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Sunday December 3rd, 2023

Sri Lanka beer battle to froth after Heineken purchase

ECONOMYNEXT – A purchase of Heineken Lanka by Distilleries Corporation of Sri Lanka, a hard alcohol maker will intensify competition challenging Lion beer, Fitch Ratings said.

Heineken was a “distant second to Lion Beer but Distilleries has the industry know-how, market access and financial strength to push into the market.

“We believe a large capacity expansion at Heineken Lanka would be required to compete effectively with Lion,” Fitch said.

“We estimate the expansion will require significant capital outlay and at least two-to-three years to complete.”

Its annual free cash flow, excluding dividends, was around 10 to 12 billion rupees.

The full statement is reproduced below:

Distilleries’ Acquisition of Heineken Lanka May Challenge Lion Brewery Share

Sun 19 Nov, 2023 – 11:59 PM ET

Fitch Ratings-Colombo-19 November 2023: Lion Brewery (Ceylon) PLC (AAA(lka)/Stable), the leader in Sri Lanka’s beer market, could face more competition in the medium term following Distilleries Company of Sri Lanka PLC’s (DIST; AAA(lka)/Stable) decision to acquire beer producer Heineken Lanka Limited, Fitch Ratings says. Heineken is a distant second in Sri Lanka’s beer market for now, but we believe DIST has the industry know-how, market access and financial strength to elevate Heineken’s operations to a level that could weigh on Lion’s market share.

We believe a large capacity expansion at Heineken Lanka would be required to compete effectively with Lion. We estimate the expansion will require significant capital outlay and at least two-to-three years to complete. We believe DIST has the financial strength to fund the expansion, with its annual free cash flow, excluding dividends, averaging LKR10 billion-12 billion. DIST, as the largest spirits manufacturer in the country, already has extensive market access covering all forms of retail channels, providing easy market penetration compared with a new entrant.

However, we expect DIST to face near-term challenges in terms of brand building given the complete ban on media advertising on alcoholic beverages by the government. Lion already has a very strong brand presence in the market compared with Heineken due to the greater mass-market appeal of its products, with cheaper pricing and customisation to local preferences.

Lion’s ability to withstand competitive pressure is also supported by its strong rating headroom. Lion continued to maintain a net cash position as of 31 September 2023, compared with a negative rating sensitivity of EBITDA net leverage of above 5.0x. We believe this provides Lion the flexibility to be more aggressive with its pricing strategy to defend its market share in an increasingly competitive environment.

We expect the acquisition to be positive for DIST as it will help the company to strengthen its market position with a presence in both hard and soft liquor markets. The acquisition will also allow DIST to take advantage of the lower excise duties applicable to beer on an alcohol-equivalent basis. There has been a shift to beer from hard liquor in recent months due to the significant increase in excise duties. DIST could also benefit from the revival in Sri Lanka’s tourism industry, as beer is more popular among tourists than locally made hard liquor.

DIST has not disclosed the value of the transaction, but we do not believe it will have a material drag on the company or parent Melstacorp PLC’s (AAA(lka)/Stable) balance-sheet strength. We rate DIST at the consolidated profile of Melstacorp based on our Parent and Subsidiary Linkage Rating Criteria.

Melstacorp’s last-12-month EBITDAR to net leverage stood at 0.7x at end-September 2023, compared with a negative rating sensitivity of above 5.5x, indicating strong rating headroom. Furthermore, our rating-case assumptions include annual spending of LKR5.0 billion on potential M&A.

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Sri Lanka UGC wants to boost number of IT-related degrees

ECONOMYNEXT – Sri Lanka’s University Grants Commission is of the view to boost the number of Information Technology (IT) related degrees in state universities with an aim to pave the way for a digital economy.

Sri Lanka’shigher education system has been producing more graduates in Arts stream while the degrees in highly demanded IT and other engineering services are being looked at only now.

“We do have a high demand for engineering, science, AI, computer and electronical engineering

studies,” Chairman of University Grants Commission, Sampath Amaratunga, told reporters at aa media briefing on Friday

“However, while avoiding neglecting the humanities, we should develop new IT skills.”

Amaratunga confirmed that a student who studied in any stream could obtain an IT degree, including students who studied in the arts stream.

The UGC data show that out of 18,490 engineering technology stream students who sat for their Advanced Levels (A/L) in 2022, 10634 were eligible for university.

“Even streams like agriculture should be encouraged to use technology,” Amaratunga said. (Colombo/Dec 2/2023)

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Sri Lanka leader inaugurates Climate Justice Forum at COP28 in Dubai

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe launched Climate Justice Forum (CJF) at the ongoing 2023 United Nations Climate Change Conference (COP28) held in Dubai in a move to gather support for vulnerable nations hit by climate-change led disasters.

This year’s climate summit held in Dubai’s EXPO2020 features a raft of issues for countries working to find common ground in tackling climate change, including whether to phase out fossil fuels and how to finance the energy transition in developing countries.

Wickremesinghe inaugurated the Climate Justice Forum at COP28 on Saturday and emphasized the critical importance of addressing climate issues with a sense of justice and equity.

The President had been in talks with many nations vulnerable to climate change disasters including African and South American countries to get their support for the CJF.

The move is to compel advanced and developed countries to look into the poor nations hit by the climate changes and help them to get over economic and debt burdens by either investing more in green energy initiatives or writing off debts to ease financial pressure.

Sri Lanka, which is now facing an unprecedented economic crisis, has seen increasing losses and damages, both human lives and physical properties due to climate change-led disasters like floods, drought, and earth slips.

In his speech at the COP28 forum, Wickremesinghe on Friday said the Climate Justice Forum will provide a platform for constructive and proactive engagements. (Dubai/Dec 2/2023)

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Sri Lanka IMF review goes to executive board on December 12

ECONOMYNEXT – The first review of Sri Lanka’s International Monetary Fund program is scheduled to go the lender’s Executive Board for consideration on December 12.

Sri Lanka officials were expecting the review to be completed in December as soon as official creditors gave their assurances.

According to the notice Sri Lanka had missed one performance criterion and has requested modifications.

Sri Lanka has outperformed on a number of quantity targets including inflation. In addition to quantity PCs there was also one non-accumulation of arrears.

There would also be re-phasing of access. The review was originally expected around September with another review based on December data, leading to September and March disbursements.

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