LOLC: Conglomerate in the making

Once the pioneer leasing company, LOLC has today evolved into a giant conglomerate. Its rapid diversification and expansion has been a recent phenomenon. The company’s 2010/11 Annual Report released last week sheds key insights to LOLC’s evolution to a leading diversified blue chip, the rationale for some of its recent investments and diversifications, the success so far as well as future plans. The insights are well captured in three reviews in the Annual Report from Chairperson Rohini Nanayakkara, Deputy Chairman Ishara Nanayakkara and Group Managing Director and CEO Kapila Jayawardena. The cover of 2010/11 Annual Report is also unique with a 3D cover and a heroic theme titled ‘The first full year since peace broke… paved the way for a conglomerate in the making’. Here are some highlights of the three reviews:

Chairperson Rohini Nanayakkara’s review

The year under review has proved stable from both the local and global perspective. The global economic recession continued to show signs of easing, though recovery has been uneven across markets, with Europe and North America not bouncing back as quickly as countries in the Asian Region have over the past year.

In Sri Lanka, the growth momentum was maintained and the economy grew by as much as 8%. The Central Bank of Sri Lanka has been proactive in continuously reviewing and bringing interest rates and inflation levels under control. This supervision enabled the financial sector to stabilise and grow and also contributed to the economy in a very positive manner. Meanwhile, the drop in the interest rates and reduction of import duties will certainly boost economic activity while FDIs too will increase over time.

The backdrop for our outstanding performance was undoubtedly Sri Lanka’s first year of total peace, where post-war growth and development has begun to flow, particularly in the north and east.

Massive development in the form of construction and repair of roads, bridges and other infrastructure development is taking place, in tandem with enhanced agricultural activity, all signifying economic growth into the future.

The flow of goods and produce from these regions is beginning to reach markets in the South and have a positive impact on other areas of the country.

Many of these developments have particular resonance within LOLC, as it has been our practice to strategically align our business with areas of growth in the country. Thus, our investments, acquisitions and new ventures mirror national growth trends and are being positioned to reap optimal benefit for the LOLC Group.

Over the last two years, we made a bold foray into the agriculture, plantations and renewable energy sectors, which have been incredible successes. Today, we have ventured into the leisure, tourism and construction sectors, propelling the erstwhile financial services provider into the top 10 diversified conglomerates in the country within a short period.

From LOLC’s perspective, 2010/11 has been a phenomenally outstanding year. All business fundamentals and performance parameters have been excellent. The Group recorded an impressive pre-tax profit of Rs. 8.3 b and Rs. 7 b as post-tax profits for the 12 months up to 31 March 2011. The comparatives for the last financial year were pre-tax profits of Rs. 2.8 b and Rs. 2.4 b post-tax profits. The growth in the pre-tax profits was a staggering 192% over last year with post-tax profits recording a growth of 194%.

It is noteworthy that more than 60% profit contribution is from our financial services sector, reflecting the stability of LOLC’s core business. Although we are pursuing the diversification of our portfolio with vigour, we simultaneously strive to add value in the financial services arena to become a one-stop shop, a complete solutions provider to our clientele. This year, we added insurance and stock broking to our basket of services and plan to take Islamic business, pawning and wealth management to greater heights.

In tandem with our business model of diversification, we have been in constant dialogue with the Central Bank of Sri Lanka towards moving LOLC from a financial services company to a holding company. Compliance with the regulations of the Central Bank is being strictly observed at every step. When the transition is completed in the coming months, group companies will handle the individual businesses whilst LOLC will assume holding company status.

Transparency and corporate accountability have underpinned the business success of the LOLC Group, giving it an extra edge over competition, especially in a milieu where businesses routinely circumvent regulations and leverage loopholes in the law.

From an operational perspective, LOLC aggressively pursued branch expansion, improving reach across more areas of the country. A key feature that has been extremely gratifying has been the opportunity to work with Government agencies such as the Postal Authority.

Our tie up with Sri Lanka Post enables us to reach the remotest of areas in the country via Post Offices. Establishing a wider footprint has also enabled the Group to tap into valuable human resource pools across the country. We can now recruit talented youth from across the country and give them the training and opportunity to move into various businesses, most particularly microfinance.

LOLC’s microfinance initiative continues to be a success story. The only regulated microfinance institution in Sri Lanka, LOLC Micro Credit has grown exponentially and provides yeoman service to communities not reached by most financial service providers.

