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The Sunday TimesBusiness

30th March 1997




Bottom 10 gets index boost

The smaller companies in the Colombo Stock Exchange are now receiving international exposure with a new dedicated index being created by a securities trading house.

The companies with a relatively small market capitalisation comprising the bottom ten per cent of the market are included in the new 'Small Caps Index' of Jardine Fleming Securities.

"Small caps are an asset class of their own, like junk bonds in the US, " says JF Small Caps Analyst Avanka Herath.

"When investing in small caps, investors are trying to gain exposure to the rapidly growing but risky part of the economy".

The local index joins 12 other indices to make an Asian Small Caps Index as well. JF Research attempts to track the small caps that are under-researched from among the 2,500 listed small caps in Asia and find those companies that will double or treble their price within the next three to four years. The companies in the bottom are filtered to eliminate the illiquid stocks. There are 34 stocks in the local index for 1997, which is reviewed every year.

JF Research calls this the entrepreneurial sector.

"On the management side they are either at the entrepreneurial control stage or, at the upper end, close to the advent of the professional management stage."

These companies are considered to be able to respond more quickly to change and are capable of fining, exploiting and defending niches within the economic environment.

However most of these companies suffer from the classic entrepreneur's dilemma of making the business grow while retaining control.

Under the Asian system, based on a family oriented culture, the preference is to keep control within the family by turning family members into the leaders of the professional management stage of the company.

"The problems with this of course is that it is much harder to fire your brother or sister for making a blunder than it is to fire an outsider," JF Research says.

While the main advantage of small companies is that decisions can be taken and carried out quickly with minimal intermediaries between the decision-maker and the executioner, the disadvantage was that there may not be anyone to promote the other side of the argument and save the entrepreneur from making costly mistakes.

"That is why we believe the most important thing is the quality of the management." JF says.

The small caps index in addition to giving more exposure to the sector hope to give investors a realistic yardstick against which to measure their stocks, provide a benchmark for valuing small caps and enable investors to evolve a strategy for switching from big caps into small caps.

Though in 1996 local small caps have underperformed the market on the long run returns are high.

"From 1988 to 1995 Sri Lankan Small Caps have outperformed the All Share Index by 200 per cent," says Avanka Herath. (A. S.)


By Business Bug

Stocks and stakes

Despite last week's victory by the ruling People's Alliance, the expected surge in Colombo's stock market did not materialise.

The reason, many brokers say, is that foreign investors have been advised to hold on to funds, anticipating an investment with better yields - a remaining stake in privatised plantation companies.

The burning issue

Government may have banned scenes depicting smoking on TV, but it will also take action to stop cigarette smuggling, we hear.

The idea is to increase revenues from duty paid on cigarettes - estimated to rise by several billion rupees, if smuggling was minimised.

Therefore, tougher new penalties for cigarette smuggling are in the offing.

Call shock

A common complaint from business houses is that 'business is bad"

But none is feeling the crunch more than cellular network operators.

One network, in a bid to cut corners, now plans to levy interest charges on payments overdue from customers from April.

And the rate of interest - a whopping two percent per month!

Ah, look who's talking.

Investor optimism rising

Market Focus by Analyst

Renewed buying interest was evident with ASPI edging towards the phychological barrier of 650. The elections having been concluded with the victory to the ruling PA administration, all uncertainties upto to the elections would have disappeared. The CSM is expected to increase marginally with investor optimism gaining ground after the election.

The only obstacle is the April holiday season, which would result in more retail sales in the CSM which could depress price levels. Foreign investors were mainly on the buying side with the main focus being on blue-chip companies such as Aitken Spence/Commercial Bank and JKH. Institutional investors were mainly concentrating on Richard Pieris/Kotagala and COMB etc... This week witnessed substantial buying by institutional investors after a period of considerable inactivity to moderate activity, which is a plus point for the CSM.

It is expected the current attractive price-levels together with optimistic expectations of the economy will attract long-term investors in the coming weeks.

The weeks ahead will witness a surge of corporate performances made public for the financial year 96/97 as well as 1st quarter performances for December. Current forecast in EPS growth is indicated as an average of 8% for 1997. Interest rates could continue to decline and are expected to decline further.

In the war-front, the disappearance of the MI-24 helicopter is causing concern, as certain theories put out on this regard states that the helicopters may have been captured intact by the LTTE, which if found out to be correct, will definitely change the complexion of the war, with possibilities of aerial attacks and the resultant threat due to this factor could have an adverse effect on the economy as a whole, which would also adversely affect the CSM.

Recommended companies which are expected to appreciate in the coming weeks: COMB/Grain Elevator/UAL/Tokyo Cement (1:2 bonus)/Kotagala/Celinco Insurance/CTC.

