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JKSB Sri Lanka Summary


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JKSB Sri Lanka Summary

  1. 1. Sri Lanka : Country & Market Overview – August 2011 John Keells Stock Brokers
  2. 2. Political Overview The removal of the constitutional bar on the Executive President having a 2 year limit has meant that the incumbent has astutely levered his post war popularity into what appears will be long stay in the seat of power. The Executive President continues to enjoy enormous powers. He can dissolve the parliament and declare emergency. He also appoints judges, heads of armed forces and police, election commissioners and secretaries to the government. In a state of emergency, the president can even promulgate regulations to override laws enacted by the parliament The main opposition remains weak, wracked by internal dissension. The administration’s foreign policy that prioritised relations with India and China have helped submerge pressure from the west over human rights concerns whilst also resulting in substantial investments in infrastructure in post war Sri Lanka. Delayed and piecemeal infrastructure development has given way to broad based accelerated development. Essential reforms long left unattended, appears to be receiving due consideration in an environment ofJohn Keells Stock Brokers 1
  3. 3. Key Socio Economic IndicatorsLiteracy rate (2009) EmploymentOverall : 91.4% Unemployment rate (3Q 2010) : 4.9% (Excluding Northern Province)Male : 92.8% Employed Persons - Agriculture : 32.7%Female : 90.0% Industry : 24.2% Services : 43.1%Life Expectancy (2007)Male : 70.3 years Water Supply : Access to safe drinking water : 85%Female : 77.9 years Electricity : Households with Electricity : 86%Mid year population 2010 : 20.65mn CommunicationAge distribution (‘000) – 2010 Fixed lines penetration : 17.3%0 - 14 yrs : 26.3% Mobile Subscriber penetration (SIMs) : 83.5%15 - 64 yrs : 67.4% Internet & Email (Fixed) penetration : 2.08%65 years and over : 6.3% Mobile Broadband penetration : 0.58%Population density (per sq km) : 329 persons Public HealthCrude birth rate (2010) :17.6 per ‘000 Public Hospital Beds per 1000 persons : 3.4Crude death rate (2010) : 6.2 per ‘000 Persons per Doctor : 1462Average household size (2010) : 4.0 EducationIncome distribution School Density (Area per school – sq km) : 6.3Gini coefficient of household income (2009) : 0.47 Primary net enrolment rate : 89.9%Mean household Income (‘09): Rs. 35,495 (US$ 320) Pupil/teacher ratio (Public Schools-2009) : 18Median household Income (‘09) : Rs. 24,106 (US$ 217) Admission to public university as a % of eligible students : 16%Poverty Head Count Ratio (2009/10) : 7.6%Source : Central Bank of Sri Lanka Publications , Department of Census and Statistics John Keells Stock Brokers 2
  4. 4. Key Economic IndicatorsDemography (2010) Government Finance (% of GDP - 2010)Labour force participation rate : 48.1% Revenue and grants : 14.9Population growth : 1.0% Tax Revenue : 13.0Labour Force : 8.11mn Expenditure and Net Lending : 22.9Unemployment rate : 4.9% (Excluding Northern Province) Current Expenditure : 16.7 Capital Expenditure and net lending : 6.1Output (2010) Current Account (Deficit)/Surplus : (2.1)GDP Rs ‘bn : 5,602 (US$ 50bn) Overall (Deficit)/Surplus : (7.9)Per capita GDP : US$ 2,399 Deficit Finance : 7.9GDP Growth : 8.0% Foreign : 4.4 Domestic : 3.6Aggregate Demand & Savings (% of GDP - 2010) Government Debt : 81.9Consumption : 81.3 Foreign : 36.1 Private : 65.8 Domestic : 45.8 State : 15.6Investment : 27.8 Interest Rates (%) Private : 21.6 1 Yr T-Bill : 7.33 State : 6.2 AWPL : 9.17Net Exports : -10.5 AWDR (12mth) : 8.16 Exports : 16.7 Imports : 27.2 Exchange Rates (Rs/US$) : 110.33Domestic Savings : 18.7Net factor income from abroad : 6.0National Savings : 24.7Source : Central Bank of Sri Lanka Publications , Department of Census and Statistics John Keells Stock Brokers 3