LOLC is now an adherent to the United Nations’ Global Compact (UNGC), which lends strength and basis to our already well-developed sustainability regime. In this context, we view our investments in the leisure and renewable energy sectors as a green step in the right direction. In the same vein, we take a holistic view of sustainability and are mindful of our responsibilities towards society. LOLC Care is an initiative set up to offer support and care for those who are less privileged and differently-abled.

LOLC has continuously worked closely with our single largest shareholder, the ORIX Corporation Japan. This is a fruitful relationship we cherish and are proud of. We were extremely proud and honoured to receive the ORIX Award for Outstanding Performance for the Financial Year 2010/11. This singular honour is a testament to the level of service we offer our customers from within our dynamic and unique business culture. I do believe congratulations are in order for every member of LOLC for being a part of this outstanding achievement.

The era unfolding before LOLC is an exciting one and I am confident that the Group is well geared to play an integral role in developing the nation and crafting a vibrant conglomerate in the process.

Deputy Chairman Ishara Nanayakkara’s review

Our journey from the time of our inception until now has been an inspirational one and forms the solid foundation on which LOLC has consolidated its dynamic growth through the years.

LOLC too has culminated its eventful journey along with the peace that has dawned in Sri Lanka, and is on the cusp of transforming into a conglomerate with diversified businesses in sectors encompassing financial services, agriculture and plantations, construction, leisure, renewable energy and trading. Conceived as a leasing company soon after the liberalisation of the economy in the 1970s, LOLC was the first Company to introduce the concept of leasing to the SME sector – revolutionising the lives and livelihoods of despairing smallholder farmers who were finally able to gain access to cheap capital to finance their modest demands for machinery and equipment – and dare to dream. Decades later, our commitment to this segment of the market still remains.

We believe that our support to the SME sector has served as a catalyst for its growth and has engendered a spirit of entrepreneurship in this sector. From the very beginning, LOLC was able to access local and global funding lines and this strong partnership made LOLC an ideal conduit through which funding could reach beneficiaries directly.

Widening its base, LOLC then ventured into factoring and is now a clear market leader in the leasing and factoring business with the acquisition of Commercial Leasing Company Ltd. (CLC). CLC becoming a wholly-owned subsidiary of LOLC has created the largest leasing and factoring entity in the country, automatically bestowing market leadership status.

The arrival of peace in the country has given birth to a new era of hope and prosperity for Sri Lanka. We at LOLC have aligned our businesses to the Government’s vision for thrust areas in the economy that will receive its maximum support. A majority of the population lives in rural Sri Lanka where agriculture is the principal means of earning a livelihood.

LOLC Micro Credit Ltd. has now been set up to focus on a level below the SME sector - the poorest of the poor, who will benefit by our range of microfinance services. After decades of eking out a living below subsistence levels, the less privileged farmers can now avail of microcredit and attempt to elevate themselves from a life of poverty. It is our vision to support these farmers to move up the value chain by providing not just microcredit, but also technical know-how and ready markets, and we have made fast progress in this regard.

In a bid to promote gender equality and improve the status of women, women in villages are being empowered by our microcredit loans and we are proud to say that 95% of them come back for more loans and achieve a perfect payback ratio.

Last year, LOLC Micro Credit’s lending portfolio had 6,000 women on the books. In 2010/11, this number has grown to over 25,000, with these women eventually setting up small businesses that sustain their families and help them realise their dreams of a prosperous future. Our vision is to mirror LOLC’s growth up the value chain supported by strong integration at the grassroots level in this manner. We have a wealth of know-how embedded in our Group companies and our philosophy of knowledge sharing enables us to enhance IT, English and technical skills amongst rural communities in which we operate.

LOLC’s stake in Brown & Company PLC was a strategic move to fuse the synergies between the largest importer of agriculture machinery and equipment with our leasing capabilities, thereby creating the largest entity of agriculture machinery and financing in the country.

Further, we perceive immense potential in the Islamic finance segment. Our Islamic finance unit has made rapid strides in garnering a widening customer base.

Pawning is another fast emerging segment of our business that will see aggressive consolidation by us. LOLC has been able to adopt and implement new financial solutions and bring new businesses online in real time due to our business enabled IT system, which gives us the required leverage to deploy our solutions rapidly and effectively across the board. Foreign currency services, mobile banking, deposits, ATMs, and many more such IT enabled systems offer convenience and comfort to our customers.

