Contents

Executive summary 03 Tobacco sector 45

Macro-economic overview 05 Tobacco consumption general trends 46
Contribution of FMCG to the economy 06 Government regulation 47
Key macro factors that drive FMCG 08 Tobacco vs Beedi 48
Industry forecasts 16 Retail sector 49
Key assumptions used 17 Analysis of historical growth in retail 50
Forecasted FMCG value and growth 18 Retail sector regional growth 51
Food and Beverage sector 19 Retail sector future potential 52
F&B general trends 20 Conclusion 54
The Dairy industry 27 Analysis of listed FMCG counters 55
The Meat industry 34 Sectoral contribution to the CSE 56
Biscuits and Chocolates 40 Analysis of relative valuations 58
Non-alcoholic beverages 41 Listed FMCG counters
Alcoholic beverages 42 Ceylon Cold Stores PLC 59
Cargills (Ceylon) PLC 62

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

Meat Soaps and

Dairy products Alcoholic detergents Tobacco
Bakery beverages Perfumes & Pulp, paper &
products Non - deodorants paperboard
Biscuits alcoholic Cleaning Inner
Confectionery beverages preparations garments
Oils and fats Shaving gels

Retail

Modern Trade General Trade

Supermarkets
Traditional trade
Hypermarkets

Source: International Standard Industrial Classification 3

Executive summary
The Fast Moving Consumer Goods segment is a significant contributor to the economy and together with retail,
accounts for close to 20% of GDP and employment. Going forward, the segment is expected to be buoyed by rising
incomes, a reduction in income inequality and growth in tourism, which together are expected to offset the impact of
slowing population growth. The sector is expected to expand by LKR 1.5 Trillion between 2015-2020, which translates
to a CAGR of 9.75%

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

Key macro factors that drive FMCG

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

Contribution to employment Sri Lanka Contribution to industrial value added

1,569 1,558 1,528 50.2%
1,383 1,450 25.0%
1,500 1,313 50.0% 50.0%
20.0% 50.0%
1,000 49.8%
17.9% 19.3% 18.5% 18.1% 15.0% 49.8% 49.7%
17.3% 17.7%
10.0% 49.5%
500 49.6%
5.0% 49.6%
- 0.0% 49.4%
2009 2010 2011 2012 2013 2014 49.2%
2009 2010 2011 2012 2013 2014
total employed in Food, Beverage, Tobacco and Retail ('000)
% of total employed

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.

Source: Central Bank of Sri Lanka 6

 Macro-economic overview
SLs consumption heavy economy has been a major boon for FMCG

Pakistan
FMCG market (2010) $41.4 Bn
FMCG % of GDP 23.3
HH Consumption % of GDP 49.2
China
FMCG market (2010) $952 Bn
FMCG % of GDP 16.0
HH Consumption % of GDP 32.7
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

Per capita Share of income Expenditure on

Population disposable allocated to FMCG by
income FMCG purchases tourists

Population Growth in Expenditure

Tourist
growth income trends
arrivals
Trends in Income Consumer
Expenditure
population distribution confidence
trends of
Age, Inflation Interest
tourists
Gender etc. rate rates

Supply
LOCAL FOREIGN

Domestic production Distribution Imports

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

10 year CAGR 0.8% 10 year CAGR 0.7% 5 year CAGR 0.5%

Extra population - ~1.5 Mn Extra population - ~1.4 Mn Extra population - ~0.5 Mn
Most regional peers have witnessed declining
population growth over time (e.g. Malaysias
4 Population growth (%) population growth dropped from 2.8% in 1990 to
1.5% by 2014).
3 Sri Lanka too follows this trend. Population growth
which averaged 2.8% p.a. in the decade after
independence, has slowed since 1980 due to the
2 following
Net emigration In 2012, Sri Lankas net
emigration was ~485,000 compared to
1 ~137,000 in 1987.
Family planning SL has one of the best
family planning programs in Asia, with over
0 50,000 volunteers
1990 1995 2000 2005 2010 2014 Higher female workforce participation rate
India Pakistan Bangladesh Vietnam 37% in 2014 vs 19% in 1980 (India and
Pakistan have female workforce participation
Malaysia Thailand Singapore Sri Lanka rates of 27% and 25% respectively)

Source: Central Bank of Sri Lanka, World Bank 9

 Macro-economic overview
..but higher income has counter-balanced low pop. growth
Per capita income (1990 - 2014) 3,625
4,000
3,000 2,400
2,000
869
1,000 472
0
1990 2000 2010 2014

10 year CAGR 10 year CAGR 4 year CAGR

Per capita income 6.3% Per capita income 10.7% Per capita income 10.9%
Population 0.8% Population 0.7% Population 0.5%
Peer analysis of per capita income - USD (1980 2014)
Country 1980 1990 2000 2010 2014
Sri Lanka 272.9 472.1 854.9 2,399.9 3,625.0
Today, the per capita income of SL
Bangladesh 219.6 290.7 403.1 762.8 1,096.6 is ~3 times that of Bangladesh
and Pakistan (despite being on
Pakistan 296.2 360.2 514.2 1,024.6 1,333.5
par with the 2 countries in 1980)
Vietnam NA* 98.0 433.3 1,333.6 2,052.3
Malaysia 1,802.6 2,417.4 4,004.5 8,754.2 10,829.9
Thailand 683.0 1,508.3 1,968.5 4,802.7 5,560.7

