Diversified conglomerate, Laugfs Gas PLC saw its net profit for the June quarter (1Q17) plunging to Rs.25.8 million from Rs.325.5 million a year ago as the borrowings taken to fund the growth during the last 12 months, when the interest rates were lower, are now weighing heavily on the company.
According to the interim financials released to the Colombo bourse, the group earnings per share dropped to 7 cents from 84 cents a year ago. This is despite the strong growth seen in the group top-line which rose by 45 percent year-on-year (yoy) to Rs.3.9 billion. The gross profit was Rs.949.1 million, up 25 percent from a year ago.
The group has now become highly leveraged as it has borrowed as much as Rs.11.37 billion during the year to June 30, 2016, to fund its expansion into different sectors, both locally and overseas.
Sri Lankan companies borrowed heavily and some became excessively leveraged during the last two years as the Central Bank kept interest rates artificially low by buying treasury bills and bonds through printed money.
This move busted the rupee as well as the country’s foreign reserves, forcing the Central Bank to raise interest rates within a very short period of time.
The finance cost spiked to Rs.247.9 million from just Rs.37.6 million a year ago, indicating the tougher times ahead for the home-grown group but its Chairman, W. K. H. Wegapitiya expressed confidence in the returns of the investments made from the borrowed money.
“The company is very confident that the returns are imminent in the medium to long term out of the judicious investment made, with the solar power plant expected to generate the earliest returns, by the third and final quarters of the current financial year, closing a considerable gap in profitability,” Wegapitiya said in a statement.
In February this year Laugfs broke ground for a Rs.5 billion, 20 mega watt solar power project in Hambantota. This is claimed to be the largest renewable energy project in the island so far.
Meanwhile, the group’s commercial operations were also impacted by the floods in May, which halted the, “operations for nearly two weeks making heavy impacts on the revenue and profitability of the company”.
Laugfs has interests in power and energy, leisure, property development and transportation and logistics among others and all segments showed negative performance during the quarter against the same quarter last year.
The group’s key energy unit in Sri Lanka saw its bottom-line turning a Rs.69.2 million loss from a Rs. 242.6 million profit a year ago. The power segment narrowed its profit to Rs.2.4 million from Rs.6.6 million a year ago.
The leisure and hospitality segment increased its losses to Rs.62.1 million from Rs.43.4 million, while the group’s transportation and logistics unit saw its profit falling to Rs. 8.4 million from Rs.20.3 million a year ago.
The State-controlled private sector pension fund, Employees’ Provident Fund had 17.28 percent stake in the firm as of June 30, 2016.