DISTILLERIES COMPANY OF SRI LANKA PLC (DIST)

22nd June 2012

Current Market Price LKR 130.00

Company Profile DCSL Group lead by its flagship Distilleries Company of Sri Lanka PLC, manages one of the nations most successful diversified blue chip portfolios spanning beverages, telecommunications, plantations, hotels, textiles, financial services, creative and media services and logistic services. The DCSL Group is among the top 5 corporate conglomerates in Sri Lanka. The Distilleries Company of Sri Lanka PLC (DCSL) is a company that can reference a history that is close to a century. The Company has grown beyond recognition since 1992. It has invested heavily and thoughtfully in several key sectors of the economy which are far removed from that of distillation, manufacturing and distribution of liquor. DCSL has now been recognized as one of Sri Lankas blue chip corporate entities. As undisputed leaders in the local spirits industry, the Company enjoys approximately 75% market share. Their operations have been upgraded by investing in state-of-the-art fully automated bottling plants and pot and patent distillation units located in four strategic regions in Seeduwa, Kandy, Kalutara and Badulla and an island wide distribution network consisting of a large fleet of vehicles coupled with warehouse facilities. The flagship products of the Company are Extra Special Arrack and varieties of Coconut Arrack, all part of an exclusive portfolio of coconut based products made available at licensed restaurants, premium supermarket chains, clubs and hospitality industry. The Company is also the exclusive agent for world renowned foreign liquor brands of the prestigious Group Pernod Ricard, France such as Royal Salute, Chivas Regal, The Glenlivet, Ballantines whiskies, Martell Cognac, Absolut Vodka, Beefeater Gin, Havana Club Rum, Jacobs Creek, Long Mountain, Montana wines and G.H. Mumm and Perrier Jouet champagnes. The beverage arm of the Group which is the core business contributed a significant proportion of the total Groups turnover. Although it comprises a small percentage of their current revenue the diversified portfolio of businesses has been making steady gains. DCSL products continue to dominate the market in the locally manufactured spirit market.

Top 5 Shareholders (as at 31.03.2012) Name Milford Exports (Ceylon) Limited Lanka Milk Food (C.W.E) Plc Mr. Muzaffar Ali Yaseen Mrs. Lorraine Estelle Marlene Yaseen Melstacorp Limited
Price Movement with ASPI

% 41.49 12.65 10.80 5.47 2.58

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Board of Directors Name Mr. D H S Jayawardena Mr. R K Obeyesekere Mr. C R Jansz Mr. N De S Deva Aditya Mr. K J Kahanda Mr. C F Fernando Dr. A N Balasuriya Mr. A L Gooneratne Ms. V J Senaratne Positions Chairman / Managing Director Director Director Director Director Non Executive Director Non Executive Director Director Director

The most important ingredient in the manufacture of coconut arrack is the supply of toddy as a raw material which has declined drastically due to the shortage of tappers plus the felling of a large number of trees in the region due to a disease. This resulted in a lesser number of trees being available for tapping. Some distilleries are illegally producing coconut spirits made out of artificial toddy which has become a massive undercover business for unlicensed toddy contractors. Information on subsidiaries