Kick-start for economy after polls

Last weeks local govern-ment elections results which point to continued political stability in the medium term coupled with the second cut in statutory reserves in as many months have set the stage for a kick-start to the economy, analysts said.

The reduction of the reserve requirement of the Central Bank will release Rs 5.3 bn into the banking system translating into an estimated Rs 15 bn in loans for local businesses.

While this will help spur local investment there were still important factors clouding foreign investment.

"The possibility of a continuing drought in the next seven weeks and resulting power cuts are major concerns for foreign investors," says C. T. Smith Stockbrokers Research Manager Rajiv Casie Chitty.

"This would undermine growth in the next quarter."

The 2 percentage point reserve reduction follows a 1 per cent reduction in January.

"This could result in a drop of lending rates by 150 - 200 basis points," says Jardine Fleming analyst Azra Jafferjee. "This is what was needed to get the economy on the recovery path."

Bank of Ceylon General Manager Savithri Jayasinghe said a decision would be taken on lending rates on Wednesday.

Most local investors who have got tired of an almost permanent wait-and-see attitude were now becoming interested in investment again, though foreign investors were still very cautious.

"So this comes at an opportune moment," Ms. Jafferjee says. "But much will depend on how the gover-nment contains the budget deficit as government borr-owing is the main factor that affects interest rates here."

Interest rate stability therefore depended on substantial privatisation proceeds coming into government coffers, helping reduce dependency on market borrowings.

The Central Bank said the move was aimed at cutting reliance on reserves as a policy measure for monetary management.

Sri Lankan reserve requirements have been extremely volatile in the last two decades, ranging from a crippling 16 per cent to a benign 10 per cent in 1987.

"Historically reserves ratios seem to have moved up and down at the whims and fancies of the Central Bank," Ms. Jafferjee observed.

"But we have left behind the era of high reserve ratios."

Others however warn that the move could be a double-edged sword if the new loans do not result in productive investment.

"The Central Bank is gambling on the funds going into productive investment," says Socgen Crosby Securities Regional Econ-omist Arjuna Mahendran.

"If not, we run the risk of fuelling inflation."

At the moment the economy was being led by buoyant tea prices and an apparel sector enlivened by a surge in orders diverted from Hong Kong in the run up to its hand over to China, Mr. Mahendran said.

But there could be instability in the plantations in the medium term with recent polls showing a disenchantment with the CWC.

Foreign investors also tended to place a lot of emphasis on peace, with the PA administration being viewed as the promoter of the peace package.

"If something definite emerges out of the select committee proceedings foreign investor sentiment would improve," Mr. Mahendran said.

US trade team coming here

A US trade delegation would visit Sri Lanka coinciding with a American trade fair to be held in Colombo in May, an American Chamber of Commerce (AmCham) official said.

"This would be the second trade mission ever to visit Sri Lanka," AmCham President Spencer T. King said.

The AmCham has 150 members only a few of which are US companies. Most members are Sri Lankan businesses with interests or joint ventures with US firms.

The trade mission which would be made up of up to 12 members would have several companies with expertise in environmental technologies, Mr. King said.

The American trade fair is held for the third time in Sri Lanka.

This year the fair would have 50 booths. AmCham says 3000 visitors came to the last fair, and expect more to arrive this year.

"The trade fair is designed to increase awareness of American products and services, while providing an opportunity for new American firms to enter the Sri Lankan market," Mr. King said.

The trade fair would also have a hospitality suite where stall holders could confer with visitors helping build new relationships.

Sinhala, Tamil on web sites

The use of local languages on the Internet is set to expand with the introduction of a Sinhala and Tamil e-mail package to the market and the first Sinhala newspaper also to be put on the Web in the coming weeks.

The e-mail package has been jointly developed by Ceycom Global Communications and Microimage. Microimage is said to be active in the Sinhala word processing market.

Ceycom says it would further boost the presence of local language on the Internet by launching a Sinhala language newspaper on the Web, allowing not only local subscribers but expatriate Sri Lankans to read a Sinhala newspaper.

Any Internet subscriber in the world can read the e-mail even without the software package by downloading the fonts free of charge.

“The fonts are available at Ceycom and Microimage websites,” Ceycom Marketing Manager Romesh de Silva said.

“But you cannot make any changes to the message or compose new messages without installing our package.”

The package is priced at Rs 7,500. A multiuser package is alvailable for local area netwrokds for Rs 12,500.

Ceycom says the product has already been commissioned at several government and private sector organisations.

The new e-mail packages also come with a guide to the Internet in the two languages.

“This is like a help guide to use the Internet,” Mr. De Silva said.

He claims the products have been competitively priced to encourage the use of e-mail in local languages.

“By making the product accessible to the majority, Sri Lanka on the whole can benefit by using the system widely,” he said.

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