DIPPED Products has good half year performance

Dipped Products Limited made a commendable performance amid increasing wage costs and escalating international rubber prices with a net profit for the second half of 2006 up by 131 percent to Rs. 281 million, while the turnover was up by 39 percent to Rs. 4.7 billion.

Lanka Orix Stockbrokers Limited reported that the company’s Earnings Per Share(EPS) rose to Rs.4.69 per share compared to 2.03 for the same period last year.

“The large disparity in the growth rates is mainly due to the increased prices leading to a larger gross profit in real terms. The gross profit margins have reduced from 23 percent to 21 percent due to the increased rubber prices and the higher wage rate. However, the fixed element in the cost structure had improved the bottom line growth for the company along with many cost reduction initiatives that had been implemented within the period,” the report said, adding that the company had been able to reduce the finance costs considerably by repaying a part of the Interest Bearing Borrowings and more is expected to be repaid in the current year.

It said that Dipped products had been maintaining a highly geared capital structure over the past and the current rates have however come down during the fist half of the financial year. “The level of Interest Bearing Loans which have peaked in the last year as a result of the assumed liability of the acquired Hanwella Rubber Products Limited is being reduced and as such the finance costs are expected to return to the normal levels unless the Company involves in further loan capital,” the report further explained, adding that the company had already made a part provision for the wage increase. The report noted that the historical practice of the Company to take into account possible future wage hikes using the actuarial method of accounting.

The upward momentum in the prices (mainly rubber) which took its toll in the early period of the previous year geared by excessive demand coming from China and driven by speculation is still being maintained at the high levels.

“The reasons together have caused a reduction in the gross margins of the company but however Dipped Products is of the belief that if the Trade Union agrees to compensate high production costs with improved efficiency the ability to sustain the high profit levels into the future will be maintained,” the report said.

Although many international rubber-based product manufacturers, including Dipped products refrained from passing the costs to the end customers at first, the eventual realisation of the stagnated prices at high levels have induced output price revisions.“The move is reflected on the high revenue and profitability recorded in the results for the current financial year when compared to the previous year,” the report noted, adding that the Thailand operation of the company is still maintaining the “problem child” status with the losses maintained. It further said that the main reason for the persistent fall back in the performance could be attributed to many reasons.

“The Thailand operations are mainly concentrated on the Examination gloves market in the Medical Gloves segment. The product carry smaller margins due to the very nature of the product and thus is very sensitive to price and wage hikes. In addition the appreciation of the Thai Baht against the US$ had also made the Thai Manufactures gloves less competitive over time,” the report further explained.

Thailand as the world's largest producer and exporter of natural rubber provides the company with an ample source of raw materials and it is expecting to achieve a breakeven level in their operations in Thailand at least in the current financial year. “As such the company is investing heavily on promotional activities in Thailand,” the report said, adding that Dipped products recently acquired Hanwella Rubber Products Limited (HRPL) is becoming profitable mainly in the converted line.

It said that HRPL had two lines out of which one was converted by the company with an investment of over Rs. 20 million to manufacture non-medical gloves. “HRPL was mainly into the examination gloves market and the remaining line still manufactures the same,” the report said, adding that the company expects to convert second line as well in order to unify it with the other line within the course of next two year.

Although the decision is contingent upon the demand patterns, the non-medical gloves can reap higher margins and thus is more profitable. HRPL enjoys a tax holiday till 2011.