Source: Central Bank of Sri Lanka, World Bank 10

 Macro-economic overview
Income disparity is high, despite a slight transfer of wealth to the middle 60%
Income share of households
The middle 60% of the population (in
terms of income) currently enjoy a
Income category 2003/04 2006/07 2009/10 2012/13 higher portion of GDP, at the expense
of the richest 20%. This indicates
lower income inequality compared to
Richest 20% 55.2% 54.7% 54.1% 53.5% the past
However, in Vietnam, Indonesia and
Middle 60% 40.3% 40.7% 41.4% 42.1% India, the middle 60% accounts for
50%, 48.7% and 48.7% respectively,
Poorest 20% 4.5% 4.6% 4.5% 4.4% of GDP. Hence, more scope for
improvement exists

Provincial share of Gross Domestic Product (%)

The Western provinces
2005 2015
2013 contribution to GDP has
fallen, but is still more
Western than 4X that of the next
3.1%4.9% 3.4%
6.0%
highest contributor
6.4% Central (Southern province)
6.3%
4.5% Southern
4.5%
4.3% North Western
4.8%
50.4% North Central 44.8%
9.0%
Uva 9.5%
Sabaragamuwa
9.0%
Northern 10.7%
8.5%
Eastern 10.0%

Source: Central Bank of Sri Lanka 11

 Macro-economic overview
A higher GINI co-efficient than many regional peers is also worrisome
Mean per capita income per month 1.59X
Urban/Rural income ratio :
20,000
1.61X 1.26X 17,262
15,000 11,245 11,819
9,653 10,843
9,104 8,916
10,000 6,463 7,100
5,993 5,782
4,589
5,000
-
2006/07 2009/10 2012/13
Sri Lanka Urban Rural Estate
Gini Coefficient of Sri Lanka (Households)
0.49 0.49
0.5 0.48
0.47 0.47
0.46 0.46
0.45 0.43 0.43

0.4
1980/81 1985/86 1990/91 1995/96 2002 2005 2006/07 2009/10 2012/13

Gini co-efficient of income (Latest reported)

60 42.1 46.3
39.3 41.1
33.9 32.0 35.6 32.6 34.9 38.6
40 29.6 25.9
20
0
China

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%

Mean household income Expenditure as a % of income

The top 10% spend less than 3X per
capita on F,B & T than the bottom 10%,
F,B &T expenditure based on income decile despite having an income 26X higher

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

Source: Department of Census and Statistics 13

 Macro-economic overview
Tourist spending also contributes to the growth of the FMCG sector.
Arrivals:
1.8 Mn
Tourist arrivals (2010-2015) Room nights;
Arrivals:
0.65 Mn 17.6 Mn
2,500,000 20,000,000
Room nights;
2,000,000 6.5 Mn
15,000,000
1,500,000 10,000,000
1,000,000 5,000,000
500,000 -
2010 2011 2012 2013 2014 2015
Room nights Tourist arrivals Revenue per tourist
night $162.4
Expenditure on F&B - tourists Expenditure per
Revenue per tourist tourist night
night $88.0 $17.8
Expenditure per Total expenditure
tourist night $313.4 Mn
350,000,000 200
$17.8 180
300,000,000 Total expenditure 160
250,000,000 $116.4 Mn 140
200,000,000 120
100
150,000,000 80
100,000,000 60
40
50,000,000 20
- 0
2010 2011 2012 2013 2014 2015
Expenditure on G&S per tourist night Revenue per tourist night Total expenditure on G&S

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

Expenditure on F&B -USD/person/day Other expenditure - USD/person/day Expenditure on F&B (%)

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.

Source: Statistics department of Thailand 15

Contents

Industry forecasts
Key assumptions used

Forecasted FMCG value and growth

16
 Industry forecasts
Slow population growth, rising incomes & lower disparity expected
Key assumptions used 2015 2020 CAGR

Population (Mn) 20.7 21.6 0.8%

Domestic direct Per capita household income 16,398 25,109 8.90%

spending on F,B & T (LKR)

Income growth factor -poorest 1.03x

50% to richest 50%

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)

Growth LKR 1.5 Trillion

CAGR 9.75%

Domestic - direct Domestic indirect Tourism -

LKR 1.2 Trillion LKR 0.2 Trillion LKR 0.1 Trillion

The largest contributor to FMCG in Sri Lanka is

domestic direct purchases (91% contribution in
Pop. growth Inc. growth Inc. dist. impact 2015). Of this, the largest growth factor is
LKR 0.1 Trillion LKR 1.0 Trillion LKR 0.1 Trillion forecasted growth in income.

Note D/D Domestic direct expenditure on F,B&T 18

D/I - Domestic indirect expenditure on F,B&T (hotels, cafes, restaurants etc.)
T - Tourist expenditure on F&B
Contents

Food and Beverage sector

F&B general trends

The Dairy industry

The Meat industry

Biscuits and Chocolates

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.

Contribution of F&B to total FMCG spend

2006/07 2009/10 2012/13
4.80% 4.48% 5.10%

95.52% 94.90%
95.20%

Source: Department of Census and Statistics 20

 Outlook F&B
But, F&Bs share of wallet has reduced with expanding incomes...
Trend of SL household income
60000 1.20
40000 1.00
20000 0.80
0 0.60
1980/81 1985/86 1990/91 1995/96 2002 2005 2006/07 2009/10 2012.13
Mean household income per month Mean household income/expenditure ratio

80/81 85/86 90/91 95/96 02 05 06/07 09/10 12/13

Food &
65.0% 57.6% 60.9% 54.4% 44.5% 39.6% 37.6% 42.3% 37.6%
Beverage
Liquor &
4.4% 3.8% 3.7% 3.4% 2.3% 2.5% 2.1% 2.1% 1.7%
Tobacco
Housing 5.4% 7.1% 8.7% 12.6% 12.6% 10.7% 11.5% 11.0% 11.3%

Personal care &

2.9% 3.8% 3.8% 4.7% 4.4% 5.8% 4.3% 4.6% 5.3%
health
Education 1.4% 1.4% 1.7% 2.0% 2.4% 2.5% 2.8% 3.2% 3.5%

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.

