Sri Lanka’s largest brewer records strong top line

Discriminatory taxing hampers growth, bottom line

Sri Lanka’s largest brewer, Lion Brewery (Ceylon) PLC (Lion) saw its net profit for the quarter ended June 30, 2015 (1Q16) increasing by 19 percent t o Rs.579.3 million from a year ago due to strong top line, the interim results released to the Colombo Stock Exchange (CSE) showed.

Accordingly, the earnings per share rose to Rs.7.24 from Rs.6.10.

The top line grew by 32 percent year-onyear (YoY) to Rs.9.14 billion mainly due to the twice increased excise duty during the third quarter in the previous year by the then government.

Meanwhile, during the quarter under review, the company reintroduced three of the brands acquired from Millers Brewery, including Three Coins Lager to the market.

“The other two being Sando Power and Sando Stout. A fourth brand, Irish Dark, a red ale, will also be made available in the months to follow,” the company said.

Despite the strong top line, the company said it could not maintain similar profit growth due to the “alcohol industry being subjected to further discriminatory taxation”.

“The growth in tourism during the first quarter also helped improve turnover,” the company said in its earnings release.

Beer sales have now been identified as another gauge, or perhaps a more accurate indicator of how an economy is doing. This is amongst traditional indicators such as gross domestic product (GDP) growth trends, property market performance and company earnings.

The analysis into the data have shown that the suds are surging in many developing Asian nations on rising incomes, younger populations and improving distributions—the characteristics largely similar to Sri Lanka.

Since the alcohol industry was made Value Added Tax (VAT) exempted by the then government during the third quarter, the industry lost its ability to claim input VAT – the VAT component paid on supplies, thus leading to higher cost of sales and other operating costs.

“As a result, both operating costs and capital expenditure have i ncreased t o the extent of the irrecoverable VAT,” the company said.

The gross profit rose by 22 percent YoY to Rs.2.2 billion while the operating profit rose by 29 percent to Rs.1.05 billion during 1Q’16.

“Further, the full benefit of efforts to improve productivity and reduce costs is not fully reflected in the financials as the irrecoverable VAT component has eroded part of the savings. Operating margins have therefore suffered,” the company added.

The net finance cost rose by a staggering 256 percent YoY to Rs.260 million as the finance income declined while the finance cost rose significantly.

Therefore, the profit before tax rose by 7 percent YoY to Rs.794 million.

As of June 30, 2015, Ceylon Beverage Holdings PLC held a 52.25 percent stake in the company followed by Carlsberg Brewery Malaysia Berhad with 24.97 percent.