  5. 5. Economic Overview - GDP Quarterly GDP Growth (%)Post war rebound will the country growing at 8% 10.00 %over the next two years. Sustained growth 9.00momentum would require a sharp rise in FDI 8.00 7.00inflows and private investment which remains 6.00relatively benign. 5.00 4.00 3.00The resurgence of intra provincial trade with the 2.00 1.00reintegration of the North and East provinces, 0.00 1Q CY2000 2Q CY2000 3Q CY2000 4Q CY2000 1Q CY2001 2Q CY2001 3Q CY2001 4Q CY2001 1Q CY2002 2Q CY2002 3Q CY2002 4Q CY2002 1Q CY2003 2Q CY2003 4QCY2003 1QCY2004 2QCY2004 3Q CY2004 4Q CY2004 1Q CY2005 2Q CY2005 3Q CY2005 4Q CY2005 1Q CY2006 2Q CY2006 3Q CY2006 4Q CY2006 1Q CY2007 2Q CY2007 3Q CY2007 4Q CY2007 1Q CY2008 2Q CY2008 3Q CY2008 4Q CY2008 1Q CY2009 2Q CY2009 3Q CY2009 4Q CY2009 1Q CY2010 2Q CY2010 3Q CY2010 4Q CY2010 1Q CY2011significant infrastructure spend and the -1.00 -2.00consequent multiplier effects feeding into -3.00increased domestic consumption underlie our -4.00 -5.00medium term expectations of 8%+ GDPexpansionWar affected provinces account for 13.5% of thecountry’s population, one third of land mass andover half the country’s coastline. John Keells Stock Brokers 4
  6. 6. Economic Overview - GDPLarge scale nationwide infrastructure projectsranging from power generation, roadways, portsand airports already well underway with foreignfunding commitments in place.GDP growth would stem from Tourism, Banking,Public Utilities, Construction and Agriculture andFisheries sub sectors in the medium term. John Keells Stock Brokers 5
  7. 7. Government FinanceRevenue target of 14.8% and deficit target of6.8% GDP likely to be met for CY11.Fiscal deficit expected to decline on lowerinterest expense on domestic financing, highervolume driven indirect tax revenues and lowerdefense expenditure relative to GDP.The taxation reforms spelt out at budgetproposals marked significant changes with areduction and simplification of tariff andtaxation structures for corporates andindividuals John Keells Stock Brokers 6
  8. 8. External TradeExports earnings were up significantly in the first 2months of 2011 up 52% off a lower base, driven bya 78.1% growth in textiles and garments whichtraditionally accounts for 45% of total exports.Imports were up 25.2% in the same period drivenby a growth in consumer goods and motor vehiclesfollowing tariff reductions last year.Trade deficit is expected to widen by 21% in CY11as a result of a continued rise in imports expectedin the latter half of the year driven by Petroleumand Intermediate Goods.Current account reduced significantly by strong networker remittances of approximately US$4bn. John Keells Stock Brokers 7
  9. 9. InflationAnnual average inflation has picked up to6.6% in April 2011, will point to pointinflation has risen to 9.8%, primarily as aresult cost push inflationary effects as food,fuel and commodity price rises are passed tothe consumer.Strong consumer credit growth has resultedin early signs of demand driven inflationaryeffects. However if the recent dip in fuel andcommodity prices are sustained, annualaverage inflation is likely to fall marginallyshort of our CY11 forecast of 8.8%. John Keells Stock Brokers 8
  10. 10. Interest ratesThe 1yr T Bill and AWPLR havecontinued to trend lower to 7.33% and9.12% respectively down by 214bps and136bps respectively over the last year.Interest rates appear to have bottomedand may trend moderately higher towardsthe end of the year with prospects ofstrong private sector credit growthremaining in tact.John Keells Stock Brokers 9
