2
Executive summary
According to International
Standard Industrial Classification
FMCG - Products that are sold quickly
and at relatively low cost
Personal
Food Beverages Other
Hygiene
Retail
Food & Beverage is the biggest component of FMCG and is expected to be a growth driver in years to come. Within
F&B, we are bullish on the demand side dynamics for dairy products such as fresh milk, ice cream and yoghurt, as well
as meat products such as chicken and processed meat. However, in both the above segments, there are supply
constraints that would need to be ironed out, in order to obtain the full benefit of burgeoning demand. In addition, we
are also bullish on the growth potential for biscuits and chocolates.
We are slightly less optimistic on the trajectory of non-alcoholic beverages such as carbonated drinks and cordials. We
estimate that demand will continue to grow for bottled water, but do not expect any player to reap significant benefits,
due to the current level of market fragmentation. In terms of alcoholic beverages, we expect demand to be stable for
hard liquor, with rising income and tourism offsetting the impact of high taxes and competition from illicit liquor. We
estimate that demand for beer could rise significantly in future, if current tax policies are revised.
In terms of other segments of FMCG, we are pessimistic on the trajectory for conventional cigarettes, based on recent
sales trends, restrictive government policies and the growth in the beedi market. However, we are bullish on the
potential for retail (with specific emphasis on modern trade), due to expected increase in penetration, supportive
government policies and focus placed by foreign investors.
4
Contents
Macro-economic context
Contribution of FMCG to the economy
5
Macro-economic overview
FMCG contributes to >20% of Gross Domestic Product & 18% of employment
Contribution to GDP Sri Lanka
23.2% 23.2% 22.0%
2,500,000 21.0% 21.5% 25.0%
2,041,505
2,000,000 1,758,479 1,909,780 20.9% 20.0%
1,518,628
1,500,000 1,206,456 15.0%
1,014,432
1,000,000 10.0%
500,000 5.0%
2009 2010 2011 2012 2013 2014
Total expendiuture on Food, Beverage and Tobacco (LKR Mn) Contribution of FB and T to GDP
Food, Beverage and Tobacco sectors recorded a Compound Average Growth Rate of 15.0% between 2009 -2014. In terms of supply
side factors, the industry has consistently contributed to ~50% of industrial value added and (along with retail), close to 20% of
employment.
China
FMCG market (2010) $952 Bn
FMCG % of GDP 16.0
Pakistan HH Consumption % of GDP 32.7
FMCG market (2010) $41.4 Bn
FMCG % of GDP 23.3
HH Consumption % of GDP 49.2 Bangladesh
FMCG market (2010) $38.6 Bn
FMCG % of GDP 31.6
HH Consumption % of GDP 47.8
Thailand
FMCG market (2010) $57.5 Bn
FMCG % of GDP 18.0
HH Consumption % of GDP 36.3
India
FMCG market (2010) $268.8 Bn
FMCG % of GDP 27.8
HH Consumption % of GDP 56.4
Vietnam -
FMCG market (2010) $30.8 Bn
FMCG % of GDP 27.3
HH Consumption % of GDP 42.3
Sri Lanka
FMCG market (2010) $ 10.9 Bn
FMCG % of GDP 21.8
HH Consumption % of GDP 52.6
Note : HH - Household 7
Source: World Bank, Economy Watch
Macro-economic overview
Key factors that drive the FMCG sector
DEMAND
LOCAL FOREIGN
Supply
LOCAL FOREIGN
Modern trade vs
Resource Import trends
General trade
availability/constraints Currency effect
Capacity utilization
Regional distribution
exchange rates
network
8
Macro-economic overview
Population growth is slowing; SL has one of the lowest growth rates in region
Population - Sri Lanka
22,000 20,715
20,201
19,526
20,000 18,784
18,248
18,000 17,331
16,000
14,000
1990 1995 2000 2005 2010 2015
0.4
1980/81 1985/86 1990/91 1995/96 2002 2005 2006/07 2009/10 2012/13
Kingdom
India
Bangladesh
Sri Lanka
Pakistan
Norway
Thailand
Malaysia
Indonesia
Australia
United States
United
Source: Department of Census and Statistics, World Bank 12
Macro-economic overview
Better income distribution is vital for future growth of FMCG
300%
243.1% Expenditure trend based on income decile
300,000 250%
161.6% 200%
200,000 174,376
127.9% 119.7% 150%
113.9% 106.7% 102.7% 94.2% 91.1%
59.4% 100%
100,000
40,582 50,641 68,362
18,963 23,588 28,292 33,599 50%
6,700 13,790
0 0%
0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% 91-100%
8,000 7,237
80%
6,005
6,000 61.2%
56.1% 55.4% 5,195
52.4% 49.1% 4,714 60%
4,271
4,000 3,521 3,861
2,842 3,123 40%
2,431 46.4% 43.0%
39.2%
2,000 33.7%
20%
23.0%
0 0%
0-10% 11-20% 21-30% 31-40% 41-50% 51-60% 61-70% 71-80% 81-90% 91-100%
F,B & T expenditure per capita F,B & T expenditure as a percentage of total expenditure
Despite revenue per tourist night increasing significantly between 2010 and 2015, expenditure on food and beverages per tourist night
remained stagnant. However, total expenditure on G&S increased mainly due to growth in tourist arrivals.
