FC Research

SRI LANKA

Earnings & Market Returns Forecast

Results Update June 2015 Quarter
1.0

Consumer Demand to continue until rupee depreciation and interest

rate hike; Market returns may continue its positive trend

The significantly high consumption demand taking place is adversely affecting the balance of
payments resulting through heavy imports. We expect credit growth and consumption
demand to continue up until a heavy rupee depreciation and an interest rate hike which is
gradually taking place. In addition to the Banking and Finance, Food & Beverage,
Manufacturing and Trading sectors which are positively benefited by the credit growth and
consumption demand, we expect the currency depreciation to positively benefit hotels,
plantation and selected manufacturing sector exporters. Amidst the developments we
maintain our market earnings forecast for Dec 2015E / Mar 2016E at 11%-13% YoY. The
positive market returns are likely to continue with settling of the political and policy
uncertainty. We expect a slowdown in economic conditions beyond June 2016 resultant to
likely rise in interest rates affecting companies across the board. As a result we expect Market
earnings to slowdown for the earnings period Dec 2016E / Mar 2017E resulting in an
earnings forecast of 4%-5% YoY.

FC Research
2.0

Results Update June 2015 Quarter

Our previous forecasts on earnings

Our Results Update March 2015 Report forecast for future earnings was as follows:
Consumer Demand to drive Dec 2015E / Mar 2016E earnings growth; Market returns may
improve once uncertainty settles: Low interest rate regime, higher disposable income and
stable exchange rate are likely to drive market earnings for Dec 2015E / Mar 2016E positively
affecting Banking and Finance, F & B, Manufacturing and Trading sectors while indirectly
affecting Diversified sector as well. We continue to maintain market earnings forecast for Dec
2015E / Mar 2016E at 11%-13% YoY. We believe market returns are likely to stay low amidst
the current uncertainty in the political front. We expect Market returns to be strong once the
prevailing uncertainty settles down. However, we expect a slowdown in economic conditions
beyond June 2016 due to possible rise in interest rates affecting companies across the board.
As a result we expect Market earnings to slowdown for the earnings period Dec 2016E / Mar
2017E resulting in an earnings forecast of 4%-5% YoY.
Our Results Update December 2014 Report forecast for future earnings was as follows:
Earnings Forecast for Dec 2015E / Mar 2016E remain at 11%-13%; Market returns to grow
once uncertainty settles: We upgrade our earnings forecast for Dec 2014 / Mar 2015E to 10%12% from the previous 6% -7% amidst earnings continuing to remain above our expectations
predominantly led by heavy trading income in the banking sector and consumer led earnings
growth coming in earlier than we anticipated. We continue to remain bullish on consumer led
earnings growth which is likely to drive market earnings in Dec 2015E / Mar 2016E to reach
our forecast of 11%-13%. Market returns suffered during the current 2 quarters with Dec
Quarter recording +0.6% return and Mar Quarter up-to-date recording c.-2.3% amidst the
prevailing political uncertainty. Despite healthy earnings growth in most companies, gap
between market returns index and market earnings index has been widening; thereby we are
bullish on market returns during the 2H2015 when the policy direction becomes clearer and
the political uncertainty settles down.
Our Results Update September 2014 Report forecast for future earnings was as follows:
Earnings recovery on track; Market returns may show strong growth: With company
earnings registering in line with our expectations, we continue to maintain our forecast for
Dec 2014E / Mar 2015E earnings growth at 6%-7% YoY while retaining our forecast for
earnings growth for Dec 2015E / Mar 2016E at 11%-13%. In line with previous expectations
market return slowed down during the last 2 months with the market return registering a
growth of 0% while the YTD return remained at 23%. Amidst the growth in Market Earnings
being in line with expectations and slow Market Returns in the last few months, we expect
Market Return to remain strong during the next few quarters once the political uncertainty
eases off.
Our Results Update June 2014 Report forecast for future earnings was as follows:
Earnings recovery to continue; Market returns to slow down: We continue to maintain our
forecast for Dec 2014E / Mar 2015E earnings growth at 6%-7% YoY while maintaining our
forecast for earnings growth for Dec 2015E / Mar 2016E at 11%-13%. Market Return during
the last few months have been strong with the ASPI gaining 18% during last five months and
2

FC Research

Results Update June 2015 Quarter

10% during last two months which has outperformed our target expectation. We believe
market returns to adjust in the short term until market earnings recovery catches up with the
rise in market returns. We continue to remain positive on market returns towards medium to
long term in line with expected growth in earnings.

3.0

Consumption boom remained stronger.

June quarter earnings showed a 10% YoY growth to LKR 47bn amidst the slowdown depicted
QoQ basis (-12.8%) mainly on the back of continuously underperforming plantation and oil
palm sectors. Positive contribution derived from growing consumption led banking & finance,
food & beverage and manufacturing sectors have assisted earnings to maintain at sustainable
levels.
Being the top contributor, Banking and finance sector continued its earnings uptrend by
recording an earnings of LKR 4.4bn (31% YoY) amidst the boost in private sector borrowings.
However, positive contribution emanated from banks and finance companies were
diminished by the negative impact derived from insurance companies resultant to trading
losses incurred due to slow movements in interest rates in the economy. Manufacturing and
food and beverage sectors also experienced a growth momentum owing to increasing
demand for products coupled with improved disposable income.
Plantation and oil palm sectors were the main negative contributors to the June quarter
earnings (139%YoY and 62%YoY respectively) due to lower commodity prices together with
political and economic unrest prevailed in main export destinations. As a result of lower
trading gains recorded in the year, investment trusts sectors earnings also plunged by 70% to
LKR 357mn.

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