  11. 11. Remittances, External Reserves and CurrencyNet private remittances have grown to US$3.4bn up 24.6% over the last year and up23.6% yoy in the first 2 months of CY11.Aid and inflows to government securities onthe back of the IMF stand by facility haspushed gross official reserves to US$ 6.6bn asof Dec.’09 sufficient to fund 6.2 months ofimports.Outlook for the currency is stable givenpotential for increased inflows over the shortto medium term. John Keells Stock Brokers 10
  12. 12. Summary of Key Economic IndicatorsJohn Keells Stock Brokers 11
  13. 13. Growth ProspectsExtensive Colombo City Development PlanPower Projects900 MW Norochcholai Coal Power Plant(Phase 1 - 300MW Completed, Phase 2 : 2013)150 MW Upper Kothmale Hydro Power Plant(Completion by 2011)Uma Oya Hydro Power Project(Completion by 2015)Moragahakanda and Kaluganga Reservoir Project (Commenced)Road Development Projects Shipping routes off Sri LankaThe Southern Highway Project, (Completion by 2011)The Colombo - Katunayake Airport Expressway (Completion by 2012)The Colombo Outer Circular Road Project (Completion by 2013)Port Development ProjectsThe South Colombo Harbour Project, (Phase 1 Completion by 2012)The Hambantota Port Development Project (Phase 1 : Completed)The Oluwil Port Development Project (Completion by 2011)Water supply projects and on-going rural infrastructure developmentTargeted 100% electricity coverage in the Island The South Colombo Harbour Project John Keells Stock Brokers 12
  14. 14. Growth Prospects• Geo-physical studies show significant potential for presence of petroleum deposits in 3 offshore basins in Sri Lanka:• First exploration licensing round was held in 2007.• Cairn Lanka Private Limited (CLPL) was offered the block No. 2 (M2) of the Mannar Basin.• Government signed a Petroleum Resource Agreement (PRA) with CLPL on 07th July 2008.• CLPL completed acquiring 1,750 Sq km three dimensional (3D) seismic data in March 2010.• CLPL plans to commence drilling 5 exploration wells in 2011.• Government is planning to hold the second licensing round in due course. John Keells Stock Brokers 13
  15. 15. Growth Prospects• Sri Lanka possesses a territorial sea of 21,500 sq. km and an Exclusive Economic Zone (EEZ) of 517,000 sq. km up to 200 nautical miles from the coastline.• Sri Lanka will have sovereign rights for the purpose of exploring and exploiting its natural resources in these new seabed areas• Sri Lanka has claimed its rights to its continental shelf.• Sri Lanka’s EEZ is expected to expand even further with the delimitation of the outer edge of the continental margin of the country.• This would permit Sri Lanka to enjoy the ownership of an EEZ equivalent to 20 times (approximately 1,400,000 sq. km) the land mass it possesses.• These new seabed areas where Sri Lanka will have sovereign rights for the purpose of exploring and exploiting its natural resources, which are going to be new frontiers for hydrocarbon (petroleum and gas) exploration. John Keells Stock Brokers 14
  16. 16. Index Growth• ASPI up 265% since the end of the war in mid May. ‘09 (up, 2.97% YTD)• Number of active trading accounts doubled in the last year An 8 fold increase in post war average daily turnover levels. Turnover Drivers • Leveraged buying, Influx of local HNI and retail funds with shift from fixed income to equities. • Significant increase in state run institutional funds. • Retail credit driven speculative trading on illiquid and second tier counters. John Keells Stock Brokers 15