Our financial services will be further strengthened with LOLC Insurance coming onboard in July 2011 for which we were granted a license in 2010. Our services will extend to both life and general insurance sectors and we intend to infuse a fresh approach to the business of insurance.

This forward integration model ensures a virtual 360 degree control over our operations, enabling us to monitor and enforce quality standards and ensure good corporate governance. Financial services remains our core business, generating approximately 50% of our revenue currently. Although LOLC will soon become a diversified conglomerate, we will continue to power growth in the financial services field, enhancing and adding value to our offerings.

As a leading player in the financial services segment, LOLC is bullish about the country’s capital markets and has recently acquired a stock broking license. LOLC Securities Ltd. will commence operations in July this year.

Our extensive presence in the financial services does not end here. LOLC has already stepped into the banking sector with a 20% stake in Seylan Bank and a 15% shareholding in HDFC, two crucial players in their respective segments.

Over the years we have collaborated closely and been a conduit for bilateral, multilateral and private equity funds with commercial and developmental objectives, both of which we optimised to build a strong community network and a sustainable organisation that can aspire to reach conglomerate status today.

My deepest appreciation goes out to all our funding partners over the years without whose financial and technical support LOLC could not have developed the systems and processes, and leveraged competencies to be a significant financial partner for customers, ranging from poor farmers to leading corporates in the country.

Our forward integration business model will be further enhanced with a fully-fledged environmentally-friendly motor garage which will secure a complete chain between the insurance company, fleet management arm and leasing services.

This synergy within the Group has allowed us to leverage on myriad business opportunities, driving profitability in every strategic business unit.

The LOLC Group’s growth has been characterised by a clear strategy to move up the value chain, setting up new businesses, supporting them until they gain critical mass and then allowing them to find their own level playing field. This consolidation at the beginning is what has given strong roots to our companies.

All our mergers and acquisitions are accomplished only after careful feasibility studies and risk assessment to ensure that they add genuine value to our existing business portfolio and that it is a sustainable niche. We want LOLC and Sri Lanka to be known as high value addition and knowledge centres of excellence, and we maintain this motto across our businesses.

The LOLC Group is committed to the well-being of the nation and towards nation building. This sense of social consciousness ensures that our business has a high sustainability quotient and that we have no negative impact on our stakeholders. As our portfolio of businesses grows in a natural culmination of a conglomerate, we continue to strengthen and reinforce our enterprise risk and governance systems to ensure compliance at all levels. Moreover, LOLC is also mindful of not over-reaching by ensuring that every new business we enter into is aligned with the enduring vision and objectives we have set for the Group. The Board support, vision and oversight is provided to every LOLC Group entity, but finally each Company is helmed by a team of professionals who share our passion to enhance LOLC’s position in the market while ensuring their operations are underpinned by hard work and ethicality at all times.

LOLC’s next key focus area will be enhancing its agribusiness portfolio, which includes tea, rubber, timber and forestry. As always, we envision adding value to these crops before exporting, to move up the value chain. Our Maturata, Pussellawa and Gal Oya plantations offer ample opportunities to maximise natural resources housed in these land extents.

This abundance of natural resources kindled our interest in renewable energy and today this interest has developed into a key thrust area for the Group with the setting up of mini-hydro power plants through Hydro Power Free Lanka PLC.

We intend to enhance the scope of our mini-hydro power operations over a period of time. Led by a pioneering vision to fashion a sustainable future for the nation, United Dendro Energy is currently engaged in building a six mega-watt wood-fired plant (Gliricidia) in Sri Lanka along with several innovative agro forestry and agricultural initiatives. The first-ever mega dendro project in the country will serve to lay the foundation for the harnessing of dendro energy as an alternative fuel source once commissioned by end 2012. The capacity of this project will be increased in the future.

Although the stem of the gliricidia plant is used to create biomass, even the leaves of the tree can also be used as cattle feed or as a substitute for bio fertiliser, thereby ensuring minimal wastage. Our investment in Agstar Fertiliser through Sierra Holdings is another move to complete the value chain.

Our Group awareness about ‘green’ initiatives is extremely high and we are constantly examining measures by which we can minimise our carbon footprint.

LOLC is the first commercial building to have the largest solar panel installation with 2,000 solar panels which provides 15% of our monthly energy needs at our head office. Our heightened sense of social responsibility has led us to be a signatory to the UN Global Compact. LOLC’s early collaboration with foreign funding lines required compliance to align our IT systems and sustainability initiatives and goals with that of the funding agency. Early knowledge of these social aspects of running a business has given us a cutting edge. Today, sustainability is ingrained into every stage of our business model and in every business area in which we operate.