Source: Sri Lanka Tourism Development Authority, World Travel and Tourism Council 14
Macro-economic overview
..but a tourist profile similar to Thailand would amplify growth further
Tourism expenditure Thailand (Jan-June 2015)
Total Total Total Total Total Total
$172 $113 $134 $170 $168 $148
F&B F&B F&B F&B F&B F&B
200 30%
$32 $25 $30 $27 $32 $28.50
180
25%
160
140
20%
120
100 15%
80
10%
60
40
5%
20
- 0%
New Zealand
Saudi Arabia
India
Total
United Kingdom
East Asia
Russia
Sri Lanka
Oceania
South Africa
Germany
USA
South Asia
China
Canada
Europe
France
Australia
Middle East
Africa
The Americas
Despite earning slightly lower than Sri Lanka in terms of total tourist income per night ($148 vs $162), Thailand attracts tourists who spend
more on F&B on average than tourists visiting Sri Lanka ($28.5 vs $17.8). Chinese, Indian and Australian tourists spend ~$170/day. Tourists
from key European destinations are more thrifty (average total expenditure of $113/day), but still spend $25/day on F&B.
Industry forecasts
Key assumptions used
16
Industry forecasts
Slow population growth, rising incomes & lower disparity expected
Key assumptions used 2015 2020 CAGR
Domestic indirect
Indirect spending as % of direct 7.5% 10% N/A
spending cafes and spending
restaurants
Total foreign guest nights (Mn) 17.6 32.7 13.2%
Tourist spending
F&B spend per guest night 2,419 3,236 6.0%
(LKR)
Note D/D Domestic direct expenditure on F,B&T 17
D/I - Domestic indirect expenditure on F,B&T (hotels, cafes, restaurants etc.)
T - Tourist expenditure on F&B
Industry forecasts
The sector is expected to expand by LKR 1.5 Trillion in the next 5 years
Forecasted expenditure on F,B & T 2015 - 2020
D/D 2,295 D/D 2,502 D/D 2,727 D/D 2,973 D/D 3,243 D/D 3,537
D/I 172 D/I 200 D/I 232 D/I 268 D/I 308 D/I 354
T 43 T 50 T 59 T 69 T 86 T 106
3,996
4,000 3,637
3,018 3,311
Billions
2,510 2,752
3,000
2,000
1,000
-
2015 (f) 2016 (f) 2017 (f) 2018 (f) 2019 (f) 2020 (f)
Non-alcoholic beverages
Alcoholic beverages
19
Outlook F&B
F&B is the most significant contributor to the FMCG sector
Monthly per capita consumption of key items
2006/07 - 2009/10 - 2012/13 - CAGR - F&B spending per capita has almost
Item
LKR LKR LKR (06 -12) doubled between 06/07 & 12/13.
F&B 2,211 3,439 4,177 11.2% However, growth has been lower than the
non-F&B segment of FMCG such as
Non-F&B expenditure on personal care and
111 161 225 12.4%
FMCG household cleaning and sanitary goods.
Nevertheless, the F&B segment accounts
Non-FMCG 3,276 4,233 6,225 11.3%
for over LKR 2 Trillion, which is ~95% of
Total 5,598 7,833 10,627 11.3% total household expenditure on FMCG.
95.52% 94.90%
95.20%
Transport &
5.0% 5.1% 4.9% 5.9% 7.1% 9.0% 10.5% 9.8% 10.4%
communication
As Sri Lankas real income levels have grown and mean household income relative to expenditure has expanded, citizens have focused
more on spending on aspects such as housing, transport and communication etc. at the expense of F&B and Liquor & Tobacco. This is in
line with Engels law which states that as income rises, the proportion of income spent on food falls, even if actual expenditure on food
rises.
40,000
13.3% 12.8% 13.9% 12.7% 20.00%
8.7% 8.5% 20.1%
20,000 11,307
5,977 10.00%
3,819 2,052 1,582 1,317
0 0.00%
Australia Singapore USA Canada Germany United New Malaysia Thailand Sri Lanka Vietnam India Pakistan
Kingdom Zealand
30,000 23,954.50
35.00% 15%, whilst in emerging markets, the
20,000 13,993.20 ratio is usually above 25%.
30.00%
10,000
However, with rising income in Sri Lanka,
25.00%
relative expenditure on dining out has
0 20.00% increased to 2.4% in 2014, compared to
1980 1990 2000 2010 2014 1.5% in 2009. This trend is in line with
Per capita income Eating out as a % of total food expenditure the US market and will indirectly
contribute to FMCG volumes.
Central Province 2
Population 2.6 Mn
Per capita food consumption Rs. 3,876 Eastern Province 6
Food as % of expenditure 39.8% Population 1.6 Mn
Total food consumption Rs. 117.2 Bn Per capita food consumption Rs. 4,139
Food as % of expenditure 53.6%
Total food consumption Rs. 76.0 Bn
Western Province 1
Population 5.9 mn
Per capita food consumption Rs. 4,531
Food as % of expenditure 31.1% Uva Province 9
Total food consumption Rs. 308.8 Bn Population 1.3 Mn
Per capita food consumption Rs. 3,381
Food as % of expenditure 44.5%
Total food consumption Rs. 50.3 Bn
Sabaragamuwa Province 5
Population 2.0 Mn
Per capita food consumption Rs. 3,586 Southern Province 4
Food as % of expenditure 42.1% Population 2.5 Mn
Total food consumption Rs. 81.8 Bn Per capita food consumption Rs. 3,747
Food as % of expenditure 39.1%
Total food consumption Rs. 109.3 Bn
Household food expenditure % of food expenditure Due to the high base, the rural
Main Food Item sector contributed to ~73% of the
Urban Rural Estate Urban Rural Estate
Cereals 2,375 2,578 4,142 12.56% 17.19% 28.31% growth in total household spend
of F&B, between 06 and 12.
