Financial Times

Sierra Cables IPO to raise funds for expansion, exports
Sierra Cables Limited, the only forward integrated cable manufacturer whose ownership by a construction and engineering group will assure it greater sales, is to use funds raised from its forthcoming initial public offer to increase production for both the local and export markets.

“We plan to take on about 20 percent of Ceylon Electricity Board’s (CEB’s) cable requirement during next year, because the CEB is poised to expand rapidly with the expected ADB funding,” a company spokesman said.
Last year, the Company recorded revenues of Rs. 753 million, which represent a growth of 28 percent over the previous year. Revenue growth during the preceding years is representative of the Company’s consistent year on year revenue growth trend over the past five years.

Bartleet Mallory Stockbrokers has forecast the firm’s gross profit will rise by almost 50 percent to Rs. 213.53 million this financial year, supported by strong demand owing to a local construction boom and potential exports to India.
The IPO, which opens on October 26, will see the issue of 200 million shares at three rupees each to raise Rs 600 million.

“The overall growth potential for the cable industry is quite high,” said Bartleet Mallory Stockbrokers. “Growth potential is clearly evident as the construction sub-sector has grown by 5.8 percent in the second quarter of year 2005.”
According to the Ministry of Housing and Construction, the shortage of houses is around 400,000 and this figure is expected to rise to 650,000 units by the year 2010, supported by growth in housing loans.

“This would lead to the construction industry benefiting which in turn will benefit the cable sector,” the brokers said in a research report. “With the demand for apartments rising at a great pace, growth potential for the PVC category of cables remains high.”

Other factors driving demand include tsunami re-construction which is expected to generate a short term boost to the PVC cable sector with almost 109,000 houses estimated to be destroyed and growth potential in the north and east.

Growth potential in the power industry is also great with demand for electricity rising faster than generation and only 68 percent of the population having access to electricity.

Also, Indian demand for EWW (Enamelled Winding Wire) used mainly for electrical devices, is estimated to be 65,000 MT a month. “With the Free Trade Agreements Sri Lanka has signed with India and Pakistan, the country has the advantage to export cable products to these nations free of duty,” Bartleet Mallory Stockbrokers said.

“With the Indian economy growing at a fast pace and since the import duty for cables in India is high, Sri Lanka stands to benefit a great deal.” The Sierra Group is a conglomerate consisting of over 18 companies in over six diverse business sectors: construction and engineering, consumer electronics, cables, leisure, property development and fertilizer. The Group has a 37 percent stake in Central Industries, a company involved in manufacture of PVC pipes and fittings.

Being part of the Sierra construction group provides great synergies in the institutional sales segment. Owing to production constrains the company has been able only to satisfy a small portion of the total cable requirement of the Sierra group.

The cable arm of the group consists of Sierra Cables and Alucop Cables, a B.O.I approved cable-manufacturing company, and they make and market a range of copper and aluminium cable products under the Alucop brand. Sierra Cables has a wide dealer network within Sri Lanka and has also received certification to manufacture cables to meet the growing cable demand from India.

From the proceeds of the IPO, Sierra will invest around Rs. 250 million to increase the company’s product offering within the telecom cable segment, invest Rs.100 million to increase its product offering to the power cable segment and use the balance Rs. 250 million for working capital purposes. Irugalbandara said the expansion will support about 50 percent more capacity of their cable manufacturing strength.

The cable industry consisting domestically manufactured cables and certain imported cable products, is worth about Rs. 600 million and has a 10 percent annual growth rate.

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