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Market corrects itself on profit taking

The week started off on a positive note and the ASPI and MPI moved up by 8.4 points and 25.7 points during the first half of the week. However during the latter part the ASPI lost 5.8 points to close at 820.4 while the MPI lost 11.6 to close the week at 1420.1. Banking sector shares led by Commercial Bank and DFCC dominated the week's activity. As a result the Banking sector index gained 43.8 points during the first two trading days but dropped 17.6 points to close at 1,976.0 on Friday.

According to company sources,Commercial Bank/DFCC is keen on having a controlling stake in Eagle Insurance, following the failed attempt to buy Sri Lanka Insurance Corporation. Elsewhere Janashakthi continued to strengthen its holding in NDB by increasing their stake to over 7.0%. This week's total turnover was Rs.378.8 million with an average daily turnover of Rs.94.7 million. Relative to last week's average turnover of Rs.197.5 million, this week was subdued. Foreign activity too remained low accounting for an outflow of Rs.13.4 million.

Point of View

Market response positively towards LTTE's reactions

The LTTE apologised to government peace delegation member Milinda Moragoda regarding a comment made by Mr. S P Tamilselvan, head of the LTTE's Political wing. A weekend newspaper quoted S. P. Tamilselvan, as saying that Moragoda had promised the LTTE that they would be able to attend the Washington DC meeting. Moragoda reacted by saying he made no such promise and wanted to withdraw from the talks until this issue was sorted out. The LTTE's Chief Negotiator Anton Balasingham then said that Moragoda had not given them an assurance of this nature and attributed Tamilselvan's comment in the media to an error in the Tamil to English translation. LTTE should return to talks

We maintain our position that the LTTE would return to the negotiation table. Their issues are currently being addressed by the Government and as reported in the media, the Prime Minister in his reply to the LTTE had pointed out that the relocation of troops in Jaffna is getting addressed and highlighted the improvements in the area. The statements made by USA, India, France and Japan show their interest and support of the international community towards the peace process. The market reacted positively to these responses during the week and we expect it to do so in the short run as well. Corporate earnings mixed

We expect corporate earnings of the concluded quarter to be mixed, and create some volatility in the market. The conglomerates and the tourism sector are expected to record strong earnings growth but the plantation sector is expected to show a drop in earnings. We believe that the market will fluctuate in a narrow band responding to the comments of the government, LTTE and the international community in the short term.

Sri Lankan economy bounces back

GDP records healthy growth

The Sri Lankan turned around in 2002 recording a GDP (Gross Domestic Production) growth of 4% recovering from a GDP contraction of 1.5% in 2001. Our forecasted GDP growth for 2002 was 3.3%. In 2002 the economy benefited from the ongoing peace process, structural reforms, changes in monetary policy and other external factors.

Agricultural and Industrial sectors record moderate growth

The agricultural sector benefited from better weather conditions and increased output from the North-East and recorded a growth of 2.5% for year. The Industrial sector (which includes the construction sub sector) witnessed a moderate growth of 1% in contrast to a decline of 2.1% in 2001. Within the industrial sector the manufacturing sub sector grew by 2.2% compared to a decline of 4.2% last year. Growth in this sub sector came from increased domestic and export demand. The largest export revenue earner, the textile and apparel industry showed weak performance throughout the year and grew by only 1.4%. This however is a recovery in comparison to a sharp decline of 8.6% recorded in 2001. The slow growth in this sector was accompanied by reduced prices (unit value declined by 6%). Weak consumer demand from Sri Lanka's major export markets and increased competition from low cost producing countries continued to affect this sector.