Prepared food 3,168 1,518 827 16.76% 10.12% 5.65%
Rural consumption is focused
Fish 2,134 1,323 559 11.29% 8.82% 3.82% mainly on cereals (with a higher
Milk & milk food 1,858 1,293 1,268 9.83% 8.62% 8.67% per capita consumption than
Condiments 1,550 1,387 1,420 8.20% 9.25% 9.71% urban sector), compared to urban
Vegetables 1,394 1,259 1,180 7.37% 8.40% 8.07% consumption that is dominated by
Others 6,428 5,637 5,234 34.00% 37.59% 35.78% prepared food.
F&B share of wallet 65.0% 57.6% 60.9% 54.4% 44.5% 39.6% 37.6% 42.3% 37.6%
consumption
118
108
100
(FAO), there is a correlation between per capita
86
81
80
79
100
76
76
12
12
7
Indonesia
South Korea
Thailand
Japan
Pakistan
Sri Lanka
Malaysia
Source: Department of Census and Statistics, Presidents Media Division, Sunday Times 26
Outlook F&B (Dairy)
The Dairy industry relies heavily on imports: USD 340 Mn import bill in 2014
Despite local production growing at a CAGR of 10% since 2005,
the local dairy industry can only satisfy ~30% of total demand
today, compared to 80% self sufficiency in the 1970s
Local production vs Imports 2005 - 2014
800.00 656 684 704 40.00%
639
600.00 518 551
469 475 474 30.00%
402
400.00
184 205 230
125 138 20.00%
200.00 100 113 121 117 144
- 10.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Local milk Collection (l millions) Total milk imports - LME (l millions) Local collection ( %)
Milk collection as % of local production Key reasons for low self sufficiency in the Dairy sector
Low productivity of cows Local cows produce an
100.0% EU average (2014) 93% average of 1-4 litres per day, compared to 40 l/day in
Europe, Australia and New Zealand.
80.0% Sri Lankas collection to production ratio remains low
59.8% 61.3% one reason is the relative isolation of many farms , but
57.7% 56.3% 55.6% 55.6%
60.0% 52.0% 53.6% also the mismatch of milk collecting & chilling facilities
islandwide (e.g. Ampara & Jaffna have high collecting
40.0% capacity but low chilling capacity. Galle & Matara have
2005 2006 2007 2008 2009 2010 2011 2012 high chilling but low collection capacity).
Lack of refrigeration facilities in rural households has
resulted in high demand for milk powder vs fresh milk
With such a high import dependence, we dont expect Sri Lanka to achieve the governments stated target of self-
sufficiency by 2020. However, this may be achievable in the long term, if focused investments are made by the
government in collaboration with the private sector
Note : LME Liquid Milk Equivalent 27
l millions Millions of liters
Source: Financial Times, Department of Animal Production and Health, Business Today, European Commission
Outlook F&B (Dairy)
Local production affected by stagnant cattle population & capacity mismatches
Livestock statistics 2004-2015
540,100
501,403
11 year CAGR 0.68% p.a.
600,000
500,000
400,000
300,000
200,000
100,000
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Financial Times, Department of Animal Production and Health, Business Today, European Commission 28
Outlook F&B (Dairy)
But demand side dynamics are strong; 5 year volume CAGR of 4.9% forecasted
Current demand Expected demand
2015 (LME) 2020 (LME) Sri Lankas per capita milk availability is
significantly lower than the global average of
934 mn 1,186 mn 104 litres p.a. (Indias availability is 106 litres
p.a.) However, per capita availability is above
the WHOs minimum dietary requirement of
Population - Volume Population -
36.5 litres p.a. and has improved from 31 litres
20,715,010 21,556,974
Availability - CAGR - Consumption -
p.a. in 2005 (10 year growth of 45%) to 45
litres p.a. in 2015.
45 litres p.a. 4.9% 55 litres p.a.
Successive increases in farm-gate price for fresh milk, will affect margins of downstream players (that utilize fresh milk/milk powder
as a raw material). At the same time, controlled prices for milk powder will result in downstream players benefitting during periods
of increased world market prices (e.g. 2013) but also being unable to get the benefit of depressed world market prices, as in 2015
(when the world Skimmed Milk Powder prices dropped 39%, but local prices were reduced by only 14%).
2006/07 - Rs 2006/07 - % 2009/10 Rs. 2009/10 - % 2012/13 Rs. 2012/13 - % 6 year CAGR
Milk Powder 156.0 80.2% 213.9 79.0% 295.6 79.1% 11.2%
Fresh milk 3.7 1.9% 7.5 2.8% 10.0 2.7% 18.2%
Ice Cream 9.3 4.8% 13.0 4.8% 15.9 4.2% 9.3%
Yoghurt 6.6 3.4% 11.8 4.3% 21.5 5.8% 21.8%
Butter 3.1 1.6% 4.2 1.6% 4.8 1.3% 7.7%
Cheese 2.5 1.3% 2.8 1.0% 4.3 1.1% 9.2%
Others 13.3 6.9% 17.5 6.5% 21.5 5.7% 8.3%
Total 194.5 100.0% 270.6 100.0% 373.6 100.0% 11.5%
Fonterra Brands Sri Lanka is dominant in the Sri Lankan milk powder market. Its Biyagama Powder Plant employs
about 250 people who pack approximately 475,000 packs of milk powder each day (which translates to over
5,000,000 kg of milk powder each month). The products marketed under Fonterra including prominent local brands
such as Anchor, Raththi, Anlene and Pediapro.
Published figures indicate that Fonterras market share is about 60% of the milk powder market. A further 30% or so
of the market is controlled by Lakspray (Lanka Milk Foods) and Nespray (Nestle) which are mainly imported from
New Zealand and Maliban milk powder which is imported from Australia. Of the local milk powder brands, Highland
commands close to 10% market share, with smaller shares being accounted for by Milgro and Pelawatte.