As at 31st March 2011

Periceyl (Pvt) Ltd 100%

Lanka Bell 97.81%

Continental Insurance Lanka Ltd 100%

Melsta Logistics (Pvt) Ltd 100%

Brown Beach Hotel 48.15%

Balangoda Plantations Plc 43.15%

Texpro 43.35%

Periceyl (Pvt) Ltd In 1996, Periceyl Pvt Ltd. was incorporated as a joint venture between Group Pernod Ricard France and Distilleries Company of Sri Lanka PLC (DCSL). Periceyl manufactures and distributes locally manufactured foreign liquor and Arrack via DCSLs extensive distributor network, to licensed restaurants, premium super market chains, clubs and the hospitality industry. In 2007, Periceyl became a fully owned subsidiary of DCSL and continues to be the market leader in the locally manufactured Brandy segment. Periceyls flagship brands include Galerie Napoleon French Brandy, Franklin Brandy, Black Opal Arrack - the unique premium arrack, and Flinton Gin. Balmora Rum, Petroff Vodka and House of Tilbury Whisky dominate an important segment in a very niche market. The company also acts as the marketing arm for DCSL to distribute the world renowned range of wines and spirits, which are owned by Group Pernod Ricard France, the second largest liquor company in the world such as Royal Salute, Chivas Regal, The Glenlivet, Ballantines whiskies, Martell Cognac, Absolut Vodka, Beefeater Gin,

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Havana Club Rum, Jacobs Creek, Long Mountain, Montana wines and G.H. Mumm and Perrier Jouet champagnes. Lanka Bell Established in 1997, Lanka Bell is the second largest fixed line operator in Sri Lanka. Lanka Bell became the only truly Sri Lankan telecommunications provider since its acquisition by the DCSL Group in 2005. Being the pioneers of CDMA technology in Sri Lanka, Lanka Bell is the undisputed market leader with a subscriber base now in excess of 1.2 million. Lanka Bell also provides broadband services, hardware, software and networking solutions and call center facilities with a finely balanced corporate and residential customer base. In 2008, the Company also invested in acquiring the rights of the worlds largest global network cable, FLAG (Fire Loop around the Globe) in partnership with FLAG Telecom, a subsidiary of Indias Reliance Communications. FLAG is the first terabyte undersea cable system to land in Sri Lanka linking key markets in Asia, the Middle East, Europe and USA to offer direct global connectivity, high speed data and internet access and far superior quality IDD facilities at extremely affordable rates to the people of Sri Lanka. Lanka Bell offers its services island wide through 62 of its very own branch offices as well as through several distribution networks with a presence of over 600 retail outlets around the country.

Balangoda Plantations PLC Balangoda Plantations PLC which was acquired by the DCSL Group in 1997 consists mainly of mid and low grown tea estates spanning the Uva and Sabaragamuwa Provinces in Sri Lanka. The total extent of its 23 Estates is over 13,000 hectares comprising of Sri Lankas most fertile tea and rubber Estates. The Plantations tea Estates covers a current cultivation of 5,400 hectares with an annual production in excess of 7 million kg. Adding to this is 1,800 hectares which is used exclusively for rubber tapping commensurate with Balangoda Plantations strong focus on latex and crepe rubber production activities. Tea production during the year 2010 reached a record high and sale prices substantially appreciated. The rubber sector enjoyed a buoyant market.

Melsta Logistics (Pvt) Ltd Formerly known as Collision Repair Centre (CRC), a 100% owned subsidiary of the DCSL Group offers the latest technology in the automotive repair industry. CRC was established to provide customers Convenience, Care, Expertise and Precision. The very first fully fledged state-of-the-art Collision Repair Centre was set up in 2005 in Seeduwa sprawling over 2 acres of land which can house over 300 vehicles at any given time and was joined by a second facility in Kandy which can accommodate 150 vehicles. CRC specializes in all makes and models of vehicles for Servicing, Mechanical Repairs, Bodywork and Accident Repairs which has enabled it to become the largest auto repair centre in Sri Lanka. CRC uses high-tech equipment to detect, adjust, repair and/or replace motor-vehicle body panels and related components. The process itself sees the use of the latest laser measurement to repair Uni-Body frame correction systems to ensure complete accuracy and precision when aligning damaged areas and when correcting structural and other faults in the frame or body of the vehicle. The Collision Repair Centre for motor insurance policy holders is fast gaining a reputation of being one of the most sophisticated and advanced in the country.

