FROM THE BOARDROOMS JKH to fully capitalize on regional growth -Krishan Balendra

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By 2018-01-14

Interview And Pics By Ravi Ladduwahetty

Just-appointed John Keells Holdings (JKH) PLC Deputy Group Chairman Krishan Balendra said on Friday that the JKH Group has positioned its businesses to benefit from the opportunities presented by the growth in the Sri Lankan economy and rising disposable incomes, as well as the broader growth story of the Indian Sub-Continent.

Below is his conversation with the Ceylon FT, in his maiden media interview, print or electronic, since assuming duties as Deputy Group Chairman.

What do you see as the growth drivers at the John Keells Holdings PLC Group?
The Retail business is presently under aggressive expansion, while the Group has well-established brands in the Consumer Foods and Beverage space, for which we have increased the product range and intend to continue to add new products. The Group runs a successful Life Insurance business, for which the growth prospects are quite exciting as the economy reaches a certain level of prosperity. We have also developed a strong brand and track record for property development. Given our real estate assets, we see significant opportunity to cater to the growing demand for conveniently located, well-constructed housing for residents in and around Colombo.

The Indian Sub-Continent continues to present significant opportunities for the JKH Group. JKH owns a 42% stake in South Asia Gateway Terminals (SAGT), the first privately owned and operated Port Terminal in the Port of Colombo, in addition to being the largest player in the Bunkering business off the Port of Colombo. Given that around 80% of volumes in the Port of Colombo are transshipments to India and the South Asian region, we believe the strong growth in the region augurs well for this business. Sri Lanka has also witnessed sharp growth in tourist arrivals from India and China in recent years, which we expect will see further substantial growth in the next few years. The JKH group owns significant city hotel and resort properties in Colombo and across several resort properties in Sri Lanka and the Maldives, which would cater to this demand.

FOOD AND BEVERAGE
SECTOR
The implementation of the sugar tax has resulted in prices of Elephant House soft drinks rising by more than 50 per cent. What kind of impact do you believe this will have on Ceylon Cold Stores' business and how do you intend to compensate for the loss of volumes?

The Sugar tax resulted in a steep rise in the costs for the soft drink industry and all industry participants have increased prices to compensate for the rise in costs. It is too early to comment on the extent of the volume reduction stemming from the price increases.

We have been consciously reducing the sugar content in our soft drinks for some time now and we plan to continue to do so. In addition, we have been expanding our beverage portfolio beyond a range of carbonated soft drinks, including the launch of a range of fruit juices and fruit-infused iced tea beverages. We would continue to pursue such plans which will, over time, compensate for the possible volume reduction stemming from the recent price increases.

Consumer spending has been lacklustre during the last few quarters, with inflation remaining high. Do you see the overall consumer spending improving during 2018?
Consumer spending has exhibited some weakness over the last 12-18 months, partly stemming from the economic impacts of the drought. We do, however, anticipate an improvement in consumer spending in the 2H of 2018.
What are your plans with the supermarket chain? Do you intend to expand your supermarket chain coverage beyond the current 65 outlets?

We are currently engaged in an aggressive expansion of our Retail business, which stems from our confidence in our business model and growth prospects for modern trade. We will increase our store count significantly over the next few years.
What is the differentiating factor between your outlets and your competitor chain outlets?

We have seen a positive response from our customers to the overall offering at our stores and will continue to seek their views to further improve our offering. The value proposition is collectively derived from multiple facets to our offering, which includes our fresh offering of vegetables fruits and meat and bakery products, the store format, availability of products, location, adequate parking and the promotions that we offer.
We recently launched a brand-new look and feel to our stores with the opening of a new store in Attidiya, for which we have received a very positive response from our customers.
Ceylon Cold Stores PLC (popular as Elephant House) is investing Rs 6.3 billion in a new ice cream and bottling plant. What is the market potential that you aim to capture from this investment?

The new ice cream plant which will be operational in May this year will give us improved capacity particularly on our range of sticks and cones which will strengthen our position in the impulse segment of the market. We do have plans for a new bottling plant and a decision on when we commence construction of the plant would be taken after assessing the volume impact from the recent price increases. The consumption levels of both categories are quite low in the country compared to other more developed countries in the region and we believe our volumes will increase as disposable incomes grow.