However, Fonterra also procures milk from Sri Lankan farmers and currently has five chilling centers that processes
milk provided by 7,000 farmers. As part of its expansion drive, Rs. 380 Mn has been invested by Fonterra in the past
two years, with plans for a further five chilling centers to be set up by 2017. In addition, Nestle too procures fresh
milk from 20,000 farmers and is believed to be the largest private sector milk collector in Sri Lanka
Source: Department of Census and Statistics, Daily Mirror, Sunday Times, http://www.nestle.lk/ 30
Future outlook -
Outlook F&B (Fresh Milk) positive
Fresh milk is economically viable, but is affected by low refrigeration penetration
1,000 Retail prices of fresh milk and milk powder 949
812
751 741
800 685 662 709
647 641
586 599
600 506 535 552
473
391 401 396
400 283 318
200
-
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Washing
17% Sri Lanka USA England India
machines
On an equivalent milk liter basis (assuming a conversion factor of ~8 times, between milk powder and fresh milk), the retail price of fresh
milk is cheaper than milk powder, One reason is due to protectionist measures imposed by the government to protect the local industry
(e.g. import duties on milk powder was gradually increased from Rs. 92/kg in 2012, to Rs. 235/kg in 2015). However, as quoted by
industry experts, the lack of adequate refrigeration penetration in Sri Lanka has been a major barrier for growth in the fresh milk
industry. Another significant barrier is the low preference shown by children, for consumption of fresh milk, according to a study
conducted by the University of Peradeniya.
(5) 0.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Department of Census and Statistics, Canadian Dairy Information Center, Food and Agricultural Organization 32
Future outlook -
Outlook F&B (Ice Cream) positive
Double digit growth in ice cream; further growth potential exists
25.00 Per capita ice cream consumption 2014 Despite lagging behind Asian
20.84 countries in the past, Sri Lankas
20.00
(Litres/annum)
per capita ice cream consumption
15.76
is now on par/ahead of regional
15.00 12.20 peers, but is still below the world
10.00 7.74 average.
World average 2.77 liters/annum
5.00
2.17 2.00 1.54 1.51 0.55 0.46 0.18
-
New Zealand Australia United States United Malaysia Sri Lanka China Thailand Vietnam Indonesia India
Kingdom
60,000,000 2.50
Sri Lanka Ice cream market
2.00
2.00 Country Take home (%) Impulse (%)
40,000,000
1.22 1.50 United States 94% 6%
Australia 85% 15%
0.80 1.00 New Zealand 77% 23%
20,000,000 41,542,000
United Kingdom 70% 30%
25,000,000 0.50
15,886,400 Sri Lanka (e) 65% 35%
Malaysia 45% 55%
- -
India 27% 73%
2006 2009 2014
China 24% 76%
Total market - litres Per capita ice cream consumption Thailand 7% 93%
Sri Lankas ice cream market is dominated by take home ice cream, similar to developed markets, but contrary to the trend of other
regional peers. Based on our opinion, this is due to the lower focus placed on impulse ice cream by Ceylon Cold Stores (CCS) which
is one of the 2 dominant players in the country. However, going forward, this trend is expected to change due to higher focus by
CCS, tourism related demand etc.
Millions
Meat consumption in Sri Lanka
200 192 190 9.50
183
9.32 9.00
180 9.16
160 8.94 8.50
160 8.00
142
134 136 134 7.50
140 7.69
124 122 7.00
120 6.86
6.32 6.13 6.71 6.74 6.50
6.57
100 6.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total meat consumption Per capita meat consumption
The post war CAGR (2009-2014) of meat consumption was at 7.2%, which was significantly higher than global average growth in
meat consumption of 3%. However, meat consumption in India (where 1/3rd of the population is vegetarian) grew at a slightly
higher pace of ~8.4% during the period. SLs consumption still lags behind most Asian peers, thus indicating the potential for
growth (e.g. if Sri Lanka achieves Thailands level of per capita consumption, volumes would increase by over 200 Mn kg).
Source: Department of Census and Statistics, Organization for Economic Co-operation and Development 34
Outlook F&B (Processed Meat)
Despite health concerns, processed meat has been a growth driver
Household consumption of sausages
and meatballs 1,222,989
1,250,000 80.0
1,000,000 931,737
846,630 60.0
750,000 59.9
46.9 40.0
500,000 41.4
20.0
250,000
0 0.0
2006/07
1 2009/10
2 2012/13
3
Processed meat (e.g. bacon, sausages, ham etc.) has been modified to either extend its shelf life or change the
taste and the main methods are smoking, curing, or adding salt or preservatives.
According to a report by the World Health Organization in 2015, processed meat is carcinogenic consumption
of 50g of processed meat a day (less than 2 slices of bacon) increased the chance of developing colorectal
cancer by 18%. According to Cancer Research UK, 3% of all cancers are ascribed to red and processed meat,
compared to 19% in the case of tobacco.
However, according to a separate study, the global processed meat industry will continue to grow from USD 362
Bn in 2012, to USD 799 Bn by 2018, despite such concerns. Key demand drivers globally would be population
growth, rising incomes in Asia and increased urbanization.
