Hemas Chief on why less FDI, economic boom despite peace

It is a thorny issue with not many in the private sector publicly commenting but top business leader Lalith de Mel, Chairman of Hemas Holdings Plc has been bold among the peers to stand up and be expressive.

In the just released Annual Report of diversified blue chip Hemas Chief de Mel has literally taken the bull by the horns by commenting on the lack of or lower inflow of investments especially Foreign Direct (FDIs) as well as why in his opinion the anticipated economic boom post war hasn’t come by as yet.

“The war is fast becoming a distant memory. The tranquility of peace gives us the climate to plan for the future without apprehension. However the expectation that a great economic boom is the dividend of peace has not quite materialized,” says De Mel.

According to him one requirement for an explosive economic boom is large infusions of foreign direct investment. “This has not happened, although the world of private equity, hedge funds and sovereign funds are awash with funds, seeking opportunities outside the West now grappling with a recession,” Hemas Chief noted.

He said that as an investment opportunity, tourism was perceived as a juicy red cherry that will attract massive inflows of investment. This, he pointed out too hasn’t happened and noted that foundations have so far been laid for only a fraction of the 15 to 20,000 rooms required to cater to an incremental million tourists.

“Our excellent GDP growth has not been strong enough to generate inflows of investment.

“Why?” is the tantalising question that hangs in the air without a clear answer,” de Mel has said in the Chairman’s Review in the Hemas Holdings 2010/11 Annual Report.

He recalled that there was an interesting comment by the country director of ADB that is certainly food for thought. As reported he said the World Bank has ranked the island 105th out of 183 countries in its “ease of doing business classification.” He therefore stressed the need to cut red tape, minimize bureaucracy, expedite approval processes, guarantee investment protection and have consistent policies in place to attract investments.

“Providers of funds are concerned with aspects outside monetary returns. Human rights, good governance and an atmosphere free of political interference are now becoming as important or possibly more important than good returns on investments. Importantly it is the perceptions that matter whatever the facts. Perceptions are reality and the real challenge is to manage perceptions,” de Mel pointed out.

Despite some frank views on the status quo de Mel commenting on the future of Hemas said “we have every reason to be optimistic. The emerging profile has brought into focus the need to determine and design the best structures that will provide optimum corporate governance. This will be a key area of my focus in the coming year,” Hemas Chief added.

The conglomerate in 2010/11 financial year incidentally produced its best ever results with net profit attributable to equity holders of Rs. 1.2 billion, up by 34% over the previous year.

Group after-tax profit was up 45% to Rs. 1.35 billion whilst profit before tax showing a similar percentage growth amounted to Rs. 1.56 billion.

Hemas’ previous best performance in 2007/8 financial year was with a bottom line of Rs. 1.13 billion and a post-tax profit of Rs. 1.15 billion. The FY 2011 performance the third time where the respective figures topped the Rs. 1 billion mark. The other occasion was in FY 2006/7.

Group revenue in FY 2011 had grown by 20.5% to cross the Rs. 18 billion  mark for the first time (as against Rs. 14.1 billion in the previous best year) whilst gross profit amounted to Rs. 5.83 billion, up from 14.4% over FY 2009/10.

De Mel said the world of Hemas has moved on from a family business to become a major public quoted company following all the principles of good corporate governance .

“This has not dulled its spirit of entrepreneurship which is now entrenched in the genes of this business. Even during the days of war the company saw the opportunities and invested for the future. The sectors that benefited from this bold approach: Hospitals, Power and Hotels, are showing a very promising profile and the green shoots of cash and profits are now visible,” the Chairman said.

He said that the old heartland of the business continues to be a very strong base. FMCG had a slight blip due to changes in rates of duty that affected its major household product Diva. Remedial measures are already in place. Notwithstanding this it produced a very impressive profit number. Pharmaceuticals sustained its star performance. Aviation continued to provide good profit growth. The Power portfolio has been restructured into a public quoted company which has an increasing emphasis in mini hydro power.

The Sector has turned in a good performance. One of the new sectors that is showing early signs of good profitability is Shipping. The business is rapidly developing a better balance. The old core sectors are now being supported by new growth areas with very good long term potential.

In terms of performance, the highlights are that sales increased by 20.5 % to Rs.18.1Bn, EBITDA increased by 19.9% to Rs. 2,493Mn. Through the refinancing of our US Dollar loans, the

Group was able to reduce the finance costs from Rs.449Mn to Rs.298Mn. Profit before tax was Rs. 1,569Mn which was a growth of 43.4%.There is a revaluation gain of Rs. 24Mn behind the profit number. Earnings showed a growth of 34.2% to be Rs. 1,210Mn. A key feature of this business and one of its major strengths is its cash flow. Cash generated increased by 41.7% to Rs. 1,995Mn.

Hemas Board has paid an interim dividend of Rs. 0.25 per share and proposed a final dividend of Rs. 0.25 per share.

The Chairman congratulated the CEO and his team for a very good performance. “I am particularly delighted with the energy and enthusiasm with which they have dealt with the challenges of growth in the new sectors,” he added.