TRANSPORTATION SEGMENT
What is the current capacity utilization of the SAGT terminal and what was the throughput handled by the terminal in 2017?
The current capacity utilization of the SAGT is approximately 85%, with 1.81 million containers handled in 2017.
The transportation segment revenue has risen by 75% during the September quarter. What do you attribute this increase in topline to?

The year on year increase in revenue in the Transportation Sector is mainly attributable to the Bunkering operations. While SAGT has seen good growth, it is an associate investment and, as such, is not reflected in JKH consolidated revenue figures.
The growth in the bunkering segment during 2Q FY 18 was attributable to India introducing an 18% GST on bunkering sales, which attracted ships for refuelling to the Colombo Port. With India cutting down the GST to 5%, what kind of growth are you expecting from the bunkering segment?

We believe that increased traffic to the Port of Colombo will support sound organic growth in the bunkering segment despite the reduction of GST in India. The Port of Colombo is the leading port in the South Asian region and has established itself as the main hub. Container cargo volumes should grow as the region develops, which should result in more volumes at the Colombo Port.
PROPERTY SEGMENT
What percentage of the waterfront apartments have been sold to date?
We have sold approximately half of the apartments at Cinnamon Life to date.

Are you on track to complete the Cinnamon Life project by 2019 and does the project cost still stand at US$ 850 million? Have there been any cost overruns? What percentage of the investment is left to be made?
We expect to complete construction of the apartments by end-2019 and the Hotel is expected to be operational by mid-2020. The overall project cost is US$ 850 million excluding interest during construction, which was the value envisaged at the outset, and at present, 35% of the planned investment has already been made.
The company has been looking at another large scale commercial/residential development in Central Colombo. Has there been any development made on this front?
Plans on the new residential development in central Colombo have been progressing well and the project should be launched in the current quarter.

What kind of impact do you think the imposition of a 15 per cent VAT on apartment sales and a 10 per cent Capital Gains Tax will have on apartment sales going forward?
The imposition of these taxes does have an adverse impact on the sector. However, we still see good demand for well-built and conveniently located residential and commercial spaces in and around the city of Colombo. We believe, like many other Asian cities, Colombo will increasingly see apartment living as land and construction costs rise and traffic congestion worsens.
LEISURE SEGMENT

What kind of impact are you seeing from the entrance of major players such as Shangri La to the city hotel market? Have you seen an impact on ARRs, occupancies and banquet sales as a result?
An influx of new room inventory will naturally have an impact on occupancy levels of existing operators in the short term. However, we see these impacts subsiding as the new capacity is absorbed by growth in tourist arrivals, which we anticipate will grow significantly over the medium term from current levels. The city will see a number of new developments, but the room count will remain significantly lower than other Asian capital cities. The tourist numbers have grown since the end of the war, but at 2 million a year, it is still a small number. The island of Bali gets over 5 million tourists a year.

How are the Maldivian hotels fairing at the moment? And what are their occupancy levels?
The Maldivian Hotels sector has seen an increase in supply of room inventory while politics has attracted some negative travel advisories in the current financial year, which has resulted in a slight moderation in occupancy levels. Some rooms in two of our Maldivian resort properties were closed for refurbishment for 6 months in the current financial year, but have been fully operational from mid-October this financial year.
What are your plans with the refurbishment of the Bentota Beach Hotel?
The Bentota Beach Hotel is being reconstructed while retaining iconic features of the original Geoffrey Bawa design. We expect the Hotel to re-open in December 2019.
There is a rumour in the market that JKH is trying to sell a few of its hotel properties. Is this true?
We are not looking to sell any of our existing hotel properties.
FINANCE SECTOR

What potential do you see for Union Assurance's Insurance business in the near future?
Life Insurance is under-penetrated in Sri Lanka compared to regional peers and we see strong prospects for the Life Insurance business over the medium term, while Union Assurance PLC is well-positioned to benefit from this anticipated growth. The Life Insurance industry has seen good growth over a period of time and we expect this momentum to continue.
Do you intend to reduce your stake in Nations Trust Bank?

The Monetary Board of the Central Bank of Sri Lanka has permitted the John Keells Group to retain its current shareholdings in the Bank till 31 December 2020 and to reduce it to 15 per cent with effect from that date.
What are your target ROEs and hurdle rates for the projects that you are looking at?
The Group expects a minimum return on capital employed of 15% from investments in new projects.

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