Source: Department of Census and Statistics, Canadian Dairy Information Center, British Broadcasting Corporation 35
Future outlook -
Outlook F&B (Chicken) positive
Chicken is dominant, partly due to economical viability
1250 1,139
Chicken as % of total Retail price per kg
Country
meat consumption 1000 Chicken prices have been
Sri Lanka 78.5% controlled by price caps
Malaysia 77.0% 750 imposed by the govt. 694
Indonesia 58.9%
India 56.3% 497 478
500 382 410 420
New Zealand 49.9% 365 332
USA 49.4% 210 214 220
Australia 43.9% 250
Thailand 39.4%
EU28 33.3% 0
Vietnam 24.8% 2005 2009 2014
China 22.9% Beef (without bones) Mutton (with bones)
Pork Chicken (Ordinary)
(+) Imports 2,098 479 1,200 2,617 990 1,236 1,952 845 352 354 17.9%
(-) Exports 1 5 55 223 608 2,310 1,812 970 1,524 1,965 132.2%
Total
availability 88,367 85,724 101,205 104,894 99,661 103,086 116,900 137,265 143,368 148,709 6.3%
Source: Department of Census and Statistics, Sunday Times 36
Future outlook -
Outlook F&B (Chicken) positive
.. but per capita chicken consumption is low, indicating room for further growth
Australia
USA
Vietnam
Sri Lanka
EU28
Thailand
India
New Zealand
Indonesia
consumption increasing to 232
Mn kg (3 year CAGR of 15.6%)
Poultry producers have difficulty in insuring against poultry diseases since such coverage
is currently limited in Sri Lanka (Hence, poultry producers need to focus on implementing
Source: Department of Census and Statistics, Department of Animal Production and Health 39
Future outlook -
Outlook F&B (Biscuits & Chocolates) positive
Strong market for biscuits; chocolate consumption is also picking up
Sri Lanka Biscuit consumption 2006-2013 9.5 Per capita biscuit consumption -2012 (kg)
50,000 48,738 2.50 Sri Lanka has one of the higher
45,000 43,492 2.40 5.7 5.4 per capita consumption levels
2.45 5.3
for biscuits, in South Asia
38,141 2.30
40,000
2.20 2.5
35,000 2.4
2.10 1.1
2.14 1 1
30,000
2.07 2.00
25,000 1.90
Malaysia
Australia
Thailand
Sri Lanka
United Kingdom
United States
India
Pakistan
Indonesia
20,000 1.80
2006/07 2009/10 2012/13
Total consumption - MT
Per capita consumption (kg/annum)
Source: Department of Census and Statistics, Ceylon Cold Stores, Sunday Times, Business Today 41
Future outlook -
Outlook F&B (Hard Liquor) stable
High alcohol consumption in SL; but mainly dominated by illicit liquor
15.1 Per capita pure alcohol consumption - 2010 Alcohol consumption in Sri
16.00 Lanka is driven heavily by the
12.2 11.6 illicit alcohol segment, where
3.6 10.9
12.00 9.2 per capita consumption is one
1.8 1.2 8.4 of the highest in the world.
1.6 0.5 7.1
8.00
0.7 4.4
11.5 4.7
10.4 10.4 9.3
4.00 8.7 1.3 0.6
6.4 2.2
3.7 1.0
2.2 0.5
- 0.3 0.1
Russia Australia United New United Sri Lanka* Thailand India Malaysia Indonesia
Kingdom Zealand States
Recorded
Recorded Illicit
Unrecorded
According to the World Health
Alcohol consumption Recorded (Proof liters) Organization, in 2010, the per capita
consumption of alcohol for drinkers only,
7.41 was 20.1 l/annum in Sri Lanka (Male and
150 6.41 8.00
148.25 Female per capita consumption of 26.7
5.05 6.00 l/annum and 2.9 l/annum respectively).
100 128.15
101.01 4.00 2.3% of consumers were heavy episodic
50 drinkers, whilst 3.0% of the population had
2.00
alcoholic disorders (far higher than the South
0 0.00 East Asian average of 2.2%).
2000 2005 2010
At 55 per 100,000 population, Sri Lanka has
Total alcohol consumption Per capita alcohol consumption the second highest rate of Cirrhosis in the
world, behind Moldova
Source: Department of Census and Statistics, Institute of Policy Studies, Sunday Times 43
Future outlook -
Outlook F&B (Beer) stable
The switch to beer may be affected by restrictive tax policies
Percentage share based on pure alcohol content
100.00%
14% 11% 11% 13% 14% 15% 16% 19% 25% 25%
80.00%
60.00%
40.00% 86% 89% 89% 87% 86% 85% 84% 81% 75% 75%
20.00%
0.00%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Hard Liquor Malt liquor (Beer)
Duty per liter of pure alcohol As a result of the double tax hike carried out in October and
4,500 November 2015, excise tax on strong beer was increased by 70%
whilst the tax on mild beer was increased by 27%. This led to Lion
3,500
Brewery (Ceylon) PLC recording a significant drop in both volumes
2,500 and profits in December 2015.
1,500
However, excise duty on arrack was only increased by 24%. Hence,
500 commencing from December 2015, the tax per pure alcohol content
Toddy (>5% alcohol)
Country made
Mild beer (<5%
Coconut Arrack
Strong beer (>5%
foreign liquor
Molasses and
is highest for strong beer, followed by mild beer and finally arrack.
alcohol)
Source: Department of Census and Statistics, Sri Lanka Excise Department, Lion Brewery 44
Contents
Tobacco sector
Tobacco consumption general trends
Government regulation
Tobacco vs Beedi
45
Outlook Tobacco Future outlook -
stable
Over 3 million smokers; 25% of whom are below the age of 25
Tobacco usage by age group
Dec 2011 Jul 2012 Dec 2012 Jul 2013 Dec 2013 Jul 2014 Dec 2014 Jul 2015
Anuradhapura
Kegalle
Jaffna
Batticaloa
Gampaha
Colombo
Trincomalee
Galle
0 0
2008 2009 2010 2011 2012 2013 2014 2015
Excise revenue (Rs. Mn) Price per Cigarette (Gold leaf)
3.6 Price/pack (USD) - 2014 Sri Lankas cigarette
3.3
2.6
2.0
prices are one of the
highest in the region! 80%
1.7 New legislation introduced in 2015, requires 80% of
1.4 1.2 1.0 the top surface area of both the front and the back
of cigarette packs to be covered with pictorial
warnings.
