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The market dipped continuously this week after its 3-week long rally. The decline, which was intensified mid week brought the market down by 52.5 points on ASPI and 130.9 points on MPI at Thursday's closing. However, after an initial drop of 35 points on ASPI early on Friday indices picked up later in the day.

Week-on week the market closed lower with the ASPI closing at 992.3 (a decline of 59.1 points) and the MPI closing at 1908.4 (a decline of 150.9 points). The turnover was not as high as the previous two weeks, but remained healthy to record a total turnover of Rs.1,095.3 million with a daily average of Rs.219.1 million.

Foreigners took advantage of the dip in the market and started picking up shares on the decline, resulting in a net inflow of Rs.157.2 million. NDB stole the limelight this week too accounting for 17.3% of the total weekly turnover. Distilleries, Seylan, HNB, HNB (non-voting), and Grain Elevators were among the other heavily traded stocks. The market after reaching a peak of 1121 points on 25th June has gone through a significant correction to sustain at around 1000 levels. Despite dipping to 965 points during early hours of Friday, the market recovered almost 27 points as buying pressure returned. The bullish sentiment has now settled down, and investors should look for the accumulation of fundamentally strong stocks at attractive prices.

Still no real news from the peace front

The government last week sent a revised proposal on the interim administration body to the LTTE, but did not give a detailed structure as they expect input from the LTTE before proceeding further. Despite increasing international pressure, the LTTE has maintained their stance and continued to demand an interim administration.

We feel that LTTE's next response would be crucial towards the re-commencement of the talks. Thus investors should closely monitor the outcome. Any positive news on re-starting talks could halt the decline in indices recorded this week, and drive the market back in the positive direction.

We feel that the decline in indices should be viewed as an opportunity to pick up fundamentally strong stocks, as the prices of most blue chips have returned to cheap levels. We expect the indices to fluctuate considerably during the week with a mix of profit taking and bargain hunting

Economy grows by 5.5% in 1Q2003

According to the Central Bank of Sri Lanka the GDP grew by 5.5% in 1Q2003 as against 0.5% recorded during 1Q2002. The services sector driven by improvements in transport, storage & communication and banking, insurance & real estate grew by 7.6%, accounting for 52.4% of total activity.

The industry sector grew by 5.4% reversing the negative 3.0% growth recorded in 1Q2002. Within the industrial sector, construction recorded a robust growth of 7.6% as against negative 0.3% recorded during 1Q2002. The manufacturing sub-sector recorded a growth of 3.2% recovering from the 2.2% negative growth recorded in 1Q2002 due to a moderate pick up in export oriented industries. Industrial sector growth, although not adequate, reflects a fairly marked turnaround. Nevertheless the acceleration in this sector is yet to begin.

The agricultural sector grew by only 0.7% as against the 3.1% growth in 1Q2002. The performance of the agricultural sector would be lower in 2H2003 as well due to the recent floods: we estimate a 20-25% drop in total agricultural production in 2h2003. However, the impact on paddy production will be offset to a great extent, as 50% of the damaged lands have already been cultivated. Increased output from newly cultivated land in the Northeast and Hambantota is likely.

Total revenue collected during January-April 2003 amounted to Rs.94.3billion. Total tax revenue was Rs.72.2billion while non-tax revenue was Rs.22.1billion. Tax revenue collected was only 27% of our estimated total tax revenue. High refunds, due to the refund of input credit under the VAT system, which increased from 12% in 2002 to 14% in 2003, limited actual collection. Total expenditure and net lending for January-April 2003 was Rs.146.8 billion. Of this recurrent expenditure was Rs.120.0 billion a growth of 4% over January-April 2002. Based on these figures the overall balance as at 30th April 2003 stood at Rs.52.5billion. This is 37.2% of our estimated overall balance of Rs.141 billion.

The delay in establishing the revenue authority will have a further impact on tax administration, which would ultimately result in lower collections in 2003. This decline in revenue would force the Government to either decrease its expenses or borrow in the domestic market. Undoubtedly curtailing capital expenditure does not augur well for the economy. Borrowing from the domestic market may be a possibility given the low interest rate scenario.

Nevertheless given the increased capital inflows to the country, excess liquidity and falling inflationary pressures we do not expect lower revenues to have an upward impact on interest rates.

The annual average of the CCPI for June was 9.0% down from 9.5% in May 2003. However, the CCPI increased 1.3% in June 2003 to 3,439.8, when compared to May 2003 due to the short supply of consumer goods. We expect a continuation of the declining trend in the annual average while we expect month-on-month inflation to move higher in July and August due to lagged effects on the floods and indirect impact of increase in bus fares with effect from 9th July.

Rupee stable during 1H2003

The Sri Lankan rupee has been stable, depreciating only 0.5% against the US$ during the 1H2003. The depreciation of the rupee can be expected to hover around the same levels during the rest of the year.

