullanka's plants are of the run-of-river variety that operates without a dam. Hence, there is also some element of seasonality in its monthly revenues.

The Company also faces renewal risks, with its first PPA expiring in 2016.

Nonetheless, the efforts taken by the management to diversify revenue sources through investments in other power projects; the first joint venture which is already contributing dividend income should be of note. The construction on the second joint venture project is already under way, and the MHPP is expected to be commissioned by May 2011. To further diversify its income sources the Company has diversified into provision of consultancy on mini hydro projects through VCL; this includes feasibility, design, construction, commissioning and maintaining of power projects.

Moreover VCL is venturing into product development; as a first step the company has now started manufacturing control panels required for power projects. Electricity demand to augment at a faster pace, in line with the Government's vision to provide electrification for all households (only 80 percent of the population have access to electricity at present)is anticipated.

TFC opens share issue

by Sapumali GALAGODA

The Finance Company (TFC), the oldest and biggest finance company in Sri Lanka launched a share issue last week.

The company is hoping to raise Rs. 1.6 billion in capital through the issue of shares.

The objectives of the share issue is to recapitalise the company and reward loyal customers for maintaining consistent relations with the company.

The Director and the CEO of the company Kamal Yatawara said that the share issue will be a public placement with 40 mln shares at Rs. 40 each as voting shares while a private placement offering 100 mln shares at Rs. 20 per share as non voting shares will be offered.

The non voting shares will be offered to the depositors.

"This move will benefit our loyal customers who have withstood the storms", he said.

The overall performance figures of the third quarter of 2010 are new deposit intake of the company has grown by 47 percent increasing monthly new deposits up to Rs. 300 million.

Around 85 percent of its depositors are consenting to their deposits being renewed at maturity.

The pawning business has recorded a growth of 50 percent during the last quarter. The real estate sector has grown by 173 percent giving a boost to the company's overall revenue.

Customers who have made new deposits prior to September 2010 can convert 10 percent of their deposits into equity in the forthcoming share issue.

Yatawara said "Now we are looking at stabilising the company by reducing the interest cost and reducing operational costs by 50 percent".