Financial Times

Ceylon Glass invests Rs 771m to expand capacity
Ceylon Glass Company Ltd. (CGC), Sri Lanka's sole manufacturer of container glass, plans to invest Rs 771 million for its expansion plans in FY 2006/07 under which it will reline its furnace and increase furnace capacity to 170 tonnes per day.

The company, owned by India's Gujarat Glass Company, estimates its net profit for 2005 would be Rs 200 million, CGC President and CEO Rajiv Prasad said. Given limited potential for growth in the local market, CGC plans to make a major foray into export markets after increasing capacity and is targeting the high-end boutique wine bottle market, first in India and then in Europe.

"We're aiming at niche markets," Prasad said. "We can do small batches of coloured bottles and we're already getting a huge amount of inquiries from the market." Prasad told a news conference CGC initially is aiming at niche segments in the Indian coloured wine container market and the south Indian coloured soft drink market.

CGC chairman, Vijay Shah, said the company has the advantage of being able to do small production runs and recently introduced new technology that allows it to rapidly change the colour of glass on one of its production lines without too much downtime.

"We can change colour from flint (clear glass) to amber in a few days," he said. "It is one of three plants in the world which can do that." CGC has installed colouring forehearth (CFH) technology which gives the firm the ability to have colour production runs without resorting to tank colouring which requires very large colour job sizes to make a run feasible.

It also makes it possible for the firm to have simultaneous colour production runs on the line equipped with the CFH in parallel with flint runs on the other two lines. Shah said the parent firm, Gujarat Glass, will use its international marketing network to get business for Ceylon Glass.

Funding for the capacity expansion will be largely through debt. Initially, Ceylon Glass will expand capacity to 120 tonnes per day from the current 108 tonnes.

Gujarat Glass plans to offer a 30 percent stake from its current 83.76 percent holding in Ceylon Glass to the public with NDB Investment Bank, formerly known as the Citi National Investment Bank, the financial advisor to the transaction.

NDB Investment Bank said CGC's profit margins have improved to 39 percent in 2004 from 22 percent. It said CGC paid high dividends in recent years but warned that this would change because of capital expenditure on increasing production and modernising the plant.

CT Smith Stockbrokers echoed the same warning saying in a recent research report that since returning to profitability in FY1999/00, CGC has over the past two years maintained a dividend payout of 88 percent.

"However, future dividend distributions will have an impact due to plant closure and subsequent high capital expenditure plant relining in FY2006/07." The brokers said that Ceylon Glass made a "remarkable" turnaround in profits subsequent to its acquisition by Gujarat Glass in 1999.

CGC has registered a 50 percent compound annual growth in net profits since 1999 whilst revenue has grown 16 percent a year compounded. The improving of efficiency and introduction of a more favourable price mechanism coupled with the expertise and size of the parent Gujarat Glass were the key factors attributed to the success of CGC, they said.

Demand for glass containers comes mostly from the beverage, food, pharmaceutical and cosmetics industries. The liquor and soft drinks segments lead in glass container volumes despite comparatively low margins.

The brokers said that "rationalizing" of container prices in line with world norms and strategically positioning prices marginally above the CIF value of imported products have led to considerable bottom line growth in Ceylon Glass in the past five years.

Sourcing of raw materials from Gujarat Glass's suppliers at lower prices, downsizing employment levels and introduction of productivity-linked remuneration has helped efficiencies in cost management, they said.

Ceylon Glass recently declared a one-for-one bonus issue and an interim dividend of 25 percent for the FY 2005. Its sales grew 22 percent in FY 2003/04.

It made net profits of Rs 187 million for the nine months ended December 31, 2004, in comparison to Rs.55 million in the comparative period the previous year and exceeding the full year's profit of the previous FY ended March 2004 by 67 percent.

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