Distilleries Company of Sri Lanka PLC (DIST), the country’s market leader in hard liquor, is planning to shift its focus more towards premium branded liquor after it came under Melstacorp Limited in a share swap two months ago. But the company fears the weakening rupee, rising global spirit prices and extremely high regulatory risk could dent its margins.
According to a draft introductory document, which listed a reference price for the Melstacorp Limited share, the group plans to leverage the rising per capita income and tourism sector in the country in its future strategies.
“The group is expected to increase its focus on premium brands such as Franklin Brandy, Flinton London Dry Gin and Petroff Vodka, given an expected increase in per capita GDP and tourism in Sri Lanka,” the document said. Periceyl Private Limited, a unit under DIST, focuses on the distribution of locally manufactured foreign liquor.
DIST on August 1, 2016 announced a major restructuring of the group to make Melstacorp Limited— then 100 percent owned subsidiary of DIST— the holding company of the DIST group by way of a share swap which offered 4 new shares of Melstacorp for each 1 share held in DIST after which the new holding company will be floated. CT CLSA Capital Private Limited, a stock broker who did the introductory document valuing the Melstacorp share between Rs.65.52 and Rs.74.94 with an average price per share of Rs. 69.78, has recommended a share price of Rs.69.0 as the reference price for the introduction of Melstacorp.
The group beverage segment accounts for 71.5 percent of the group net revenue and CT CLSA expects such revenues to grow by 10.2 percent in 2017.
This is based on a forecasted volume growth of 4.0 percent and net revenue per proof liter growth of 6.0 percent.
The forecasts are however based on the assumption that the existing tax structure on alcoholic beverage would continue through 2019.
However, Sri Lanka’s government has been in the habit of raising taxes on the sector as the first thing when they feel that their coffers are running out. Economists have now begun to question the efficacy of such moves as demand may well stop being inelastic after a certain price level. While the group’s telecommunication sector contributes 9.3 of the net revenue, it is expected that the sector contribution could decline and thereby would evaluate its exposure going forward.
“The group is expected to continue evaluating its exposure in the telecommunication sector,” the document added. Further, the group’s plantation segment will also diversify into oil palm while reducing its exposure to tea and rubber segments, which have been facing challenges due to weak commodity prices and mandatory wage hikes.
Melstacorp has business interests mainly in beverage, plantations, telecommunications and financial services.