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Share prices declined as the government's fiscal plans adversely affected some selected sectors. Banking stocks suffered the most as the sector index slipped 41 points on Thursday after the budget. The ASPI and MILANKA recorded a marginal dip of 6.61 and 24.98 points to close at 810.62 and 1352.07 points respectively. The market picked up by 14.4 points during the first two days of the week as the positive news from the peace negotiations, coupled with strong corporate earnings, drove the market towards another rally. However, the market reacted negatively to the budgetary proposals as the ASPI declined 20.98 points over the next 2 days.

Trading volumes remained thin, however, in a holiday depleted market as the bourse recorded a turnover of Rs.342.63 million over the 4 days at an average of Rs.85.66 million per day.

Foreigners also maintained a low profile as foreign buying totalled to Rs.23.9 million, resulting in a net outflow of Rs.19.6 million during the 4 days.

The much awaited Initial Public Offer of Apollo Hospitals Colombo got under way last Friday at the Hospital Auditorium. The offer will open for both individuals and institutions on November 21, 2002. Applications will be available at any CSE member firm or HNB customer centers from November 11.

We are positive on the issue due to several factors. Macro factors include an inadequate state-run healthcare system, a nationwide shortage of hospital beds, and an aging population, while company specific factors include the availability of the best equipment and doctors, and the excellent track record of Apollo Hospitals India. Based on a Discounted Cash Flow (DCF) basis, our valuation per share is Rs.25.60. We forecast a loss of Rs.62 million for the period ended March 31, 2003 and expect the hospital to be profitable during the Financial Year 2003/04. We project a profit of Rs.157 million for the FY2003/04 and expect it to jump up by 72% to Rs.270 million during FY2004/05. Among the key revenue generators are, income from Surgeries and Laboratory tests.

Earnings are supported by a strong asset base, as we project a net asset per share of Rs.10.37 as at March 31,2003. This excludes the appreciation in the value of the land due to completion of the nearby highway. We estimate that a revaluation would add another Rs.2.45 per share.

Further details on the valuation are available in our Research report, "Apollo Lanka Hospital" dated November 06, 2002.

Sri Lanka's largest private bank released its results for the nine months of the year 2002 with a 254% jump in the net profit to Rs.478 million. The group profits increased to Rs.348 million from Rs17 million recorded during the corresponding period of 2001. The profit increase can be largely attributed to the 46% increase in net interest income. The prevailing low interest rate regime helped the bank to increase its net interest income by 2.15 billion. Foreign exchange income was down by 36% while other income was up by 15% compared to first nine months of 2001. HNB's loans and advances grew by 20% to Rs.59.6 billion while the implementation of HATNA.NET led to a healthy increase in deposits by 10% to Rs.83 billion.

The recent budget proposals will adversely affect the banking sector earnings due to the 10% VAT (surcharge) imposed on the Banks.

JKH First Half FY2003 Net Profit up by 247% Sri Lanka's most diversified company John Keels Holdings responded positively to its critics while recording a net profit Rs.491 million for the first half of financial year 2003, up by 247% compared to the first half of financial year 2002.

Turnover grew by 29% to Rs.7.5 billion while the profit before tax was up by 165% compared with the corresponding period of Financial Year 2002. The growth in turnover was mainly due to the pick up in the hotel sector, financial services, and food and beverage. The correspondingly larger increase in profits can be attributed to the decline in Cost of Voluntary Retirement by 57%, a one-time profit from the sale of Wadlock Mackenzie for Rs.103 million, the reduction in finance expenses by 10% and the jump in the associate Company Profits by 138%.

Based on the first six months earnings the annualised EPS is Rs.5.28 per

share while net assets per share as at September 30, 2002 is Rs.47.55. The Price Earnings Ratio at a price of Rs.77 is 14.6 times.

We expect core operating performance during the Second half of FY2003 to be much better than the 1st half. The second half usually sees a bigger contribution from tourism due to its high season. For example, earnings during the 2nd half of FY2002 were Rs.401 million vs Rs142 in the 1st half of FY2002. In addition, we also foresee an overall increase in tourism from previous years. Improved economic conditions at present should also help JKH to record a better performance during FY2003.

Point of View:

There was no real surprise in the Budget 2003 as there were only a very few new incentives and concessions. However, the sectors that took a beating from last year's economic downturn e.g. Plantations and Hotels were not given any direct incentives. Although the Government did not resort to a significant rise in general taxes, the taxes imposed on the banking and the financial sector appears to be detrimental for the sector and the economy as a whole.

Collection from income tax and excise duty is expected to be lower due to incentives given. However, collection from import tax and VAT (both measures cover a wide area under the latest budget) is expected to boost the revenue. Stronger economic growth in the absence of the Ethnic War will also contribute to a better picture in terms of government revenue.

After many years in which infrastructure spending was curtailed to contain the budget deficit, for Budget 2003, spending on public investments has seen a 16% increase YOY. However, as a percentage of GDP this figure remains at 5.3% while last year it was 5.9%. The defence budget at Rs. 50.38 Bn has seen only a marginal decline from last year's figure of Rs. 49.21 Bn although fighting in the North has stopped. Nevertheless, it must be noted that higher spending in 2003 is mainly due to spill over spending from year 2000. Defence spending should see a considerable reduction in budget 2004 peace is to prevail.

Reduction in privatization proceeds and revenue might add pressure on the budget deficit.

The lack of aggressive revenue methods spelled out in the budget 2003 adds some pressure on the budget deficit. However, the expected divestiture proceeds from privatization (estimated at about Rs. 14 Bn) and increased export earnings, not to mention foreign grants, are expected to bump up state coffers. The estimated budget deficit is at 7.5% of GDP, down from 8.9% projected for year 2002.

The GDP growth for the US and the EU for year 2003 is expected to be around 2.6% and 2.3% respectively, much lower than the average growth rates for the past decade for these countries. The average growth for the US economy for the past decade was 3.5% - 4.0% while for the EU it was 3.0% - 3.5%. Thus, the fear of a delay in the global recovery is still on the cards with the recovery process expected to be slow.

This would somewhat dampen the domestic economy which is taken into account in the GDP growth projected for year 2003 at 5.5%.

The 5% tax rebate given to quoted companies to be eliminated As a result of this proposal, the effective tax rate of all listed companies would increase from current 30% to 32.5% with effect from 1st April 2002. However, this would not have a considerable impact on the companies' bottom-line.

The imposition of 10% VAT on banks' net profit and remuneration to its employees and the application of 0.1% debit tax to all bank accounts is expected to increase effective tax of listed bank's to approximately 42.5% from the current 30%. However, the calculation of net profit and the employees' remuneration is still under debate. Although it has been stipulated that it cannot be passed down through the system, the pricing power enjoyed by the banks would help them to pass it on to its customers in the medium term. However, the lack of short-term incentives given by the budget led to dismal market performance during the latter part of the week. This is after a considerable appreciation with the 2nd round of peace talks being a success.

As mentioned in our previous weekly, until the two major IPOs go through, we expect the market to continue sideways. We maintain our last week's view that market activity would fluctuate on thin trading volumes until the two major IPOs are subscribed and investors start looking at other stocks. This lack-lustre behavior is also now fuelled by the criticism on Budget 2003. If market sentiment continues to weaken, the crucial 800 barrier will be tested.

However, we believed that the downside will be limited, due to bargain hunting and a positive long-tem view of the market by investors.

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Copyright 2001 The Associated Newspapers of Ceylon Ltd.
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