However, the effectiveness of such health warnings
Indonesia
India - Delhi
Philippines
Bangladesh
Sri Lanka
Malaysia
Thailand
Pakistan
According to the WHO, annual mortality from tobacco related deaths in Sri Lanka was 20,000 (55 deaths per day). This is one
reason that prompted the president to declare that the government will ban the use of Tobacco products by 2020.
However, in 2015, Ceylon Tobacco company contributed to 7% of Government revenue hence, even though the government is
willing to restrict consumption by raising taxes and prices, it is not expected to take steps to sacrifice a key source of revenue
entirely (especially with the current fiscal deficit)
Source: Department of Census and Statistics, The Island, Daily News, World Health Organization 47
Future outlook -
Outlook Tobacco stable
and a thriving beedi market
Beedi vs Cigarettes Market share (2007-2015)
Growth in Beedi (07-14) 173%
1.1 Bn Beedi sticks 3 Bn Beedi sticks
4.6 Bn Cigarettes Growth in Cigarettes (07-14) (13%) 4 Bn Cigarettes
100
20 32
80 43 41 44 40 44 45 43
60
40 80 68 57 59 56 60 56 57
55
20
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Consumption Pattern (%) Cigarettes Consumption Pattern (%) Beedi
Currently, Beedi is available in over 140 brand names. Over 17,000 Sri Lankans are engaged in beedi related jobs.
Beedi is taxed at far lower rates than traditional cigarettes the only tax incurred is on the import of the Tendu leaf,
which is taxed at Rs. 350/kg. Hence, Beedi accounts for less than 1% of the Tobacco sectors contribution to State
revenue. In addition, between 2007 and 2014, the price of a regulated cigarette stick increased by 100% (Rs. 14 to Rs.
28), but price of beedi only increased by 50 cents to Rs.2.50!
However, in USA, beedi is treated identical to cigarettes (taxed at same rate, required to have a tax stamp and needs to
carry Surgeon Generals warning)
On a regional basis, in 2009, Indians consumed 1 trillion units of Beedi vs just over a 100 billion units of Cigarettes. Less
than 2% of Indian Beedi smokers give up smoking, compared to around 30% of cigarette smokers in USA and Europe
(because cost and social pressures are low for beedi smokers)
On a positive note, proposals were raised in the budget-2015 to raise annual license fee of beedi manufacturers to Rs.
5,000, from existing level of Rs. 1,500. The import duty on Tendu leaves was also increased from Rs. 250/kg to Rs.
350/kg
Source: Department of Census and Statistics, Financial Times, Ceylon Tobacco Corporation 48
Contents
Retail sector
Analysis of historical growth in retail
49
Future outlook -
Outlook Retail positive
Retail & Wholesale trade have been vital cogs in the post war boom
Value of retail and wholesale trade LKR Mn (09-14)
Domestic Trades contribution 242,206
to GDP has averaged 10.70%
between 2009 - 2014 224,238
203,739
557,216
186,904
512,987
509,664
157,590
468,713
138,950
341,798
1,038,186
282,929 925,273
806,592
702,046
526,546 597,573
50,000 7.00%
2010 2011 2012 2013 2014
Wholesale and retail trade Percentage of total loans
Central Province
5
Value of trade Rs. 60 Bn 4
Contribution to Provincial GDP 6.3% Eastern Province
CAGR (10-13) 5.8% Value of trade Rs. 66 Bn
Contribution to Provincial GDP 12.1%
CAGR (10-13) 71.5%
Western Province 1
Value of trade Rs. 450 Bn
Contribution to Provincial GDP 12.3%
Uva Province
8
CAGR (10-13) 8.1%
Value of trade Rs. 39 Bn
Contribution to Provincial GDP 9.4%
CAGR (10-13) 26.9%
Sabaragamuwa Province
7
Value of trade Rs. 39 Bn
Contribution to Provincial GDP 7.3% Southern Province
3
CAGR (10-13) 10.6% Value of trade Rs. 97 Bn
Contribution to Provincial GDP 10.2%
CAGR (10-13) 20.8%
Malaysia
UK
Thailand
India
Indonesia
According to AT Kearney, which developed the Global Retail Development Index, Sri Lankas retail market remains in the early
stages of development & will be buoyed by rising consumption, shift to convenience, tourism & improvement in infrastructure.
Source: Central Bank, AT Kearney, Financial Times, Cargills (Ceylon), Ceylon Cold Stores, Richard Pieris 52
Future outlook -
Outlook Retail positive
Foreign investors are confident of a retail boom backed by government support
Modern
Tobacco Trade
Stable Positive
Cordials
Negative
54
Contents
55
Analysis of listed FMCG counters
The sector is the second largest in the CSE, accounting for 29% of mkt. cap
Contribution to CSE Mkt cap CTC, NEST, DIST,
CARS and CCS 5
03.05.2016
232
56 Food, Beverage 18% counters
counters and Tobacco
counters
26% Others
47
29%
71%
8% counters
Retail 4
CARG, CTHR, CFT
Consumer staples Others 3% and TESS counters
Energy
Industrials
Financials
Materials
Telecommunication
discretionary
Utilities
Consumer staples
Healthcare
Consumer
services
56
Analysis of listed FMCG counters
CARG & CCS were selected for further analysis due to exposure to FMCG & retail
Top 8 Consumer staples counters by market cap
Of the top 8 counters, Ceylon Cold Stores and Cargills were selected for further analysis due to the following reasons
Exposure to a range of FMCG products (e.g. soft drinks and Ice cream for CCS; Meat, Agrifood, Biscuits and Dairy products for
Cargills)
Exposure to retail
Reasonable free float
Of the counters that were not picked for further analysis, Ceylon Tobacco, Distilleries and Lion Brewery were dropped due to focus
on one single area in terms of FMCG. Nestle was dropped due to inadequate free float and liquidity. Carson Cumberbatch and Bukit
Darah were dropped due to inadequate exposure to FMCG and the fact that majority of revenue is generated overseas.