Our interest in aligning our goals to the national vision to boost the tourism sector has resulted in exciting developments in the leisure arm of our business. Our acquisition of the Confifi Group of Hotels in the south – Club Palm Garden, Riverina and Eden Resort & Spa – and Tropical Villas, has given us ownership of a large swathe of beach property. Currently all are under refurbishment, except Eden.

This entire stretch will be unveiled as a unique resort property in 2013, catapulting us to the forefront of the leisure sector as the largest room operator along Sri Lanka’s Golden Mile. We are exploring possibilities to construct a city hotel to widen our leisure portfolio further, to cater to the holiday and business traveller alike.

The dawn of peace calls for massive infrastructure development in the country, not only in the underdeveloped north and east but also islandwide. Greater economic activity has already revived the construction sector, and keeping in mind the infinite potential of this sector, Brown & Company PLC and LOLC Group have invested in Sierra Constructions Company Ltd., which includes a construction and cabling company.

I believe that LOLC has achieved rapid success due to cognisance of its limitations and aspirations, which has given us a crystal clear view while formulating our business model. Yes, we do help set up Group companies and nurture them, but ultimately the management is left to the best and brightest industry professionals.

Our ambition to grow and expand is tempered by a strategic approach which ensures that we have clearly mapped out growth plans that are time-bound and which enable us to stagger investments to ensure that the payback time is such that steady cash flow is ensured, even though certain businesses may be in the incubatory stages.

Moreover, LOLC has allowed stakeholders to buy into its success by divesting a certain percentage of its businesses to the public. This requires excellent financial management skills, and astute financial prudence and discipline to maintain the perfect balance and leverage on the investment pool within our control.

As we prepare to don the mantle of a conglomerate, LOLC will continue to pursue organic growth by improving the performance of Group companies whilst also assessing opportunities for joint synergies with external partners. We exercise the greatest caution while entering businesses and ensure the right management synergy exists for a smooth transition.

I sincerely hope the LOLC success story – from company to conglomerate – will help you appreciate our journey and also bring home the important role that each of you, valuable stakeholders, have played in our transformation into a diversified conglomerate at the upper echelons of Sri Lanka’s business landscape.

Group MD and CEO Kapila Jayawardena’s review

The achievements of LOLC Group in the year under review are nothing short of phenomenal! We have recorded the best financial performance thus far, rapidly expanded our footprint, empowered our brand value, diversified our portfolio and, above all, maintained a consistent stream of income to sustain our unprecedented growth.

In this context, one might ask what our secret for success is. LOLC’s passion for sustainable business, impeccable timing to launch new investments and ability to identify future business trends continue to drive the Group to the forefront of Sri Lanka’s corporate landscape. We consciously align our business model to accommodate the opportunities stemming from the growth sectors of the local economy.

This is the first full year since peace broke and it has been an extraordinary year of progress in many of the growth sectors of the economy. The local economy recorded an impressive growth of 8.0%, the highest annual rate of growth reported in the last three decades.

From a strategic perspective, one of the key decisions we took several years ago was to align LOLC’s strategy with economic trends that reflect the evolving sectoral growth areas in Sri Lanka. Whilst monitoring the economic trends of the country, the dawn of peace has enabled us to seize opportunities hitherto unavailable.

Our analyses revealed that three sectors were clearly outperforming the rest and held the potential to grow exponentially into the future. These sectors were leisure, construction and renewable energy. Keeping in mind that LOLC already had significant investments in the agricultural sector, we added agriculture and our core business of financial services to the list. These five areas would henceforth form the strategic areas of focus and involvement for LOLC Group.

Within this context, LOLC made its initial foray into the leisure market last year, with the acquisition of the Confifi Group of Hotels and Tropical Villas. Our first step would seem paradoxical – to close them down, except for Eden Resort and Spa for refurbishment and, in time, place them under the management of a globally renowned hotel management company.

However, we are as always looking at the bigger picture; not short-term gains but the long-term profitability of the enterprise. As developmental work around the country reaches full flow, the construction industry is experiencing a natural boom. LOLC, through its stake in Sierra Holdings and Construction, is ‘in on the ground floor’ as it were.