  17. 17. Index Growth• Recent upward movements in the ASPI is largely driven by strong local retail and HNI participation with significant price movements evident on second tier illiquid stocks; not necessarily reflective of broad based buying interest.• The more liquid MPI constituted by the more heavily traded large cap stocks is still 13.5% off its peak in early October 2010• Current excessive broker credit issued to clients by the industry as well as concerns in the West are headwinds the market is facing at present.• Average daily turnover levels upto Rs. 2.6bn YTD from Rs. 2.4bn will rise further with expectations of upto 50 new listings in 2011/2012.• The IPO pipeline includes a host of finance companys, state run entities, and firms in the retail, logistics and construction space. John Keells Stock Brokers 16
  18. 18. Market ParticipationForeign Participation- Recent foreign selling on account of higher near term valuations in comparison to regionalpeers that also offer better liquidity. John Keells Stock Brokers 17
  19. 19. CSE Trading StatisticsCSE- Trading Statistics 2005 2006 2007 2008 2009 2010 2011YTDAnnual Turnover (US$Mn) Equity 1,140 1,011 949 1,020 1,244 5,125 3,238Domestic % 78% 67% 61% 46% 69% 81% 89%Foreign % 22% 33% 39% 54% 31% 19% 11%Market Days (No) 238 241 241 238 240 237 84Daily Average Turnover (US$Mn) Equity 4.8 4.2 3.9 4.3 5.2 21.7 27.4Domestic (% of Trades) 94% 95% 95% 94% 94% 96% 96%Foreign (% of Trades) 6% 5% 5% 6% 6% 4% 4%Companies Listed 239 237 235 235 231 240 2647Market Capitalization (US$ Bn) 5.8 8.0 7.4 4.5 9.5 20.6 22.5Market Velocity (%) 23.7 14.8 12.7 16.9 26.3 32.8 34.7Market Cap. / GDP 24.6 29.8 22.9 11.1 22.6 41.1 42.3ASP INDEX 1,922 2,722 2,541 1,503 3,386 6,636 6,833ASPI y-o-y Change % 28 42 (7) (41) 125 96 2.67 John Keells Stock Brokers 18
  20. 20. Sectoral Valuations PER (x) EPS Growth (%) Price/Book ROE (%) Sector Value (x) FY11E FY10 FY11E FY12E FY10 FY11E FY12EBanking Finance & 3.13 23.49 25.8 13.3 13.6 28.6 93.7 (2.3)InsuranceFood & Beverage 4.06 32.36 22.3 12.5 13.6 6.9 77.5 (8.1)Engineering 2.23 27.25 7.9 8.2 6.7 48.1 (3.3) 22.4Conglomerates 2.36 12.96 25.8 18.2 14.4 28.9 42.1 26.0Leisure 2.61 9.79 81.5 26.7 22.1 102.3 205.2 20.8Manufacturing 2.95 20.90 20.7 14.1 11.0 50.9 46.9 28.5Telecommunications 2.00 10.69 N/A 18.7 17.3 (423.9) 171.1 8.1Energy 1.50 12.08 N/A 12.4 10.6 110.5 1697.6 16.5Plantations 1.66 24.76 19.2 6.7 8.5 10.0 186.2 (20.6)Market 2.43 16.57 34.3 14.7 13.1 (5.4) 133.7 12.1* FY10 - Based on actuals; FY11E / FY12E excludes exceptional items (Prices as of 12th August2011) John Keells Stock Brokers 19
  21. 21. Trading on the CSEFOREIGN OWNERSHIP• No Restrictions on Foreign Ownership - Ownership upto 100% is permitted except for a 40% cap on Plantations and a 15% cap on banks for any local or foreign individual or entity or entities acting in concert• Disclosure of a local/foreign buyer upon acquiring 10% of a listed entity• Acquisition of 30% of the voting shares of a company by an individual/entity or a group acting in concert triggers a mandatory offer to purchase all outstanding sharesTAXATION - No Capital Gains Tax on quoted securities. - 10% Tax on dividends withheld at source. John Keells Stock Brokers 20
  22. 22. Transaction Costs• Brokerage and transaction costs are fixed for trades upto the value of Rs 50mn by the CSE and are common to all brokers.• Brokerage for transactions in excess of Rs. 50mn are negotiable down to a minimum of 0.2% for the local broker. Transactions upto Rs. 50mn (Effective 1st Jan 2011) Charge Brokerage Fees 0.640% Securities and Exchange Commission Fees 0.072% Colombo Stock Exchange fee 0.084% Central Depository System fee 0.024% Share Transaction Levy 0.300% Total 1.120% Transactions over Rs. 50mn (Effective 1st Jan 2011) Charge Minimum Brokerage Fees 0.2000% Securities and Exchange Commission Fees 0.0450% Colombo Stock Exchange fee 0.0525% Central Depository System fee 0.0150% Share Transaction Levy 0.3000% Minimum Total Transaction Cost 0.6125% John Keells Stock Brokers 21