Services sector drives growth

The Services sector accounted for 54% of total output in 2002. This sector grew by 6% in 2002 recovering from a slow growth of 0.5% in 2001. Within this sector the transport, storage and communication sub sector grew by 7.7% compared to a growth of 3.8% in 2001. The wholesale and retail sector grew by 5.5% from a decline of 6.7% in 2001 largely benefiting from the opening up of the North- East parts of the country despite weak export demand. The Banking, insurance and real estate sub sector recorded a healthy growth of 11% due to the economic recovery and higher interest spread. Inflation drops to a single digit-figure

The CCPI (Colombo Consumer Price Index) registered annual average inflation at 9.6% for 2002 compared with 14.2% in 2001. The lower depreciation of the rupee (depreciation calculated on annual average US$ stood at 7% compared to 17% in 2001), weak commodity prices in international markets and the reduction of the import surcharge from 40% to 20% resulted in lower import inflation. However the decline in inflation was offset to a great extent by the removal of subsidies on commodity prices, increases in administered prices of kerosene, electricity and bus fares etc.

Budget deficit fell considerably

Total Government revenue fell to 16.5% of GDP in 2002 from 16.7% of GDP in 2001 mainly due to the reduction in surcharge on imports and the removal of the 20% surcharge on corporate taxation. However the corresponding reduction in Government expenditure from 27.5% of GDP in 2001 to 25.4% of GDP in 2002 brought down the overall budget deficit to 8.9% of GDP in 2002 from 10.8% of GDP in 2001. Foreign grants received for budgetary purposes were at 0.4% of GDP. Privatisation proceeds received during 2002 were Rs. 5.7 billion, well below the targeted revenue of Rs. 21.0 billion.

Relatively large surplus in the balance of payment

The 2.4% drop in export earnings and 2.2% increase in import expenditure resulted in the trade deficit increasing to 8.5% of GDP in 2002 from 7.4% of GDP in 2001.

Increase in flow of foreign funds

Private long-term capital flows increased from US$39.0million toUS$139.0million in 2002. With the relatively peaceful environment in the country, FDI flows increased 195% to US$242million from US $82million in 2001. Long-term loan capital received by the Government declined by 14% in 2002 to US$492 million. However, 89% of the long-term-loan capital was received on concessionary terms. As a result the overall balance of payments reported a surplus of US$338.0 million.

A detailed analysis incorporating these figures into our forecasted GDP growth for year 2003 (currently at 4.7%) will be made available in our upcoming strategy report.

James Finlays: First Quarter Results Update

The net turnover of James Finlays decreased 20%. We feel that this is due to their high exposure to the tea sector through the Plantations and Tea Exporting and Warehousing divisions. Cost of Sales also dropped 12% from Rs. 923.9 million to Rs.813.5 million.

A majority of the James Finlays estates are in the hardest hit low and mid grown tea producing areas intensifying the negative impact on the company from both the plantation and exporting and warehousing divisions.

The plantation subsidiaries of Finlays', Udapussellawa and Hapugastenne recorded losses of Rs. 10.6 million and Rs. 46.4 million respectively. Turnover of the two plantation companies, Udapussellawa and Hapugastenne also dropped by 12% and 21% respectively for the first quarter on a year-on-year basis. A detailed analysis of the results and performance of the non-tea sector will be made available early next week following a company visit.

Tea market round up

The tea auctions on April 29 and 30 had the largest sales since the auctions of July 2 and 3 2002 Overall 7.1 million kg came under the hammer and approximately 50% of the quantity sold was low grown tea.

The NSA of low grown teas this week was Rs.152.40 per kg, going above Rs.150 for the first time since the auction of January 9 2003. Production and Export quantities dropped 0.8% and 13.8% respectively in 1Q2003 relative to 1Q2002 resulting in a drop in export revenue of 10.5% The largest earnings declines are from tea in packets followed by tea in bulk. Earnings from the export of tea bags showed a growth of 8.5% in March 2003 compared with March 2002.

Middle Eastern stability - a key

The drop in export revenues in the first quarter can be attributed to the crisis in the Middle East, which has since reached a certain type of stability. We expect tea prices to improve in the short term with more buying interest from the Middle East.

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