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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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UNESCO DG to discuss archaeological endeavours in Anuradhapura, Sri Lanka: President

ECONOMYNEXT – Sri Lanka’s president has said that he will discuss initiatives for long-term archaeological endeavours in the Anuradhapura city with visiting UNESCO Director General Audrey Azoulay.

Azoulay will visit Sri Lanka from July 16-19 and take part at the celebration of the 75th Anniversary of Sri Lanka’s membership of UNESCO at the Nelum Pokuna Theatre in Colombo.

She will also travel to UNESCO World Heritage Sites around the island, the Ministry of Foreign Affairs said.

“I have invited the Director General of UNESCO to visit Sri Lanka and discuss initiatives for long-term archaeological endeavours in the Anuradhapura city. Several universities overseas have shown interest in supporting us for these activities, and we are moving forward with their collaboration,” Ranil Wickremesinghe said.

“Anuradhapura boasts a rich history spanning over a millennium, once renowned as a hub of trade and economics. Preserving and exploring this ancient city’s archaeological treasures remains a significant endeavour.”

“New archaeological efforts in the Anuradhapura district are now imperative,” Wickremesinghe said during a ceremony to inaugurate a 150-kilowatt solar power system installed by the LTL Group at the Sri Maha Bodhiya premises in Anuradhapura on Saturday (13).

Wickremesinghe pointed out that UNESCO has undertaken extensive archaeological projects in Angkor Thom in Cambodia, and Luang Prabang in Laos.

“However, we have not taken the necessary steps to implement these activities in Anuradhapura city. Therefore, I have advised both the Department of Archaeology and the Cultural Triangle to undertake these initiatives.”

These efforts are part of a comprehensive program aimed at establishing Anuradhapura as a globally renowned city, Wickremesinghe said.

While Sigiriya has gained international fame, Sri Lanka has not adequately highlighted Anuradhapura’s historical significance as a major trade and economic center in the past, the president pointed out.

“Cities like Tanjore (Thanjavur), Madurai, and Sanchipuram are often discussed, yet Anuradhapura, the fourth city, has been overlooked. Therefore, it is crucial to develop Anuradhapura city.”

As part of these initiatives, preparations are underway to establish new hotels in Anuradhapura, which will contribute significantly to its development, Wickremesinghe said. (Colombo/Jul13/2024)

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Government committed to improving living conditions in Jaffna: Sri Lanka PM

ECONOMYNEXT – Sri Lanka’s prime minister, who is in Jaffna “to monitor the progress” and “get a little feedback” has said the government is committed to improving living conditions of the people in the northern peninsula.

“This government is dedicated to improving the living conditions of the Jaffna Peninsula,” Dinesh Gunawardena told a Jaffna District Coordinating Committee meeting on Friday, according to a statement by his media division.

“In order to increase the living conditions, we have embarked on an increase in most of the expenditure needed by the departments, and also special allocations for rural and urban development in the local government area.”

Nationalist Gunawardena met with Tamil politicians at the Jaffna Divisional Secretariat Office and participated in the distribution of rice and egg incubators for low income families.

“A special privilege to be with you all, in order to monitor the progress made by all of you, as well as to get a little feedback where we stand today in relation to the reports given.”

Gunawardena joins a string of leading political figures who have visited the north ahead of upcoming polls.

The government was, he said, “committed to improve the services and living conditions, therefore, to provide the necessary infrastructure for developments, which means much to your area.”

The prime minister said he appreciated the efforts of farmers because “farmers are all private sector, I would say. Let us not forget, farmers are all in the private sector, either in the ownership or in the tenancy. They are private contributors to the national development of the economy.”

The poverty numbers are “fairly managed” in the country. Gunawardena said, pointing out that poverty was a key problems in any economy. “Any country, you would agree with me, the richest country, in the United States even, food stamps have been given. So all economies the world are going through difficult situations in relation to the poor.