There is great momentum in eco-investment too; the National Energy Policy has targets set for generating power through renewable energy sources to the National Grid by 2015. Sustainable investment by ‘going green’ is at the very core of our business model since inception. This core theme is reflected in every strategic move of the LOLC Group. LOLC’s vision to possess a green portfolio consisting of Mini-Hydro, Bio-Mass and Wind Power is now becoming a reality through our Companies – United Dendro Energy, Gal Oya Plantations, Maturata and Pussellawa Plantations.

Taking our sustainability commitment a step further, LOLC, whilst converting all conventional lighting in our establishments, to CFL is also going in for LED lighting. LED lights yield substantial savings in terms of power consumption, leading on to a 95% energy saving.

Purely with the desire of maintaining a ‘sustainable office’ concept, we installed 2,000 solar panels at our Head Office premises. Now we enjoy a 48KW grid connected solar system with expected net metering, which generates 15% of our monthly power consumption at the Head Office. On weekends and holidays, the produced electricity is channelled to the National Grid.

However, from a strategic perspective, where the areas of construction, leisure, agriculture and renewable energy generation are concerned, LOLC is not a direct operator, since these are not core areas of expertise for us. What we do is to invest in projects with good growth potential, provide strategic vision and let the experts run the business. This simple ability to identify strengths and outsource expertise where necessary has succeeded in building internal capacity while harnessing best practices, lending maturity and depth to the Group.

We also ensure that business prudence prevails and all such projects embody ‘exit in sight’ provisos.

Thirty years ago we pioneered leasing and expanded our financial portfolio to factoring, working capital, savings and deposits, micro-financing, Islamic financing, pawning, insurance, stock broking and fleet management to become a one-stop-shop offering an array of financial services.

We truly excel in our core business, financial services. Our main financial services companies generate more than 60% of our profits and will remain our core business.

The Group recorded a commendable post tax profit of Rs. 7 b as against Rs. 2.3 b in the previous year, an increase of 194%. Our book grew by 48% to reach Rs. 112 b from Rs. 75 b in the corresponding year reflecting the lending portfolio of the Group companies. Our Group Non-Performing Loan (NPL) ratio is approximately 2%, a laudable figure in comparison with the industry average of 7%. While the financial services sector brings us steady growth and profitability we believe that we have now built a strong portfolio of other investments and businesses which will bring us continuous profits and capital gains, considering the profile of short to medium to long term nature of such businesses.

This will give LOLC a sustainable stream of long-term growth and profitability from a diversified array of businesses. The success of this diversification strategy of the Group was proven by the consolidated revenues from leisure, agriculture, plantation and trading sectors.

The contribution from the leisure sector was Rs. 1.4 b to the Group’s revenue, while the Agriculture and Plantations sector contributed Rs. 5.1 b to the consolidated revenue.

In less than 10 months under our purview, investments in leisure recorded a Rs. 219 m pre-tax profit and the Group recognised a negative goodwill of Rs. 272 m.

Our Finance Company, Lanka ORIX Finance Company Limited (LOFC) went beyond leaps and bounds to be established as a premier finance house in the country. The total deposit base of the company grew by 72% to reach Rs. 17.4 b from Rs. 10 b last year. The recent capital infusion on prudent basis has strengthened the company even further, with a new brand and logo established and a listing on the way, and a fair share of it for our valued employees, LOFC is fully geared to become the number one finance company in the country.

Commercial Leasing Company Ltd. (CLC) continued to be a success story. The lending portfolio increased by 88% to record a book of Rs. 18.4 b. With the exponential growth in the portfolio, branch network and the customer base, CLC did not lose sight of its credit quality, which is the reason it has maintained a gross Non-Performing Loan (NPL) ratio of 0.8%.

LOLC Micro Credit (LOMC) continued to remain as a preferred conduit by most of the external funding lines, not only because of its outstanding performance but also because of its unique low cost distribution channels coupled with its low overhead and borrowing costs. Five more foreign funds were procured in the year under review to support the growth of the book by 106% to reach Rs. 8.2 b. With pawning as a new product in the product mix with dedicated centres across the island known as ‘Ransavi Centres,’ LOMC is on course to reach new heights on microfinance arena.

The Islamic Business Unit of LOFC recorded tremendous growth in the year under review. With the highest profit returns in the industry and a rapidly growing asset book, Al-Falaah is the single largest IBU attached to a Finance Company. To meet the increasing demand, we have a network of dedicated IBU centres currently operating in the areas of Kalmunai, Kaththankudi and Oddamavadi, with 10 more centres in the pipeline.

To optimise the resources and effi