The Sunday Times FT - Richard Pieris on aggressive expansion

The Richard Pieris Group is ready with its ‘forward integration’ plans with new ventures in furniture, construction and long term investment in the electronic media.

Pravir Samarasinghe, Director/ Chief Operating Officer, Richard Pieris Group spoke to The Sunday Times FT about its new investments and the economic situation in the country.

How has your growth been during the last quarter?
The performance was somewhat mixed, with some sectors performing exceptionally well whilst some lagged behind. Turnover grew by 32 percent and profit from operations increased by over 100 percent when compared to the corresponding period in the prior year. Our net profits had a “non-recovering, one-off gain” of Rs. 103 million when we sold a section of the Uva Plantations belonging to Namunukula Plantations (NPL). If this capital gain was deducted, then the growth would be somewhat flat. Retailing did extremely well and we are keeping our growth momentum as planned. Plantations have also done very well, supported by strong rubber prices and improvements in yields and productivity.

The disappointing side of performance came from the rubber value additions-mainly tyre re-trading and the rubber products manufacture for exports. In tyre, the main problem was the increase in the raw material prices, which we had not pushed through to the consumer. The tyre sector increased its turnover by 15 percent to reach Rs.227 and price increases and cost reduction initiatives have now been affected and improved performance is expected in the next quarter. We also had certain constraints in capacity, which has now been overcome and we are quite confident that in the next six months, the tyre sector will turnaround. The issues in the exports sector had been more complicated during the last quarter. Here again the increase in rubber prices drastically affected margins. To rectify this we have increased sales prices, but it had not been very easy. However, most of the customers have now responded positively. The next quarter will still be poor, but we expect the performance to turnaround in the last two quarters.

Why did you acquire Namunukula Plantations?
There were mainly three reasons. It added more rubber to our portfolio. It gives us a balanced crop mix where tea is concerned. Our interest was mainly in the up country teas and a little in mid country teas. NPL has a long stretch of low country tea and has a factory capacity to handle about seven million kilogram’s of low country tea. This enabled us basically to get control over the low country tea.

In addition to this NPL has a valuable real estate base in the southern belt of Sri Lanka from Matara to Galle to Kalutara, which borders the southern expressway.

Why did you sell Uva Plantations?
It was a very sick company when we took it over last year from a consortium lead by John Keells. It had a debt of nearly Rs.1 billion accumulated over the years. We purchased it with an idea of restructuring it both operationally and financially. A part of the financial restructuring of NPL was selling the six Uva Range of tea estates for Rs 400 million and recording a healthy capital gain. The proceeds from this disposal have been applied to reduce the debt levels of Namunukula Plantations. We are further looking at options of divesting the low yielding non core crops, which we feel does not support our long term goals.

What are the steps you’ve taken to turnaround the tyre sector?
We have implemented a number of measures from increasing capacities in mixing, rationalising operations to making changes in our management structure.

We intend reducing costs by temporary closing down a factory and rationalising the manufacturing activities. We are also focusing more and more on branding and end user loyalty.

What is the deal with Associated Motorways Ltd (AMW)? Why did you buy that stake?
At the time we acquired the minority stake of 20 percent, the company had a lot of value; it was undervalued and we felt it was a good buy. The company did well and I believe it continues to do well, especially in their small vehicle sector. We also sold it at the right time and booked about a Rs. 127 million gain.

Did you try to acquire AMW, given Dr. Sena Yaddehige’s penchant for acquiring companies?
We continuously look at opportunities to acquire companies which we feel have a value to us, a good fit and which compliments our organic growth plans. AMW had a fit with our company especially in the rubber related areas. However we considered this as a short term portfolio investment.

How badly hit are the exports by the rubber price increase?
The exports comprising rubber flooring, latex mattresses and pillows and shoe soling sheets continued to incur losses due mainly to the escalating rubber prices. This sector recorded a loss of Rs.53 million in the first quarter. Rubber prices increased by more than 70 percent during the past 12 months. We cannot immediately transfer all that to the customers, but to a great extent we have been successful in gradually revising sales prices on a staggered basis and we are confident of a total turn around from the second half of the year.

