Financial Times

Lanka Tiles mulls factory in Bangladesh
Floor tile manufacturer, Lanka Tiles Ltd., is thinking of setting up a production plant overseas, most likely in Bangladesh, in order to be able to source cheaper sources of energy because of rising power costs here. The company, a subsidiary of Lanka Walltile, also expects the final phase of its recent capacity expansion to come on stream by June.

"We're looking at the option of putting up a plant overseas," said Lanka Tiles managing director Mahendra Jayasekera. "We have to look for cheap energy supplying countries. This is an energy intensive industry and energy prices are expected to go up in future. So energy supplying countries have a huge edge over other countries."

The company has been exploring the possibility of setting up a tile factory in Bangladesh although Jayasekera stressed that nothing had been finalized yet. "We're looking at a plant in Bangladesh. We have been making inquires and have done preliminary studies," he said. "The market is very promising - energy is cheap, labour is cheap, and the market is huge."

The main sources of energy for the company are electricity and Liquid Petroleum Gas and energy costs contribute to around one-third of total production costs, according to CT Smith Stock Brokers. Lanka Tiles, which manufactures and sells glazed ceramic floor tiles, sees prospects in Bangladesh as promising although there was some recent political unrest.

It is looking at setting up a plant having a capacity of about 4,000 square metres a day with an initial investment of around Rs 600-700 million, which probably would be funded through internally generated funds. "One advantage we have in Bangladesh is that our brand is well known as we have been exporting to Bangladesh," said Jayasekera. "So we don't foresee difficulties in penetrating the market."

The company believes that by making tiles in Bangladesh itself it could avoid high import taxes that make imports uncompetitive, especially against cheap imports of Chinese tiles which come in at low invoice values to Bangladesh.

Lanka Tiles is right now at the tail end of its latest expansion phase having spent Rs 150 million on increasing output last year. The total cost of the overall expansion in capacity by 40 percent is Rs 550 million. The firm expects to have a capacity of 7,500 square metres a day by June. It exports about 15 percent of its total output, mainly to Australia.

Tax concessions granted to the new production unit of the company has allowed Lanka Tiles to benefit from the reduction in the effective tax rate. "The 40 percent expansion attracted tax free status. We imported machinery. Profits from that expansion is tax free," said Jayasekera.

The output of the unit is tax-free for a period of five years, CT Smith Stock Brokers said in a recent research report on the company. Lanka Tiles would also be enjoying concessionary rates of taxation after the tax holiday period lapses.

The lower effective taxation has boosted earnings with Lanka Tiles reporting a 23 percent increase in revenue for the first nine-months of FY2004/05. Profits attributable to shareholders increased 14 percent to Rs.106 million. The stock brokers said Lanka Tiles has managed to increase profits despite higher production costs. Costs of energy and imported raw materials have increased appreciably, it said.

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