Brown Beach Hotel Spectacular golden sand fringed by a turquoise tropical sea nestling amidst the palm groves of the quaint fishing village of Negombo, Brown Beach Hotel has been treating guests to memorable holidays in Sri Lanka for decades. Sprawling across a 6.5 acre beach front estate with its unspoiled private beach, Browns Beach Hotel has

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been the most popular seaside resort in the immediate area of the Bandaranaike International Airport situated only 37 kms away from the commercial capital of Colombo. Browns Beach Hotel which is also associated to Aitken Spence Hotels Chain became part of the DCSL Group in 2011. The Hotel has currently seized operations to facilitate the construction of a new 180 room 4 stars plus luxury resort which is expected to be operational for the 2013 winter season.

Texpro Manufacturers of printed and dyed woven fabrics for export garments industry, Texpro became a member of the DCSL Group in the year 2001. Texpro imports woven greige fabric from international manufacturers for dyeing, printing and finishing according to customized specifications received from discerning customers across the globe. The Company was both financially and technologically restructured since its acquisition hence has earned a good reputation for quality, timely delivery and service standards in the industry. The company also enjoys low levels of energy consumption due to its very own Bio-mass steam producing facility in its efforts to reduce its overall carbon footprint. The high quality standards maintained has enabled the Company to secure orders from international Buying Houses and Retailers such as The Federated Group, Colombia Sportswear, Next, Sportif, Bhs, Gap, Tesco, Tommy Hilfiger, C & A, Intimissimi, Macys, Liz Claiborne, Calzedonia and John Ashford to name a few in addition to many high-end garment manufacturing factories in Sri Lanka and neighboring countries. In addition to exports the Company is also one of the largest suppliers of woven fabrics to Sri Lanka Army, Air Force, Civil Defence Force, Police and the Department of Education. The garment industry seems poised for a turnaround due to the depreciation of the Rupee against the US Dollar. They are optimistic that the textile industry should benefit from this. Continental Insurance Lanka Ltd A fully owned subsidiary of the DCSL Group is a dynamic player in the insurance industry who is committed to providing world class levels of service in its journey to become the No. 1 insurance provider in Sri Lanka. Headed by an experienced team of professionals, some of whom are directly responsible for revolutionizing the insurance industry in Sri Lanka, Continental operates with the single minded goal of providing clients with cutting edge insurance products & solutions that can be tailor-made for their individual requirements. The Continental Insurance Product Portfolio currently includes Motor, Fire, General Accident and Marine Insurance coverage with more products being developed by Continental for introduction in the near future.

Future Direction Consolidation remains a key focus of the Group. The DCSL Groups growth areas are aligned with the nations needs and we will continue to explore opportunities in sectors that need to be developed further for national growth and nation building. Logistics has been identified as a key thrust area in the future as the country prepares to build a maritime and warehousing hub status for itself. The Groups entry and exit strategy continues to boost their bottom line and enables them to remain in business sectors where they have clear control over the management. Their next target is to establish product range in the international market and R&D Division is working to achieve this aim in the near future. Substantial revenue growth is expected from the Broadband business with network expansion to the north and east. Looking at the power sector construction work on the mini hydropower plant should be completed this year. In the meantime they have acquired a renewable energy permit from the Sustainable Energy Authority of Sri Lanka and an Electricity Generation License has been obtained from the Public Utilities Commission of Sri Lanka. Further they have entered into a power purchase agreement with the Ceylon Electricity Board for the sale of Electricity generated for a period of 20 years. Since the tourism sector is now open to new growth vistas with the ending of hostilities this is another strategic investment for the Group.

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Financial Performance

Income Statement As @ 31st March Gross Revenue (Rs.000) Net Revenue Profit / (Loss) Before Tax Taxation Net Profit / (Loss) After Tax Earnings Per Share Price PE

