Financial Times

Distilleries seen overtaking other conglomerates
Distilleries Company of Sri Lanka (DCSL) last week announced the completion of its acquisition of Lanka Bell for Rs 1.6 billion, extending its reach into a new fast-growing sector, the latest move in an acquisition strategy that stock brokers see as evenually making it bigger than existing conglomerates.
Higher profits from the liquor business and improved contributions from insurance, and now telecom, are seen driving growth at Distilleries, which is owned by influential tycoon Harry Jayawardena.

“Distilleries is likely to become the premier diversified conglomerate in Sri Lanka because they have interests in so many sectors - tourism, food and beverage, insurance and now telecommunications,” declared Vajira Premawardhana, executive director at Lanka Orix Securities.

“They have a knack for going into high growth, high cash generating sectors.”
Other sectors that Harry Jayawardena is reportedly interested in buying into through Distilleries and other firms under his control include hospitals, hotels, and transportation, while he is also rumoured to be keen on controlling banks. Distilleries already has stakes in DFCC Bank and Commercial Bank.

“The Distilleries share has been showing steady growth and probably has not reached its true potential due to its lower proportion of dividends,” said Aritha de Silva, head of research at stock brokers Asha Phillip Securities. “The share has much better potential to trade at higher values if it could combine a better dividend than shown in the past.”

Distilleries’ core activity – liquor – makes it cash rich given the fast-selling nature of the product but the company is likely to borrow funds for future acquisitions as well as using funds generated internally.

“Their strategy has been to grow by acquisition more than the core operation itself,” said another stock broker. “Just the profits of Distilleries alone can’t support acquisitions, so inevitably they have a lot of borrowing.”

DCSL is considered highly geared right now but the planned divestment of part of its stake in Sri Lanka Insurance would give it fresh funds for further acquisitions. “Even the Lanka Bell buy was a very sudden thing,” said one stock broker. “May be he’s (Jayawardena) making use of opportunities as and when they arise.”

Premawardhana of Lanka Orix Securities said that with the listing of Sri Lanka Insurance, the value of Distilleries will further increase. “When Sri Lanka Insurance is listed its market cap will be very large. When that gets consolidated with Distilleries, the value of Distilleries will go up.”
Also, DCSL’s gearing ratio will come down with the cash inflows, enabling the firm to reinvest the money in other profitable ventures and expand further while maintaining control of Sri Lanka Insurance.

“So we’re looking at a very fast growing, diversified conglomerate,” said Premawardhana. “They can grow much bigger than John Keells Holdings and other conglomerates.” Turnover and net profits of Distilleries is still lower than JKH but this year JKH’s growth is seen as stagnant, mainly because of the downturn in tourism caused by the impact of the tsunami.

“So the gap is narrowing between the two companies and soon Distilleries might be able to overtake JKH,” said Premawardhana. “Liquor is a cash cow. At the same time, telecoms – with their recent acquisition of Lanka Bell – generates a large stream of cash. The importance of generating cash is that it helps a company’s growth – the cash they generate from existing businesses will be channeled into the acquisition of new business.”

Lanka Bell, with its rollout of new CDMA technology phones, is taking advantage of the complacency of Sri Lanka Telecom which has not yet adopted the technology. SLT has a waiting list of 400,000 many of whom could switch over to Lanka Bell which has gained a competitive advantage over SLT with CDMA.

DCSL finance manager Damien Fernando said in a statement to the Colombo Stock Exchange the acquisition of 76.6 percent of Lanka Bell through DCSL subsidiary Milford Holdings adds telecommunications to DCSL’s diversification portfolio that already includes insurance, plantations and fabric processing through its subsidiary companies.

Harry Jayawardena was appointed chairman of Lanka Bell to represent Milford Holdings, and Suren Goonewardene the managing director. The others appointed to the board were Damien Fernandi, Royle Jansz and Prasad Samarasinghe. Other directors of Lanka Bell are Steven Baker and Jacqueline Ong Tee Yin.

DCSL also has significant interests in other sectors such as tourism, leisure, hotel holdings and hotel management, shipping, logistics, printing, power generation through its associate company Aitken Spence and Company.
Premawardhana of Lanka Orix Securities said Distilleries is looking at expanding further in tourism

“One short coming in their hotels portfolio is that they don’t have city hotels. So they may look at buying Hotel Developers, owners of the Hilton – that would be the real icing on the cake,” he said.

“Also, they might expand freight forwarding and transportation through their stake in the Aitken Spence group as transportation is one sector that is growing very fast.”

Other brokers said there was speculation Jayawardena was interested in hospitals. “At one time he was supposed to be eyeing Apollo and now Asiri,” said a broker. Rumours of such takeover interest saw shares of Asiri Hospitals rise last week.

Brokers said Distilleries cannot yet be called a diversified group because not all Jayawardena’s firms were in the holding company. They noted that Distilleries is a company that is usually perceived as being associated with one person rather than seen as a corporate entity.

“Jayawardena’s holdings are not very straightforward. He has a big network of companies with a lot of cross holdings. So it’s difficult to say what he owns.”

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