Source: Department of Census and Statistics 21

 Outlook F&B
... which is a phenomenon visible in other countries as well
80,000
Per capita income vs expenditure on F,B&T 50.00%
42.4%
61,926 38.0%
56,285 35.3% 40.00%
60,000 54,630 31.7%
50,235 47,822 28.0%
46,332 44,342
22.2% 30.00%
USD

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

Per capita income Exp. On F,B &T as a % of expenditure

Per capita income vs dining trends - USA As a percentage of household

60,000 54,629.50 55.00% expenditure in Sri Lanka, F,B&T
46.88% 48,374.10 50.00%
accounted for 35.3% in 2014, compared
50,000
43.01% 48.55% 50.12% to 38.2% in 2009. The average
45.00%
40,000 39.00% 36,449.90 expenditure on FB&T in developed
40.00% markets seems to be in the range of 10-
USD

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.

Source: US Food and Drug Administration 22

 Outlook F&B
Food consumption is mainly in the West, but North & East is picking up
Northern Province 8 The Western Province accounted for
Population 1.1 Mn 32% of F&B consumption in 12/13,
Per capita food consumption Rs. 4,010 compared to ~35% in 09/10. In
Food as % of expenditure 47.6% comparison, the Eastern Provinces
North Western Province
3 Total food consumption Rs. 50.5 Bn share increased from 4.5% in 09/10 to
Population 2.4 Mn ~8% in 12/13.
Per capita food consumption Rs. 3,592
Food as % of expenditure 39.2% North Central Province 7
Total food consumption Rs. 113.8 Bn Population 1.3 Mn
Per capita food consumption Rs. 4,070
Food as % of expenditure 40.0%
Total food consumption Rs. 52.6 Bn

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

Source: Department of Census and Statistics 23

 Outlook F&B
Rural areas contribute to over 70% of F&B spend
Total household expenditure on F&B by sector 2012/13

Rs. Rs. Rs.

204 Bn 729 Bn 37 Bn
Urban Rural Estate
Population 3.8 Mn Population 16.1 Mn Population 0.9 Mn
Per capita F&B Per capita F&B Per capita F&B
consumption Rs. 4,723 consumption Rs. 3,946 consumption Rs. 3,402
F&B consumption CAGR F&B consumption CAGR F&B consumption CAGR
(06-12) 16.2% (06-12) 12.2% (06-12) 9.4%

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.

Source: Department of Census and Statistics 24

 Outlook F&B
Share of Rice & Sugar has declined; Dairy, Meat & other F&B has picked up
Share of household expenditure on F&B (%)
1980/81 1985/86 1990/91 1995/96 2002 2005 2006/07 2009/10 2012/13
Rice 31.5 25.3 22.4 21.2 18 13.8 13.9 17.3 13.6
Sugar 7.8 6.3 6.2 5.2 3.3 3.3 3.6 3.4 2.9
Condiments 8 10.4 9.1 9.9 9.1 9 9.3 9.1 9
Vegetables 7.5 9.9 8.8 8.3 7.9 8.1 8.4 7.6 8.2
Milk and Milk
3.3 4.3 4.7 7.1 8.4 9.8 8.7 7.8 8.9
products
Coconuts 8.2 5.9 8.6 6.9 7.3 5.6 5.5 5.6 6.1
Meat 1.8 2.5 3.1 4.4 3.2 4.4 4.2 3.9 4.3
Fish & Dried Fish 8.1 9.8 9.1 11.2 10 12.1 12.6 12.5 13.3
Other food and
23.8 25.6 28 25.8 32.8 33.9 33.8 32.8 33.7
drinks
Total 100 100 100 100 100 100 100 100 100

F&B share of wallet 65.0% 57.6% 60.9% 54.4% 44.5% 39.6% 37.6% 42.3% 37.6%

Per capita rice

133
125

consumption
118

150 According to the Food and Agricultural Organization

112

108
100
(FAO), there is a correlation between per capita
86
81
80
79

100
76

76

income and consumption of rice i.e. when per

46
43

50 capita income increases, rice consumption stagnates/

21

12
12
7

declines. For example, with growing prosperity, rice

0
consumption has been on a declining trend in middle
India
China

Indonesia

South Korea

Thailand
Japan

Pakistan

Sri Lanka
Malaysia

and high income Asian countries such as South Korea

and Japan.
Per capita consumption - 2005 Per capita consumption - 2011

Source: Department of Census and Statistics, Food and Agricultural Organization 25

 Outlook F&B
Lifestyle changes have led to a change in Sri Lankans diet
Per capita Rice consumption per month - grams Per capita monthly consumption of other products
5,000
2006/07 2012/13 Change
4,307 Bread - grams 1,533 926 (40%)
3,800
4,000
3,299 Mukunuwenna
1.10 0.95 (14%)
2,903 bundles
3,000
Kankun - bundles 0.28 0.26 (7%)
1,781 1,773
2,000 Green gram - grams 50 37 (26%)
Biscuits - grams 173 204 18%
1,000
Potatoes - grams 466 507 9%
- Eggs - number 2.65 2.92 10%
Kekulu Samba Nadu Cake - grams 26.56 28.32 7%
2006/07 2012/13