2008 57,685,562 38,941,718 5,938,638 (1,763,938) 4,174,700 13.67 98.00 7.2

2009 40,830,967 21,872,493 4,382,740 (1,682,794) 2,699,946 8.86 65.00 7.3

2010 39,809,611 20,047,956 3,462,334 (1,310,692) 2,151,642 7.12 118.00 16.6

2011 49,788,711 20,172,641 10,761,866 (2,424,356) 8,337,510 27.08 180.00 6.6

2012 63,516,035 27,365,928 9,306,135 (2,800,555) 6,505,580 19.94 145.00 7.3

2013 E 77,489,563 33,386,432 11,353,485 (3,416,264) 7,937,221 24.33 158.13 6.5

From 2008 to 2012 revenue growth had been in the range of (29.22) % to 27.57%. giving a CAGR of 5.23% from 2008 to 2012. In 2010 Gross Revenue was Rs.39.81 Bn and this has increased by 25.07 % in 2011 to Rs.49.79 Bn and further increased by 27.57% from Rs.49.79 Bn in FY 2010/11 to Rs.63.52 Bn at the end of FY 2011/12. Main Revenue segment is from Beverages which accounts for 83.39% and 6.78% are from Telecommunications segment.

Revenue %

Beverages Plantations Telecommunications 52,965,638 2,629,925 4,306,697 83.39% 4.14% 6.78%

Diversified 3,613,775 5.69%

Revenue Analysis
40.00%

30.00%
20.00%

Percentage

10.00% 0.00% Revenue Growth 2009 2010 2011 2012 2013 E

-10.00%
-20.00% -30.00% -40.00%

Revenue Analysis 2009 2010 Revenue Growth -29.22% -2.50%

2011 25.07%

2012 27.57%

2013 E 22.00%

From 2008 to 2012 profit growth had been in the range of (35.33) % to 287.50%. Overall average had been a positive growth rate of 52.47% from 2008 to 2012.

Profit %

Beverages Plantations Telecommunications 6,633,084 27,407 94,562 84.90% 0.04% 0.15%

Diversified 1,057,735 1.67%

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Balance Sheet As @ 31st March Funds Employed Stated Capital Capital Reserves Revenue Reserves Shareholders's Funds Net Assets per share PBV Total Borrowings Non Current Liabilities Net of Borrowings Current Liabilities Net of Borrowings Assets Employed Non Current Assets Current Assets

2008 300,000 1,954,438 16,604,397 18,858,835 70.75 0.7 6,965,491 47,465,039 10,556,249 49,443,052 36,768,733

2009 300,000 2,499,892 19,633,002 22,432,894 74.78 1.2 5,177,203 873,815 7,014,536 14,970,337 12,143,691

2010 300,000 2,719,791 17,742,678 20,762,469 69.21 0.6 3,966,369 1,029,315 8,353,782 16,719,976 11,885,894

2011 300,000 6,035,128 25,300,673 31,635,801 105.45 0.6 4,599,738 1,774,898 10,949,712 30,307,167 21,786,146

2012 300,000 5,864,013 30,532,309 36,696,322 122.32 0.8 10,986,207 2,361,513 14,251,290 33,448,103 34,530,725

Margin Analysis
20.00% 15.00%

Percentage

10.00% 5.00%
0.00% 31st March 2011 31st March 2012

Net Profit Margin

Net profit has significantly decreased by 21.97% from Rs.8.34 Bn in FY 2010/11 to Rs.6.51 Bn at the end of FY 2011/12. However 31st March 2012 Net Profits include investment and other income of Rs.1.46 Bn. Net Profit Margin had decreased by 6.51% YoY from 16.75% in FY 2010/11 to 10.24% at the end of FY 2011/12. The cash flow was negative at Rs.6.87 Bn as at of 31st March 2012.

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Price Volume Movement

DIST Price Volume Chart

Share Volume

Share Price

Volume Price

DISTs share price has decreased from Rs.180.00 to Rs.149.00 at the end of 31st March 2012. DISTs all-time highest price was Rs.197.00 and its all-time lowest price was Rs.3.50. Currently trades around Rs.130.00.

140.00 120.00 100.00

Rs.

80.00 60.00 40.00 20.00

Date 6/29/2011 7/18/2011 8/3/2011 8/19/2011 9/7/2011 9/26/2011 10/13/2011 11/2/2011 11/22/2011 12/8/2011 12/23/2011 1/12/2012

Investor Ratios

EPS Rs. NAV Rs.