Already the flooring and shoe soles are making profits, but our latex businesses are yet to turnaround. However we are very positive on the latex business and are expanding our pillow capacity four fold.

Are you getting into hotels?
No. We looked at it about a year or two ago. We studied the industry a lot both in Sri Lanka and South East Asia. In hindsight we are happy that we did not invest in hotels.

What are the new investments?
We are looking at a few new investments in related areas. Retail is one area where we are bullish and will keep on expanding and will also evaluate opportunities in South Asia.

In the retail sector we plan to aggressively expand our Arpico super-centres. The format sizes will range from 40,000 to 70,000 square feet with plenty of parking. Our model is different from the other super market chains and independent operators. The current demographic and socio-economic trends are fuelling the growth and expansion in the modern trade which is mainly taking a share out of mum and pup corner grocers.

We will also study opportunities in countries such as Pakistan and Bangladesh.

Why not India?
The situation currently in India does not support foreign direct investment in this type of retailing. You cannot have a multi branded store there. Currently India allows FDI in single branded stores, such as Nike shops or a shop selling a single brand. They are also now encouraging their own people to come up with large scale retailing; So India is a difficult market.

What are the other investments?
In plantations we are sitting on a huge resource base and we will look at other opportunities in addition to the core crops. We have already started value addition to tea for export. We are gradually developing our St. Clair’s brand and hope to create another quality pure Ceylon international brand like Dilmah.

We have also looked at value addition to our timber. We started a factory with a Dutch party to export rubber wood furniture. The company is called Hamefa Kegalle (Pvt) Ltd. We started commercial manufacturing last month. We will make ‘antique’ look-a-like furniture with rubber wood. They are to be sold in Europe and North America.

We also acquired another furniture factory which was non-operational last month at Horana. Here we are looking at adding value to another variety of timber found in our plantations and exporting the furniture made out of this hard wood. We invested Rs. 25 million to buy the factory at Horana and will spend another Rs. 30 million to upgrade it.

What are your views on the plantation wages situation?
This will come in October. This is why you have to improve the yield and productively, and make good quality teas to increase margins to absorb the wage increase.

The wage increase will definitely have an adverse affect on your profitability.

Unfortunately the worker unions vehemently oppose the wage increases being linked to productivity, which is detrimental to the sustainability of the industry.

How will the fertiliser subsidy issue affect you?
The removal of the fertilizer subsidy has a material impact on our cost structure.

Already the regional plantation companies and the smallholders have been making representations to the government to reintroduce the subsidy to safeguard the industry and protect the livelihood of thousands of workers.

A reduction in fertilizer application, especially by the smallholders, has happened since the fertilizer prices increased and this has affected yields and the quality of tea. It is essential that the government re-considers their decision for the sustainable development of this strategic industry.

Why did you start a newspaper? Was it due to certain political ambitions?
No political ambitions. Our aim is to have a fiercely independent media. The Nation and Rivera are completely apolitical. We want to educate the people and be a voice in uniting the people.

Are you getting into television as well?
Not immediately, but other areas such as the electronic media also interests us. In the long term we could look at getting into the whole gamut of the media industry.

How is your construction business doing?
We have just gone into this new area this year and have plans to aggressively develop it. In addition to houses and commercial developments we will take up infrastructure development contracts also and have recently been awarded a large bridge and road works. At present we are evaluating venturing into the Gulf region where the construction industry is booming.

What are your views on the economy and the stock market?
Next year, we feel will be an extremely difficult year for the country in terms of the economy. Good weather has helped our agricultural sector and the services sector lead by telecom has also maintain the growth so far.

What has additionally cushioned our balance of payments has been the post tsunami debt moratoriums which will come to an end this year.

This coupled with the excessive expenditure on account of the ongoing military conflict and the deteriorating fiscal deficit will no doubt bring about higher inflationary pressures, higher interest rates and weaken the rupee.

Therefore I believe next year will be a very difficult year. This year things have been rosy so far on borrowed time and next year corporate results will also be affected because of the bad situation. It will definitely negatively impact the stock exchange.