Per capita Fish consumption per month - grams

140 Consumption of healthy food options such as green leaves
116 and green gram has reduced, whilst consumption of cakes,
120
100 103 biscuits, chocolate etc. has increased.
100 87 91 A clear shift is visible from Kekulu rice to Nadu rice , over
74 78
80 71 time Kekulu is often considered the most nutritious
60 variety of rice in Sri Lanka. However, certain research
44
indicates that Nadu (parboiled rice) has a lower Glycaemic
40 30
Index than even Kekulu rice.
20 A shift is also visible away from Kelavalla (Yellowfin tuna)
0 consumption, towards consumption of other fish
Paraw Kelavalla Hurulla Other small Teppili/ Kelavalla is recognized as having one of the lowest
fish Tilapiya/ cholesterol content of all fish types.
Korali

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

Cows for milking Other cows Bulls Calves

Sri Lankas total cattle population has declined by

% of collection 100,000 from ~1.2 Mn in 2004, to ~1.1 Mn in 2015.
District % of cattle - 2015 Cows for milking purposes has also increased by less
centers - 2012
than 40,000 during this 11 year period. In addition, the
Kurunegala 9.8% 20.4% number of calves has declined by over 40,000, thus
raising questions of future viability of the industry.
Anuradhapura 9.0% 11.1%
Interestingly, the number of cows used for other
Ampara 8.7% 2.3% purposes (mainly for slaughter) has also declined by
Batticoloa 7.0% 1.1% almost 40,000 over the 11 years.
The main 6 districts account for almost 50% of Sri
Jaffna 5.8% 1.1% Lankas cattle population. However, a severe mismatch
Puttalam 5.6% 4.4% between cattle volume and collection capacity is visible
Others 54.1% 59.6% in Ampara, Batticoloa and Jaffna.

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.

Local Fresh Milk prices Imported Milk Powder prices

Farm gate price (LKR/litre) 500 Retail Prices vs Global SMP prices
450
60.0 51.5 53.3
48.8 400
50.0 42.7 350
35.5 37.3
40.0 32.9 300
26.3 250
30.0 21.4
200
20.0
150
10.0
2008 2009 2010 2011 2012 2013 2014 2015
-
2006 2007 2008 2009 2010 2011 2012 2013 2014 Anchor price -400g Global SMP price -rebased

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%).

Note : LME Liquid Milk Equivalent 29

Source: Ministry of Livestock and Rural Community Development, Department of Census and Statistics, Food and Agricultural Organization, Times of India
 Outlook F&B (Dairy)
Milk powder accounts for ~80% of demand, but growth visible across the board
Per capita expenditure on Milk & Milk products per month

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

Equivalent retail price

Retail price-Fresh milk- fresh milk liters)
(Equivalent Retail
Retail price
price-Anchor
Anchor(1(1kg)kg)
Appliance penetration 2012 Households with refrigerators (%)
Computers 26% Over 2,000,000 Sri Lankan
households do not possess 98%
a refrigerator 87%
Rice cookers 57%
58%
Refrigerators 58%
31%
Television 96%

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.

Source: Department of Census and Statistics, Sunday Times 31

 Future outlook -
Outlook F&B (Fresh Milk) positive
Expected income growth & good margins bodes well for the future of fresh milk
Cost of production vs Retail price of Fresh Milk (2005 - 2014)
56.27% 49.91%
53.33%
75 51.65% 68 69 60.0%
46.57% 62
48.47% 57
17.70% 54
55 28.17% 29.11% 29.07% 53
40.0%
33 35
35 27 28 30 27 27 29 28 29 30
19 20 21
20.0%
15

(5) 0.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cost of production Retail price (750 ml) Gross Margin (%)

Sri Lankas per capita fresh

milk consumption is one of
the lowest in the world
According industry sources, fresh milk consumption has
Per capita fresh milk increased from 150,000 litres per month, to over
Country
consumption 2013 (l) 1,000,000 litres per month by 2013. As per the FAO, there
Sri Lanka (estimate) 0.6 is a positive correlation between income growth and
growth in fresh milk consumption. Two reasons for this
China 17.8
could be resultant increase in refrigeration penetration as
Australia 110.5 well as the negative health connotations associated with
New Zealand 108.5 milk powder (e.g. presence of oxidized cholesterol. Anchor
European Union 62.4 itself launched Anchor liquid milk in November 2015.)
United States 71.6 Thus we estimate ample growth potential for fresh milk in
Sri Lanka.

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.

Source: Datamonitor, Lanka Business Online 33

 Outlook F&B (Meat)
Despite growth in recent past, meat consumption lags behind peers

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

140 Per capita meat consumption - 2014

116.61 111.74
120
100
80 72.80
64.82
60 53.01 51.27 49.86
40
19.92
20 10.70 9.16 3.26
0
Australia USA New Zealand EU28 Malaysia Vietnam China Thailand Indonesia Sri Lanka India

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

Total consumption (kg) Per capita consumption (grams/annum)

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)

Local production, Imports and Exports - MT

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CAGR
Local
86,270 85,250 100,060 102,500 99,280 104,160 116,760 137,390 144,540 150,320 6.4%
production