57
Ceylon Cold Stores Ceylon Cold Stores
17.86
3.78
Sri Lanka
PER (x)
PBV (x)
Cargills Ceylon Cargills Ceylon
23.77
Source: Bloomberg
2.78
Olympic Industries Olympic Industries
56.45
18.28
Bangladesh
China
4.60
Indofood CBP Indofood CBP
28.31
5.44
Indonesia
Britannia Britannia
India
49.32
27.28
CP All (7 Eleven) CP All (7 Eleven)
11.48
Thailand
Big C Big C
31.41 28.52
4.15
Nestle Pakistan Nestle Pakistan
37.54
25.33
Pakistan
20.18 21.13
Malaysia
Foods
UK
Tesco Tesco
8.67
57.83
Sainsbury Sainsbury
5.10
10.90
Pepsi Pepsi
22.15 22.52
13.75
USA
Walgreens Walgreens
2.96
24.56
58
Analysis of listed FMCG counters
Ceylon Cold Stores (CCS) CCS recorded revenue of LKR 34.1 Bn and bottom-line of LKR 2.9 Bn in FY 15/16, which
reflected YOY growth of 23.0% and 85% respectively. The Retail segment accounted for 65%
Target price LKR 626.20 (+21.6%)
of group revenue, but profits were mainly driven by the high margin manufacturing segment.
Recommendation BUY
The retail segment currently has 50 outlets, mainly in the 8,000-10,000 square foot (large
Share Data
format) range. Over the next 3 years, we expect outlet expansion to continue, with a
Market Price as at 15.06.2016 LKR 515.00 minimum of 5 new outlets (all large format) being added per annum. Increased footfall as a
52 Week Range LKR 340.00 - 515.00 result of outlet expansion, coupled with a higher average basket value, is expected to result in
Shares in issue (as at 31.03.2016) 95,040,000 a 3 year revenue CAGR of 12.5% for the segment, from FY16/17- FY 18/19. Furthermore, the
Average Daily Volume (52 Weeks) 10,144
retail segment is expected to benefit from the removal of deemed VAT provisions in January
Public holdings (%) 18.5
2016 (The company paid deemed VAT of LKR 286.3 Mn in FY 15/16)
Main shareholders as at 31.03.2016No. of Shares % The manufacturing segment comprises of beverages and ice cream, which are estimated
John Keells Holdings PLC 70.6
to have contributed almost evenly to segmental revenue, in FY 15/16. Going forward, we
Whittal Boustead (Pvt) Ltd 10.7
Standard Chartered Bank Mauritius S/A Chambers Street Global
expect growth to be driven by ice cream, with per capita consumption expected to grow from
2.8 Fund , Lp
GF Capital Global Limited 2.2 2 litres per annum in FY 15/16 to over 2.5 litres by FY 18/19. However, the beverages
A N Sethna 0.8 segment will not witness significant growth as explained on slide 41 (this may be negated to
an extent by new products such as green tea infused fruit juices (Twistee) and isotonic drinks
Price Performance (F5)). Overall, we forecast a 3 year revenue CAGR of 10.2% for the manufacturing segment.
Volume,
LKR
Mn 0.4
The estimated gearing (debt/equity) stood at 5.4% as at 31st Mar 2016. Low gearing,
550
combined with a strong cash position, provides the company with the financial flexibility to
500 0.3 invest in growth and expansion. In addition, the dividend payout ratio is in excess of 50%,
0.3 resulting in a reasonable dividend yield of 3.5% to the investor, based on current prices.
450
400
0.2 Between FY 16/17 FY 18/19, we forecast revenue and net profit CAGR for the group, of
0.2 11.7% and 13.0% respectively. Based on forecasted growth rates (driven by retail expansion
350 and higher ice cream volumes), high degree of financial flexibility and a reasonable dividend
0.1
300 yield, we initiate CCS with a BUY.
0.1
250 0.0
Jun-15 Sep-15 Dec-15 Mar-16
Volume Price Adjusted ASPI
60
Analysis of listed FMCG counters
Ceylon Cold Stores (CCS)
Balance Sheet
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Assets
Non-Current Assets
Property, Plant and Equipment 5,447 5,365 6,123 6,026 5,940 5,864
Investment property 85 94 111 122 135 148
Intangible assets 162 153 143 133 122 111
Investments in associates 5,262 5,362 5,887 6,160 6,601 7,074
Non-current financial assets 76 93 131 144 165 185
Other non-current assets 285 287 383 383 383 383
Deferred tax assets 37 - - - - -
11,355 11,355 12,778 12,968 13,345 13,766
Current Assets
Inventories 2,065 2,383 2,720 2,979 3,377 3,822
Trade and Other Receivables 1,348 1,481 1,746 1,920 2,162 2,438
Amounts due from related companies 4 7 6 6 6 6
Tax recoverable 111 41 - - - -
Other current assets 151 254 293 293 293 293
Short term investments 181 730 2,065 3,343 5,303 7,507
Cash in hand and at bank 382 244 224 485 428 571
4,242 5,140 7,053 9,026 11,568 14,637
Total Assets 15,597 16,495 19,831 21,994 24,914 28,403
61
Analysis of listed FMCG counters
Cargills (CARG) Cargills recorded revenue of LKR 71.4 Bn and bottom-line of LKR 1.7 Bn in FY 15/16, which
reflected YOY growth of 15.9% and 583.8% respectively. Retail, FMCG and Restaurants
Target price LKR 182.10 (+16.7%) contributed to 78%, 18% and 4% respectively of group revenue.