The PE has decreased from 6.6 times on 31st March 2011 to 7.3 times as at 31st March 2012. The current PE of 6.5 times is lower than the industry average of 14.3 times. The stock is trading below its industry price and has a high potential to increase. Net Asset per share has increased from Rs.122.32 on 31st March 2011 to Rs.105.45 at the end of 31st March 2012. The PBV has decreased from 1.7 times on 31st March 2011 to 1.2 times as at 31st March 2012. The current PBV of 1.1 times is lower than the industry average of 4.4 times.

Key Financial Ratios As @ 31st March DPS Dividend Yield %

2008 1.75 1.79%

2009 2.25 3.46%

2010 2.50 2.12%

2011 3.00 1.67%

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Based on forecast we expect the company to reach Rs.77.49 Bn Gross Turnover and Rs.7.94 Bn Net Profit after tax by the end of 31st March 2013. EPS was Rs.27.08 on 31st March 2011 and this has decreased to Rs.19.94 at the end of 31st March 2012. The EPS has decreased on the prior year by 26.37%. Based on average trend in growth we forecast the EPS to be Rs.24.33 31st March 2013. Valuations and assumptions are calculated based on the annualized profits of 31st March 2012 results while taking into account the performance based on last three years audited financial statements of the company. Summary of valuation of the share given that the market condition remain the same are as follows

Basis Multiples 31st March 2013 E Price Company PE as at 22.06.2012 6.5 158.13 Sector PE as at 22.06.2012 Discounted by 20% 11.9 289.50 Company PBV as at 22.06.2012 1.1 134.55 Sector PBV as at 22.06.2012 Discounted by 20% 3.7 452.58
Conclusion DISTs share has decreased from Rs.180.00 on 31st March 2011 to Rs.145.00 as at 31st March 2012. This is mainly due to prevailing bearish market sentiments. The current price of the DIST share of Rs.130.00 is trading below both industry PE and PBV multiples. The share value based on company PE and PBV multiples using forecasted earnings for 2013 is Rs.158.13 and Rs.134.55 respectively. However the values based on industry discounted multiples of PE and PBV basis are Rs.289.50 and Rs.452.58 respectively. The share value based on industry multiples averages around Rs.371.04 in terms of 2013 forecasted earnings. Thus based on expected earnings and asset growth we are of the view that the share price will show growth in the medium to long term.

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Research
Cheryl Ranasinghe Sandamali Jayawickrama Imran Perera Karthiga Kathirgamanathan Director-Research Research Analyst Research Analyst Research Analyst [email protected] [email protected] [email protected] [email protected] +94 115 328 253 +94 115 328 227 +94 115 328 229 +94 115 328 228

Sales
Ashan Dassanayake Niranjan Niles Chandana Edirisinghe Romesh Kenny Gayan Silva Ruwan Rodrigo Sooriya Arachchi B. L. A. Dayananda Manoj N. Dheerasinghe Krishan Williams Anjana C. Weerasinghe S. Roshan Fernando Director Director Director Manager-Institutional Sales Asst. Manager-Retail Sales Asst. Manager-Regional Sales Investment Advisor Investment Advisor Investment Advisor Investment Advisor Investment Advisor Investment Advisor [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] +94 115 328 101/2 +94 773 070 555 +94 115 328 277 +94 115 328 211 +94 777 723 096 +94 115 328 204 +94 777 763 099 +94 115 328 210 +94 773 836 475 +94 115 328 209 +94 773 405 071 +94 115 328 205 +94 715 329 617 +94 115 328 208 +94 771 991 104 +94 115 328 216 +94 773 380 034 +94 115 328 218 +94 775 295 824 +94 115 328 223 +94 772 379 817 +94 115 328 219 +94 776 047 464

Disclaimer
The report has been prepared by Taprobane Securities (Private) Limited. The information and opinions contained herein has been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.

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