(+) 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

URBAN RURAL ESTATE

Household chicken Household chicken Household chicken Total chicken consumption in SL
consumption (13) consumption (13) consumption (13) was ~150 Mn kg in 2014,
growing at a CAGR of 6.3%
20.5 Mn kg 53.5 Mn kg 3.5 Mn kg between 2005-2014.
CAGR (07-13) CAGR (07-13) CAGR (07-13)
8.17% 5.10% 5.35% Rural household demand for
CAGR (09-13) CAGR (09-13) CAGR (09-13) chicken accounts for over 2/3rds
of total demand. Demand has
17.78% 11.00% 10.99% been growing at double digits
across the spectrum in the post
war period.
Per capita chicken consumption
50.00 44.5 Per capita consumption too
40.8 39.6
40.00 36.3 improved from 4.4 kg in 2005 to
7.2 in 2014. This is still below the
30.00 21.6 Asian average of 10kg and the
20.00 12.7 world average of 15 kg, in 2014.
11.4
7.9 7.2 6.3
10.00 1.8
Per capita chicken consumption
- is projected to grow to 11 kg by
2017, which would result in total
China
Malaysia

Australia
USA

Vietnam

Sri Lanka
EU28

Thailand

India
New Zealand

Indonesia
consumption increasing to 232
Mn kg (3 year CAGR of 15.6%)

Source: Department of Census and Statistics, Sunday Times 37

 Future outlook -
Outlook F&B (Chicken) positive
Supply side constraints for poultry producers must be ironed out going forward

70% of cost of producing chicken is feed cost

50% of feed ration consists of Maize, which is subject to import restrictions. However,
local production of Maize is grossly inadequate (e.g. in 2014, out of total feedmill
Poultry feed requirement of 350,000 MT, only 160,000 MT were produced locally in the Maha season)
In addition, feedmillers are exposed to foreign exchange risk, for the proportion of raw
material that is imported feedmill operators eventually pass on any cost increases to
poultry producers

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

Others bio-security measures such as segregated farms, microbiological laboratories to monitor

poultry diseases, expenditure on disinfectants etc.)
Due to the long production cycle, production cannot be changed in the short term to
meet market conditions; hence there is less flexibility

Source: Bairaha Farms 38

 Future outlook -
Outlook F&B (Other meats) stable
However, consumption of other meats has been stagnant
Pork Beef
8,000.00 1.00 Volume CAGR : - 0.4%
45,000 2.00
7,080 36,600
6,695 0.80 35,150 33,840
7,000.00 1.80
6,403 35,000
0.60 1.60
6,000.00
25,000
0.40 1.55
1.49 1.40
5,000.00 0.34 0.34
0.31 0.20 15,000 1.34 1.20
4,000.00 0.00
5,000 1.00
2005 2009 2014
2005 2009 2014
Local production (MT) Per capita consumption Local production (MT) Per capita consumption

Mutton Sri Lankas swine population has been declining, from

~85,000 in 2005, to ~72,000 in in 2014. Number of pigs
2,000 1,800 0.20
slaughtered for meat too has reduced from ~30,000 to
1,500 ~24,000 between 2005 and 2014.
1,500 1,340 0.15
Beef production too has declined, whilst milk production
has more than doubled between 2005 and 2014, thus
1,000 0.10 indicating that a higher proportion of cattle are now
0.10 reared for milk rather than for slaughter
0.08
500 0.07 0.05 Sri Lankas goat population has witnessed the most
significant decline, with an average annual decline of
0 0.00 2.8%, from 405,000 in 2005 to 313,000 in 2014.
2005 2009 2014

Local production (MT) Per capita consumption

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)

Sri Lanka Chocolate consumption 2006-2013

Per capita chocolate
Country
consumption 2012 (kg)
1,200
1,250 1,108 65.00 United Kingdom 9.6
1,000 912 Australia 5.4
60.00
750
60.36 United States 5.3
55.00 Indonesia 0.3
500 54.60
50.00
Malaysia 0.3
250
49.56 Thailand 0.1
- 45.00 India 0.1
2006/07 2009/10 2012/13
Sri Lanka 0.1
Total consumption - MT Per capita consumption (g/annum)

Source: Department of Census and Statistics, Datamonitor 40

 Outlook F&B (Non-alcoholic beverages)
Demand constraints for soft drinks & cordials; supply constraints for bottled water
Per capita expenditure per month Future outlook -
Bottled water stable
2009/10 2009/10 2012/13 2012/13 Bottled water, which was introduced to SL in the 1980s, has
Item
Rs. % Rs. % been growing due to reasons such as tourism, increased tendency
Tea 83.5 85.5% 104.2 83.0% for locals to eat out, changing lifestyles resulting in flight to
convenience etc. However, the corporate sector (hotels, banks,
Fruit drinks/Cordials 2.3 2.4% 2.7 2.2% embassies, airlines, factories etc.) continues to account for ~60%
of demand of large scale suppliers (mainly in the form of five
Soft Drinks 5.3 5.4% 6.8 5.4%
gallon bottles)
Bottled Water 0.5 0.5% 1.5 1.2% As of 2013, there were 75 local bottled water brands registered
Coffee 3.4 3.5% 4.5 3.6% under the health ministry and 6 imported brands. Of the 75 local
Other non-alcoholic brands, 55 had SLS certification. However, the biggest threat to
3.7 3.8% 5.8 4.6% the industry is posed by illicit manufacturers (e.g. in a raid in
beverages
2013, Public Health Inspectors seized 5000 units produced by
Total 97.7 100.0% 125.5 100.0% unregistered manufacturers, in the Eastern & North Eastern
provinces.

