Chevron calls for Sri Lanka lube regulator with powers to limit competition

ECONOMYNEXT – Sri Lanka’s listed Chevron Lubricants Lanka Plc is calling for enforceable regulations to keep unlicensed players out of the market as profits are dented by a hike in income tax and rising costs from currency depreciation.

"The industry’s appeal to elevate the Public Utility Commission of Sri Lanka (PUCSL) as a fully-fledged regulator instead of a shadow regulator remains unfulfilled," Chairperson Rochna Kaul told shareholders in the 2018 Annual Report.

The PUCSL did, however, raise public awareness about selecting reliable lubricants rather than falling prey to unlicensed players in the industry, she said.

Some unlicensed players may be selling fake products but customers have 13 licensed brands to choose from.

Licensing limits competition, raises operating costs, reduces choice for customers and opens up opportunities for corruption. It is not clear why Sri Lanka has limited competition to only 13 players, but liberalization is mostly a political decision.

"The size of the local market, the rate of growth, and high competition emanating from 13 market players is expected to be a constraint," Kaul said.

"In response, we intend to place greater emphasis on growth segments such as exports, for sustained profitable growth."

-Tough market-

The company carried out a market audit in 2018 to identify opportunities and challenges.

"Based on the findings of this study, in January 2019, we implemented improvements of our go-to-market strategy," Pat McCloud, Managing Director/CEO at Chevron Lubricants Lanka said.

"The core of the strategy is to incentivize our distributors and channel partners to grow the business."

The company is also rolling out special promotions to lure consumers and grow its markets in Sri Lanka, Bangladesh, and the Maldives.

In 2018, Chevron Lanka’s revenue fell 2 percent to 10.9 billion and earnings declined 22 percent from a year earlier to 1.99 billion rupees.

Earnings were 8.30 rupees a share.

The stock was trading 40 cents lower on Tuesday at 62.20 rupees.

The New Inland Revenue Act took away the tax concession that the company had previously enjoyed.

Chevron Lubricant Lanka’s earnings were taxed at 14 percent due to its export component. However, the new tax rules only allows the lower tax rate if the primary business is exports.

The company, which mostly serves the Sri Lankan market, is now taxed at 28 percent.

Exports account for around 10 percent of total sales revenue in 2018.

Rising oil prices, exacerbated by the steep depreciation of the rupee, forced Chevron Lubricants to increase prices.

"While retail customers opted for less expensive alternatives and decreased use of lubricants, there was also reduced demand from industrial customers, particularly from the construction industry, primarily due to challenges faced by that sector," McCloud said.

The lubricants industry recorded 0.3 percent volume growth in 2018 according to the PUCSL.

Chevron had lost some government tenders in 2017, but ramped up its sales and marketing campaigns, resulting in a 12 percent growth in sales during the first three quarters of 2018.

"However, the gains made throughout the year were negated during the fourth quarter as sales performance mirrored the downturn in the industry, economic slowdown, and uncertain political environment," McCloud said.

"We were compelled to increase our sales prices twice in the second half of the year to counter inflationary pressures.

"This was a difficult decision to make, yet necessary to restore lost margins. As expected, this move impacted sales volumes negatively. The competition eventually followed in our wake with their own price increases in the last few months of the year." (COLOMBO, April 2, 2019-SB)