Financial Times

End to portfolio investments

The decision by Hayleys this week to sell off its 28 percent stake in Dimo’s, the motor vehicle company best known as agents for Mercedes Benz and Tata, has triggered discussion on the future of portfolio investments in companies here and across the world.

In Sri Lanka, portfolio investments became popular about 20-25 years ago as a means of balancing risk but in recent times – in line with global trends – companies are re-assessing this category of their business. Business analysts here said many companies were exiting from non-core business areas and concentrating on their core areas of activity, and in this context the Hayleys move is seen as a wise decision.

Hayleys has another problem, however. It’s short of capital and capital is hard to come due to the group’s shareholding structure. High interest rates makes borrowing too expensive while the group has resisted take-over bids in the past and is reluctant to bring in new capital from the market fearing a take over. High inflation costs and a rising energy bill which is hurting most of its manufacturing operations has been putting pressure on the company’s bottom line. The debt burden is also high.

The company, as revealed in the annual report, has been reviewing some of its operations and the Dimo exit is in line with this decision. However resisting a take over in the current environment where companies use internal funds to reduce costs and borrow from the market instead of expensive funding from banks is going to be one of the biggest challenges the company will face in the future. Stockmarket player Dhammika Perera’s foray into Hayleys this week set off rumours that he may be aiming to take a fair slice of the company. However these rumours were shot down by his investment advisor who said Perera wanted a 10 percent stake in Hayleys, nothing more.

Perera is generally seen as buying into companies and exiting after a while with a nice profit, which is what he is most likely to do in the Hayleys case. But the bigger picture in this week’s developments is that Sri Lanka’s corporate sector is facing a serious crisis of rising costs, demands on the wage bill and business uncertainty due to the fluid political situation.

While some small companies – particularly SMEs - are either downsizing or shutting down unable to operate in a costly environment, many of the bigger companies are selling off their non core businesses or reducing the liability. The first quarter results of listed companies in the Colombo bourse show a dismal picture of the economy and expected profits and reflects growing concern that the economy will face one of worst crises in recent times this year. Inflation has hit the roof and the government has discontinued the old Cost of Living Index which reached a record 30 percent last month. The new index is lower.

A few years back John Keells Holdings offloaded its restaurant business – Pizza Hut and other ventures – while lately the Richard Peiris Group (RPC) is looking to exit from loss-making ventures in the organisation. Recently it sold its media business – which include the Nation and Rivira newspapers – after mounting losses in a non core business venture made it unbearable on RPC’s bottom line. Company chairman Sena Yaddehige has been scouting around for a buyer for the group barring its profitable ventures like plantations but the huge debt has been a deterrent at least for two parties who showed some interest.

Aitken Spence is putting its money where its mouth is – core business of leisure and travel. Its huge expansion into India, the Middle East and Seychelles in a mix of management and part-ownership in the leisure business is certain to pay off just as the hotel sector gets virtually ‘killed’ by the number of empty rooms in resort hotels.

In Colombo alone, the five-star hotels are struggling to break-even with low occupancies and recently were infuriated by a ruling to restrict guests during the SAARC summit in July in Colombo.
Spence’s Maldivian properties have been the lifeline to the company, raking in the profits and helping to keep their loss-making Sri Lankan hotel operations afloat till the tide turns in a topsy-turvy industry.

The same applies to John Keells which is also benefiting from its Maldivian properties to sustain local leisure activities. In the current environment of political and business uncertainty, it is most likely that many companies would walk away from non core activities as soon as a buyer is found just like in the Hayleys case and re-direct all their resources and energies into core areas of business.

“We are constantly reviewing portfolios to see whether there is a need to exit or not,” said the head of a Colombo conglomerate. That’s for sure happening and will haunt many companies as costs rise and business uncertainty continues.

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