Future outlook - Future outlook -

Carbonated Beverages
Per capita consumption of carbonated soft drinks in Sri Lanka is
~8 litres p.a. This is above India (3l) but below Pakistan (16l)
and Thailand (39l). It is also below the global average (22l)
According to Ceylon Cold Stores, the growth potential for the
Carbonated Soft Drinks industry will be constrained to an extent
due to the growing segment of health conscious consumers.
This is a trend visible globally as well (e.g. per capita
consumption in US in 2015, was at the lowest level since
1985).
stable Fruit drinks/cordials negative
According to industry experts, consumption of fruit based cordials
is declining substantially in Sri Lanka.
However, the Ready to drink segment (Nectar) has been
witnessing reasonable growth. In the pre-2009 period the ready
to drink sector grew at a moderate 4-5%, compared to growth of
10-15% in India, but has since picked up pace. However, since the
cordials segment is far larger, the growth of ready to drink
nectars has not managed to negate the effect of the decline in
cordials.

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: World Health Organization, Sri Lanka Excise Department 42

 Future outlook -
Outlook F&B (Hard Liquor) stable
New licenses continue to be issued, especially in dominant Western province
80,000 New licenses issued and revenue generated Excise department 100
83
80
60,000 62
51 55
60
40,000 42 40 41
35 36
40
20,000
20
20,694 23,755 27,436 28,536 36,666 55,318 60,081 66,041 69,123
- 0
2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue generated by excise dept (Rs. Mn) Number of new licenses issued

In line with its status as the major contributor to

Annual household expenditure on Liquor and Tobacco (12/13) liquor consumption in Sri Lanka, the Western
Uva province has province has a lions share of liquor licenses, with
Despite accounting for a
highest per capita 11% 25% of the 4,065 licenses in the country, in 2011.
quarter of total consumption,
expenditure of ~Rs. Colombo district alone had 768 licenses in the
per capita expenditure in
3,000/= per annum 9% 26% year.
Western province is only ~Rs.
2,000/= per annum In addition, liquor consumption has drastically
6%
picked up in the Northern Province, in the post-
war period. According to a survey carried out by
13% the Alcohol and Drug Information Center,
14%
Mullativu district had the second highest alcohol
5% consumption rate in the island, with over 34% of
13% residents identified as habitual users of alcohol.
3%
Illicit alcohol continues to dominate in the area, as
Western Central Southern
Northern Eastern North Western it can be obtained for a fifth of the price of the
North Central Uva Sabaragamuwa lowest grade legal liquor.

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)

This is expected to adversely affect the beer segment, which was

alcohol)

capturing share from hard liquor in the recent past, due to

popularity amongst the younger population, combined with other
factors such as urbanization.

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

36.0% 37.1% 36.0% 36.7% 43.3% 36.5% 40.0% 35.5%

35.0% 38.4% 39.9% 35.9% 38.9% 34.1% 34.8%

34.2%

29.0% 24.5% 24.1% 27.4% 22.5% 24.6% 25.9% 29.7%

Dec 2011 Jul 2012 Dec 2012 Jul 2013 Dec 2013 Jul 2014 Dec 2014 Jul 2015

<24 Years 25-39 Years >=40 Years

Tobacco usage by males in selected districts

60%
50.0% - 2014 On average, over 14% of Sri Lankans above the
41.0% age of 15 were consumers of tobacco products
40%
32.6% 32.2%
in 2013 (~29% of males and 0.4% of females).
29.9% 28.9%
27.1% 26.7%
24.6% 23.0%
Close to 2% of smokers had been initiated to
20% tobacco before turning 10 years old. Close to
17% had done so before turning 15.

0% However, the percentage of consumers who

Kandy
Monaragala

Anuradhapura
Kegalle

Jaffna
Batticaloa

Gampaha

Colombo
Trincomalee

Galle

smoke on a daily basis, has reduced from ~80%

in 2012, to ~71% in 2014.

Source: World Health Organization, Alcohol and Drug Information Center 46

 Future outlook -
Outlook Tobacco stable
.. But cigarette consumption is affected by stringent government regulation
Due to inelastic demand, excise Cigarette prices vs Excise Revenue
revenue is directly proportional
to tax rates imposed
80,000 73,646 40
66,161
58,567
60,000 49,623 53,563 30
35
37,288 37,601 40,675 30
40,000 28 20
25
20 22
20,000 16 18 10

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

is limited by the fact that over 95% of cigarettes are

sold in loose form.

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

Retail sector regional growth

Retail sector future potential

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

2009 2010 2011 2012 2013 2014

Domestic trade Import trade Export trade

Loans and Advances provided to retail and wholesale trade

250,000 Loans and advances LKR Bn 233,835 230,826 9.50%
provided has increased at a
CAGR of 20.8% between 183,192 9.00%
200,000 9.2%
2010-2014
158,804 8.50%
150,000
108,380 8.3% 8.00%
100,000 7.9%
7.2% 7.7% 7.50%

50,000 7.00%
2010 2011 2012 2013 2014
Wholesale and retail trade Percentage of total loans

Source: Department of Census and Statistics, Central Bank 50

 Future outlook -
Outlook Retail positive
Growth in trade has been spread out across the country
Northern Province
9 The Western Province accounted for
Value of trade Rs. 33 Bn ~49% of trade in 13, compared to ~60%
Contribution to Provincial GDP 10.3% in 10. In comparison, the Eastern &
2 CAGR (10-13) 95.1% Northern Provinces share increased
North Western Province from ~2.9% in 10 to ~10.6% in 13.
Value of trade Rs. 98 Bn
Contribution to Provincial GDP 11.0%
CAGR (10-13) 25.2% North Central Province
6
Value of trade Rs. 45 Bn
Contribution to Provincial GDP 10.3%
CAGR (10-13) 30.1%

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%

Source: Department of Census and Statistics, 51

 Future outlook -
Outlook Retail positive
SL is a top market for retail investment; organized retail expected to grow
#1st GRDI Score - 2015
#9th #14th
65.3 #15th #23rd #24th
56.6
51.7 51.1 47.1 47.0