Recommendation BUY The retail segment currently has over 250 outlets. Over 30% of outlets are estimated to be
located outside the Western province, providing Cargills with a unique foothold in such areas.
Share Data
Driven by the investment of LKR 2.5 Bn made by the International Finance Corporation in FY
LKR 156.00
14/15, we expect outlet expansion to continue, with approximately 20 new outlets (with
Market Price as at 13.06.2016
equal emphasis on large, medium and small format outlets) being added per annum.
52 Week Range LKR 135.20 - 191.00
Increased footfall as a result of outlet expansion, coupled with a higher average basket value,
Shares in issue (as at 31.12.2016) 224,000,000
as well as the strong presence outside the Western Province, is expected to result in a 3 year
Average Daily Volume (52 Weeks) 28,019 revenue CAGR of 9.1% for the segment, from FY16/17- FY 18/19. Furthermore, similar to
Public float (%) 20.5 Ceylon Cold Stores, the retail segment is expected to benefit from the removal of deemed
VAT provisions in January 2016 (The company paid deemed VAT of LKR 861.9 Mn in FY
Main shareholders as at 31.03.2016 No. of Shares%
14/15).
C T Hol di ngs PLC 70.2
Mr. V R Pa ge 6.7 The FMCG segment comprises of multiple products such as Dairy (Cargills and Kotmale),
Empl oyees ' Provi dent Fund 3.3 Meat (Finest, Sams and Goldi), Agri-food (Kist), Confectionery (Kist Biscuits) and distribution
Odeon Hol di ngs (Ceyl on) (Pri va te) Li mi ted 2.2 (Millers). Over 2/3rds of segmental revenue is estimated to be generated from Dairy and Agri-
Ceyl on Gua rdi a n Inves tment Trus t PLC - A/C No.1 1.9
food. Based on our estimates of industry growth rates, we forecast a 3 year revenue CAGR of
13.5% for the FMCG segment.
Price Performance
The Restaurants segment comprises of the KFC and TGIF franchises. With 27 outlets, KFC
LKR Volume, is estimated to contribute to over 90% of segmental revenue and was recently recognized as
200 Mn 1.2 the most outstanding performer for 2015 in the Indian sub-continent, by the parent Yum
Brands. However, TGIF, with 1 outlet, is yet to turnaround, but is estimated to have witnessed
1.0 revenue growth last year. Overall, we forecast segmental revenue to grow at a 3 year CAGR of
180
10.7% from FY16/17- FY 18/19.
0.8
160 There has been a significant reduction in gearing (debt to equity) between FY 13/14 and
0.6 FY 15/16, as a result of repayment of over LKR 5 Bn worth borrowings during that time
140 period.
0.4
Between FY 16/17 FY 18/19, we forecast revenue and net profit CAGR for the group, of
120
0.2 10.0% and 23.8% respectively. Based on forecasted growth rates (driven by retail expansion
and higher FMCG contribution), reasonable financial flexibility and our expectation of lower
100 0.0
finance cost driven by repayment of borrowings, we initiate CARG with a BUY.
Jun-15 Sep-15 Dec-15 Mar-16
Volume Price Adjusted ASPI
63
Analysis of listed FMCG counters
Cargills (CARG)
Balance Sheet
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Assets
Non-Current Assets
Property, Plant and Equipment 22,121 18,834 20,266 19,949 19,218 18,598
Investment property 3,350 3,491 3,544 3,597 3,650 3,703
Intangible assets 1,708 1,036 1,077 1,058 1,042 1,028
Investments in associates 368 1,094 2,306 2,280 2,254 2,228
Other long term investments 660 - - - - -
Prepayment on leasehold land and building 26 25 25 24 23 22
Deferred tax assets 349 75 63 63 63 63
28,582 24,554 27,280 26,970 26,249 25,642
Current Assets
Inventories 6,117 6,218 7,195 8,881 9,558 10,971
Trade and Other Receivables 3,349 2,839 3,572 3,334 3,718 4,222
Amounts due from related companies 157 957 1,016 1,016 1,016 1,016
Other financial assets 537 924 1,004 1,330 2,444 4,017
Cash and cash equivalents 602 1,672 2,144 874 1,422 1,669
10,763 12,610 14,931 15,435 18,158 21,895
Total Assets 39,345 37,164 42,211 42,405 44,406 47,537
Equity & Liabilities
Capital & Reserves
Stated Capital 131 131 131 131 131 131
Other equity - (1,974) (2,252) (2,568) (2,928) (3,338)
Reserves 7,584 7,501 8,378 8,378 8,378 8,378
Retained earnings 4,549 6,885 7,865 9,341 11,285 13,894
12,264 12,543 14,121 15,281 16,866 19,065
Minority Interest 46 337 384 479 598 750
Total Equity 12,310 12,879 14,505 15,760 17,464 19,814
64
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responsibility or makes no warranties or representations, express or implied, as to whether the information provided in this document is
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