“We have to look after the poor especially in these remote villages of the Northern Province…”

Minister Douglas Devanada, MPs M A Sumanthiran, Angajan Ramanathan, C Vigneshwaran, Dharmalingam Siddharthan, and other officials participated in the meeting. (Colombo/Jul13/2024)

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Sri Lanka leader’s presidential campaign faces dilemma over coalition: sources

ECONOMYNEXT – Sri Lanka leader Ranil Wickremesinghe’s presidential election campaign is facing a dilemma over coalition due to rivalry parties with different political ideologies, sources said.

President Wickremesinghe is yet to announce his candidacy for the presidential poll which is expected to be declared by the island nation’s Election Commission after July 17.

However, his close allies and some ministers in the current coalition government have already started a campaign to promote him assuming that President Wickremesinghe will declare his candidacy.

Three sources who spoke to EconomyNext said legislators from the main opposition center-right Samagi Jana Balawegaya (SJB) are ready to join, but they do not want to be in coalition with the ruling Sri Lanka Podujna Peramuna (SLPP).

“SJB members who want to join Wickremesinghe are bit nervous because people wanted to oust SLPP in 2022 for their past sins including corruption and wrong economic policies,” on source who is in a member in the core campaign strategy group told EconomyNext.

Another source said majority of nationalist party SLPP are with the president, but a few key SLPP leaders do not want to back Wickremesinghe because of his market-led economic policies.

“SLPP does not want to be seen as backing Wickremesinghe’s privatization moves. So a few leaders are worried to join the campaign and have different idea of fielding their own campaign,” the second source who is indirectly involved with facilitating meeting between Wickremesinghe and legislators said.

The SJB is leaned towards somewhat liberal economic policies and has ensured to treat all ethnic people equally, while SLPP has backed a state-controlled economy and has given priority for ethnic majority Sinhala Buddhists.

UNDECIDED VOTERS

There is no formal and transparent survey to assess the popularity of possible presidential candidates.

However, an informal survey shows Opposition and SJB leader Sajith Premadasa is leading followed by Marxists Janatha Vimukthi Peramuna leader Anura Kumara Dissanayaka.

The same survey has shown a gradual gain for Wickremesinghe in the last three months.

“He is confident of winning, but he has to win most of the undecided voters for that,” a third source, who is in the campaign planning team, said.

“Still things are very fluid. Majority of the people still don’t understand the benefits of economic recovery and the country getting out of the debt default under the current president. We will have a clear picture by end of next month.”

Wickremesinghe was elected as the president in July 2022 by the parliament after his predecessor Gotabaya Rajapaksa fled the country in fear of his life amid mass protests and outside the presidential palace.

Wickremesinghe has implemented some tough economic reforms including raising taxes, imposing new taxes, freezing recruitments to state-owned companies, and privatizing loss making government-owned entities in line with commitments agreed with the IMF.

UNPOPULOUR REFORMS

Those reforms have made him unpopulour mainly among government employees and lower income groups.

He has raised the salaries of government employees from April this year while has introduced a new transfer payment called Aswesuma for lower income and vulnerable groups.

Sri Lanka faced an unprecedented economic crisis with a sovereign debt default in 2022. But it has recovered faster than expected under Wickremesinghe administration with difficult and unpopulour reforms.

People protested against the SLPP-led government in 2022 and ousted then leader Gotabaya Rajapaksa and all his relatives from the key ministerial positions for their alleged involvement in corruption and wrong economic policies.

The SLPP which had more than two-third majority in the parliament after 2020 general election, is worried about its perception and electoral performance after the economic crisis.

Analysts say Wickremesinghe has a greater chance to win if he join with SJB than SLPP because of the SLPP’s negative perception.

Sources, however, said they are in discussions with both SLPP and SJB legislators to agree on a common programme for Wickremesinghe’s presidency.

Presidential election is likely to be held either in October first week or second week, Election Commission officials say.

Wickremesinghe lost the parliamentary election in 2020, but entered the parliament in 2021 using the solo seat his party won through the national list.  (Colombo/July 13/2024)

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