China Malaysia Sri Lanka India Nigeria Philippines

On the radar To consider Lower priority

85% Penetration of organized retail CAGR - Revenue from retail
80%
SL has one of the 12% p.a. LKR Bn
55% lowest penetration
CAGR -
levels for organized
40% retail, in the region
15% p.a.
30%
20% 16%
8%
31 49 10 18 11 18
Sri Lanka
China
USA

Malaysia
UK

Thailand

India
Indonesia

Cargills Ceylon Cold Stores Richard Pieris

2010/11 2014/15

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

The government removed deemed VAT provisions on supermarkets,

effective 01st January 2016 (Deemed VAT restricted the extent to which
Government supermarkets can claim supplies as being VAT exempt, to 25% of total
support for revenue). The removal of deemed VAT is expected to be a major boost
to retailers in terms of margin improvement for example, Cargills
retail stated in its Annual Report for 2014/15, that LKR 861.9 Mn was paid as
deemed VAT during the year.

The International Finance Corporation (IFC), along with the Canadian

government, announced in March 2016, that it would invest USD 15
Foreign Mn in Sri Lankan retail chain Richard Pieris Distributors
investments in
The IFC announced in August 2014, that it would invest USD 20 Mn
retail into Cargills Foods Company, which is the retail branch of Cargills
(Ceylon) PLC

Source: Financial Times, Cargills (Ceylon), Daily News 53

Conclusion
FMCG
Positive

F&B Other Retail

Modern
Tobacco Trade
Stable Positive

Biscuits & Non-alcoholic Alcoholic

Dairy Meat beverages
Chocolates beverages
Positive Positive Positive Stable Stable

Fresh Carbonated Hard

Chicken soft drinks Liquor
Milk
Positive Positive Stable Stable

Ice Other Bottled

water Beer
cream meats
Stable Stable Stable
Positive

Cordials
Negative

54
Contents

Analysis of listed FMCG counters

Sectoral contribution to the CSE

Relative valuations of listed counters

Listed FMCG counters

Ceylon Cold Stores PLC (CCS)

Cargills (Ceylon) PLC (CARG)

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

Sector wise market cap (LKR Mn) and price to earnings

21.0 19.8
1,202,461 18.2 18.1
15.7
759,990 Market
9.8 11.2
9.6 cap
465,426
7.3
241,283 159,152
P/E
120,243 73,267 52,147 14,814

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

Market capitalization Market cap Revenue from Average daily

Entity Free float(%)
10.05.2016 (LKR Bn) (%) FMCG and retail volume (shares)
CEYLON TOBACCO COMPANY PLC 203.2 7.7% 100% 16% 12,465
NESTLE LANKA PLC 114.2 4.3% 100% 9% 3,244
DISTILLERIES COMPANY OF SRI
65.7 2.5% 89% 42% 94,643
LANKA PLC
CARSON CUMBERBATCH PLC 54.0 2.0% 43% <50% 2,336
CEYLON COLD STORES PLC 44.8 1.7% 100% 29% 9,451
BUKIT DARAH PLC 36.9 1.4% 42% <50% 1,318
LION BREWERY CEYLON PLC 36.4 1.4% 100% 14% 8,607
CARGILLS (CEYLON) PLC 35.8 1.4% 96% 21% 23,364

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

Kweichow Moutai Kweichow Moutai

19.75

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

Unilever Pakistan Unilever Pakistan

Analysis of listed FMCG counters

Nestle Malaysia Nestle Malaysia

27.49 28.58

20.18 21.13
Malaysia

Associated British Associated British

Foods
3.70
33.58

Foods
UK

Tesco Tesco
8.67
57.83

Sainsbury Sainsbury
5.10
10.90

Coca Cola Coca Cola

7.87

Pepsi Pepsi
22.15 22.52

13.75
USA

Kraft- Heinz Kraft- Heinz

1.76
43.95

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

Source: Bloomberg, company reports, CSE, NDBS Research

59
Analysis of listed FMCG counters
Ceylon Cold Stores (CCS)
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Turnover 23,614 27,699 34,069 37,352 42,115 47,450
Profit Attributable to Equity Holders 1,218 1,525 2,875 3,244 3,653 4,143
Gross Profit Margin (%) 11.93 13.25 16.13 16.20 15.76 15.37
EPS 12.81 16.05 30.25 34.13 38.43 43.60
Forward P/E (X) * 10.98 18.58 14.22 15.09 13.40 11.81
DPS 4.00 11.00 18.00 18.00 18.00 18.00
Dividend Yield (%) 2.84 3.69 4.19 3.50 3.50 3.50
BV 105.22 112.12 129.90 149.13 174.42 205.23
PBV (X) 1.34 2.66 3.31 3.45 2.95 2.51
ROE (%) 12.18 14.32 23.29 22.89 22.03 21.24
Total Debt/Equity (%) 14.50 6.65 5.41 4.36 3.27 2.27
*P/Es from FY13/14-FY15/16 ha ve been ca l cul a ted us i ng yea r end s ha re pri ce. P/Es for FY16/17-FY18/19 ha ve been ca l cul a ted us i ng the current s ha re pri ce.
Income Statement
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Revenue 23,614 27,699 34,069 37,352 42,115 47,450
Less: Cost of Sales (20,797) (24,029) (28,573) (31,300) (35,477) (40,156)
Gross Profit 2,817 3,670 5,496 6,052 6,638 7,294
Other income 1,164 1,197 1,556 1,718 1,963 2,239
Administration Expenses (794) (886) (1,473) (1,615) (1,821) (2,052)
Distribution Expenses (1,222) (1,312) (1,100) (1,206) (1,360) (1,532)
Other expenses (422) (509) (583) (665) (749) (844)
Operating profit 1,541 2,160 3,896 4,284 4,670 5,104
Finance cost (120) (61) (12) (39) (39) (36)
Finance income 34 56 140 301 485 734
Changes in fair value of investment property 72 9 17 11 12 13
Share of results of equity accounted investees 18 (18) (21) (21) (21) (21)
Profit Before Tax 1,545 2,147 4,020 4,536 5,108 5,794
Taxation (327) (621) (1,145) (1,292) (1,455) (1,651)
Profit After Tax 1,218 1,525 2,875 3,244 3,653 4,143
Profit Attributable to Equity Holders 1,218 1,525 2,875 3,244 3,653 4,143