Tourist arrivals during January-May 2003 stood at 184,308, an increase of 25.6% over the same period last year. Arrivals from Western Europe and South Asia increased by 31.8% and 24.2% respectively. However, arrivals from East Asia declined for the second consecutive month recording a 37.3% decline in. May in comparison to May 2002. Earnings from the tourism sector recorded a 28% increase over January-May 2002. We remain optimistic about the outlook for the tourism sector.

Apollo Hospitals released results for its first full financial year with strong QoQ performance. They recorded a net loss of Rs.272.1million during the ten-month period, after writing off depreciation and pre-operational expenses. The net loss for the period is inline with our forecasted loss of Rs.287 million for the same period.

A QoQ comparison indicates that revenue grew by 25% during the 3 months ended 31st March 2003, compared to the 3months ended 31/12/2002. This is justified by the strong operational growth of the hospital during its first full financial year.

Operating profit up 193%

Apollo hospitals has written off Rs.19.1 million as pre-operational expenses (expenses incurred during April-June 2002) when arriving at an operating loss of Rs.73.9 million. It is interesting to note the growth in operating profit over each of the quarters of the concluded financial period: The first four months recorded an operating loss of Rs.95.4 million, while the 3 months to 31st December 2002 saw the turn around with an operating profit of Rs.5.5million. This improved to Rs.16.1million during the 3 months to 31stMarch 2003.

Interest rates restructured

Apollo, which carries Rs.985million of Long term Debt and Rs.175million of short-term debt, had a total interest burden of Rs.194.5million during the 10-month period. However they managed to take advantage of the low interest rate scenario, as its average long-term interest cost reduced from 18.5% to 16.5%. Bank overdrafts are costing the company 14%-14.5% at present. The reduction in the rates is reflected in the QoQ comparison of the finance cost as it declined from Rs.74million to Rs.32million during the last quarter. We believe this could reduce further by the settlement of overdrafts and further rearranging of its long-term borrowings at lower interest rates. After charging the finance cost Apollo recorded a net loss of Rs.272million for the 10 months to 31/3/2003. However QoQ, the net loss has reduced by 76% to Rs.16.1 million. We project a heavy depreciation charge of Rs.238 million for FY2003/04 (21% more than our original forecast), as depreciation of some of the new equipment is to commence during this period. After factoring in this additional burden of depreciation, our forecasted earnings for FY2003/04, are revised downward to Rs.2.9million from Rs.44.9million.

We expect Apollo Lanka Hospitals to marginally break even in FY2003/04 and to show strong earnings growth over the next 3 years. With most of its fixed costs already expensed, future expansion costs are also low. Our DCF-based fair valuation on the stock stands at Rs.20.90/share. The stock value is also supported by strong net asset backing. We maintain our optimism on Apollo as a long-term value prospect. NDB continues aggressive expansion policy

National Development Bank (NDB) emerged as the successful bidders for the 58.44% stake of Zurich NDB Finance Lanka (Pvt) Ltd, which was on offer for sale. NDB secured the 10.2million shares divested by Zurich Financial Services Group at a price of Rs.143/share, through its subsidiary Capital Development and Investment Company Ltd (CDIC). Zurich NDB Finance Lanka (Pvt) Ltd holds 87.27% of Eagle Insurance Company Ltd. The acquisition results in NDB increasing its stake in Eagle to 66%. CDIC is expected to make a rights issue to raise the Rs.1.48 billion. NDB is expected to take the bigger slice of the rights issue. Bank of Ceylon, which holds 23.9% of CDIC, would partly finance the purchase. NDB, which is already looking at strategically re-modelling itself to become an entity, which provides both development and commercial banking activities, would further strengthen itself as a strong financial powerhouse due to this acquisition.

The acquisition could have an impact on NDB's Return on Capital Employed (ROCE) in the short-run as the investment is not expected to produce a high Return on Investment (ROI) immediately. However, in our opinion the acquisition is a value addition to NDB in the long run. Once the operations of Eagle are revamped to exploit synergies such as cross selling, a positive impact towards the bottom line can be expected.

Hayleys announces 1 for 9 rights issue

Hayleys Limited announced a 1-for-9 rights issue at Rs.20/share. This rights issue increases the issued share capital to 50 million. The share was trading at Rs.209.00 at the end of trading on Tuesday.

In FY2002/03 the EPS of Rs.13.62 resulted in a PER of 15.3x based on Tuesday's closing price of Rs.209.00. Theoretically on historical earnings the share should drop to Rs.190.10 following the rights issue, diluting the EPS of FY2002/03 to Rs.12.26. Based on this diluted EPS (in FY2003) and a price of Rs.209.00 the PE is 17.0. The stock has traded at PE's in the range of 20 - 25 under bullish market conditions in 1992-1994. Due to the rights issue, the interest bearing loans and borrowings of the group will decrease from Rs.1,072 million to Rs.972million. We estimate that the finance cost will also decrease by approximately Rs.11 million. The net assets per share as at 31/3/2003 was Rs.131.80. With the rights issue this dilutes to Rs.117.82. Based on Tuesday's closing price of Rs.209 per share, the PBV is 1.77.

The stock has been fundamentally strong and has seen a 25.6% increase in price in June.

Source: HNB Weekly Market Review

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