Sharp gains from Pelwatte Sugar due to prices’ mismatch

Despite sharp decreases in the price of sugar in the world market, mainly during the nine months to September 2006, retail prices in the local market haven’t followed this global trend allowing companies like Pelwatte Sugar Industries to profit tremendously from this development.

The company's average selling price per kilogram of sugar for the financial year 2006 was Rs.39 per kilogram but with the retail prices of brown sugar somewhere between Rs.60 – 70 per kilogram during the first half of the financial year 2007, the company is expected to have enjoyed significantly higher prices during that period.

According to a report by CT Smith Stockbrokers (Pvt) Ltd, the company has an annual capacity of approximately 50,000 metric tonnes of sugar even though output averaged 40,578 metric tonnes for the past three years.

Pelwatte provides around 10-20% of Sri Lanka's total brown sugar market and imports all of its white sugar. It is also planning on diversifying away from sugar with ambitious plans to venture into dairy farming, eco-tourism and dendro power.

C.T. Smith says despite a 14% decline in its revenue in the second quarter of the current year to Rs.977 million, the company has ended up with a turnover for the first half of the financial year of just over Rs.1.3 billion. The net profit for this period is Rs.588 million which is a 47% increase when compared to the corresponding period for the last financial year. Even though the second quarter results have declined compared to the previous year, the company has seen an unexpectedly sharp 42% decline in the cost of sales from Rs.720 million to Rs.416 million. Consequently, the gross profit margins have improved from 37% in the second quarter of 2006 to 57% in the second quarter of 2007, and the net profit margins improved from 28% to 49% during the same period.

Earnings are highly seasonal due to the harvesting timetable of sugar cane so it is important to note that Pelwatte usually reports losses during the second quarter of the financial year, the report said. For example, the company reported a net loss of Rs.172 million of which Rs.69 million went for taxes in the second quarter of the financial year 2006.