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

Equity & Liabilities

Capital & Reserves
Stated Capital 918 918 918 918 918 918
Revenue Reserves 8,286 8,764 9,745 11,278 13,220 15,653
Other components of equity 796 974 1,683 1,977 2,439 2,934
Total Equity 10,000 10,656 12,346 14,173 16,577 19,505
Non Current Liabilities
Borrowings 185 84 15 17 21 25
Deferred tax liability 439 566 771 771 771 771
Employee benefits 365 376 394 394 394 394
Other non-current liabilities 143 118 132 132 132 132
Other deferred liabilities 20 25 26 26 26 26
1,153 1,170 1,339 1,341 1,345 1,349
Current Liabilities
Trade and other payables 2,567 3,121 4,039 4,424 5,014 5,676
Amounts due to related companies 116 126 123 123 123 123
Income tax liabilities 35 330 687 687 687 687
Short term borrowings 140 101 69 67 63 59
Other current liabilities 461 467 646 646 646 646
Bank overdrafts 1,126 524 583 533 458 358
4,443 4,669 6,147 6,480 6,991 7,549
Total Equity & Liabilities 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

Source: Bloomberg, company reports, CSE, NDBS Research

62
Analysis of listed FMCG counters
Cargills (CARG)
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Turnover 56,145 61,631 71,442 77,048 84,422 95,052
Profit Attributable to Equity Holders 1,086 223 1,624 1,924 2,392 3,057
Gross Profit Margin (%) 10.88 9.16 11.18 11.63 11.84 11.92
EPS 4.85 1.00 7.25 8.59 10.68 13.65
Forward P/E (X) * 28.16 137.36 20.69 18.51 14.89 11.65
DPS 2.00 2.00 2.00 2.00 2.00 2.00
Dividend Yield (%) 1.47 1.46 1.33 1.26 1.26 1.26
BV 54.75 55.99 63.04 68.22 75.29 85.11
PBV (X) 2.49 2.45 2.38 2.33 2.11 1.87
ROE (%) 8.85 1.78 11.50 12.59 14.18 16.03
Total Debt/Equity (%) 136.24 95.89 79.34 69.84 57.30 45.46
*P/Es from FY13/14-FY15/16 ha ve been ca l cul a ted us i ng yea r end s ha re pri ce. P/Es for FY16/17-FY18/19 ha ve been ca l cul a ted us i ng the current s ha re pri ce.
Income Statement
Figures in LKR, Mn FY13/14 (A) FY14/15 (A) FY15/16 (A) FY16/17 (E) FY 17/18 (E) FY 18/19 (E)
Turnover 56,145 61,631 71,442 77,048 84,422 95,052
Cost of Sales (50,035) (55,984) (63,455) (68,086) (74,430) (83,719)
Gross Profit 6,110 5,647 7,987 8,962 9,992 11,333
Other Income 1,191 1,427 1,549 1,670 1,830 2,060
Distribution Expenses (1,637) (2,041) (2,313) (2,431) (2,664) (2,999)
Administration Expenses (2,468) (2,896) (3,362) (3,626) (3,973) (4,473)
Other expenses (695) (566) (397) (429) (470) (529)
Earnings Before Interest and Tax 2,501 1,572 3,463 4,147 4,716 5,393
Net Finance Cost (1,198) (832) (604) (725) (457) 57
Changes in fair value of investment property 305 65 53 53 53 53
Share of loss of equity accounted investees (34) (0) (26) (26) (26) (26)
Profit Before Tax 1,574 805 2,886 3,448 4,286 5,477
Taxation (481) (557) (1,195) (1,428) (1,775) (2,269)
Profit After Tax 1,093 247 1,691 2,020 2,511 3,209
Profit Attributable to Equity Holders 1,086 223 1,624 1,924 2,392 3,057
Minority Interest 7 24 67 96 119 152

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

Non Current Liabilities

Borrowings 1,289 731 198 421 382 344
Deferred tax liability 1,130 570 778 778 778 778
Deferred income 106 96 85 85 85 85
Employee benefits 416 521 638 638 638 638
Put liability - 1,974 2,252 2,568 2,928 3,338
2,941 3,892 3,950 4,489 4,811 5,182
Current Liabilities
Trade and other payables 8,104 7,830 10,937 10,059 10,998 12,368
Current tax liability 466 916 1,473 1,473 1,473 1,473
Amounts due to related companies 20 - 4 4 4 4
Dividends payable 23 28 33 33 33 33
Borrowings 15,481 11,618 11,309 10,587 9,625 8,663
24,094 20,392 23,756 22,155 22,132 22,540
Total Equity & Liabilities 39,345 37,164 42,211 42,405 44,406 47,537

64
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