Liquor giant targets 50% profit share outside core business
Despite volume losses Distilleries Company posts record profit

The Distilleries Companies of Sri Lanka Limited (DCSL) has posted an after-tax profit of Rs. 420 million for the year ended March 31, 2001, its highest ever profit, although only marginally up 0.85% from the previous year’s Rs. 416.4 million, the company has revealed in its just released annual report.

DCSL is following a strategy of limiting its dependence on liquor revenue to 50% of consolidated profits by divesting profits sources, the company’s Chairman, Dr. V. P. Vittachi said.

He explained that this would insure the company against major changes in profitability of the liquor sector "due to arbitrary tax hikes, increased illegal and illicit liquor sector activities and shifts in alcohol consumption volumes and patterns."

Vittachi claimed that while many first world medical practitioners acknowledged the health benefits of a moderate consumption of alcohol, certain interested parties in the third world seek to disrupt the industry by blaming the ills of illegal liquor and moonshine on the legal liquor.

"Hence the strategic investments in companies in diversified fields would give your company the ability to ensure its continued profitability and increase in value of the investment of shareholders."

DCSL has substantial interest in two quoted plantation companies, Balangoda Plantations Limited (43%) and Madulsima Plantations Limited (31%) as well as Aitken Spence & Company Limited. Its subsidiaries include Periceyl (Pvt) Limited, manufacturing "foreign" liquor like whisky and brandy as a supplement to DCSL’s core products of a range of arracks. It also controls the Beruwela Distilleries (Pvt) Limited.

Vittachi said that sales volumes that dipped after the import duty hike in 1998 had not shown any signs of recovery. Retail prices were increased by 23% in October 1998 and several price hikes due to tax increases in 1999/2000 have made locally manufactured tax-paid liquor "more and more unaffordable to the masses."

"We estimate that over 70% of Sri Lankan liquor consuming population now cannot afford tax-paid liquor. Another approximately 10% from the top bracket consume imported high-priced liquor. The balance 20% is shared by the legal sector and the tax-unpaid illegal liquor sector," he said.

Vittachi said that the tax increases heaped on the legal liquor industry had enhanced the operating margins of tax-unpaid liquor.

"Protection from influential persons, corrupt authorities, ineffective and outdated excise legislation, and insignificant fines imposed on convicted liquor offenders, have made the illegal liquor industry a highly profitable business to many," he said.

The company estimated that including the loss of approximately Rs. 2.2 billion a year due to the increase of their prices as a result of import duty hike on spirits, the Treasury is losing approximately Rs. 10 - 12 billion annually due to the booming illicit industry.

"The loss of profits to your company due to tax-unpaid liquor is estimated to Rs. 600 million a year," Vittachi said.

He said that illegal arrack is sold to unsuspecting consumers at prices similar to that of legal arrack. In appearance, illegal arrack was similar to the legal product and retailers dealing in it made Rs. 50 to Rs. 75 a bottle compared to their Rs. 10 margin on the sale of a tax-paid product.

"Many licensees complain that since the licensing system was changed a few years ago, selling only legal tax-paid liquor has become unviable mainly due to having to pay monthly kick-backs to politicians and their stooges.

"Licensees are forced to pay these illegal gratifications to ensure that the licence for the following year will be forthcoming. Other such as some police personnel, and some Excise Department officers expect monthly santhosams to be paid to them, and also free liquor. Many licensees are pushed to sell tax unpaid liquor to cover these costs."

He said that the Inland Revenue Department obtains details of legal sales of licensees from the manufacturers and this means that selling tax-paid arrack made them incur extra income taxes and turnover taxes.

"The requirement to pay taxes to the IRD for selling legal liquor is yet another incentive for retailers to peddle illegal liquor. It is an irony that state departments and their regulations that have been established to safeguard and increase state revenue are in fact working against the liquor industry to decrease revenue," he said.

The directors have recommended a dividend of 42.5% for the year under review, up from 40% the previous year on its one-rupee share. Vittachi said that the gross yield of 17% per annum on the year-end share price was an attractive return for individual shareholders. The company’s shares which had a book value of Rs. 8.56 and was described by him as "one of the few value stocks in the market" that traded between Rs. 3.75 and Rs. 4.25 during the year.

The directors of the company are: Messrs. V. P. Vittachi (Chairman), D. H. S. Jayawardene (M/D), R. K. Obeyesekere, A. N. D. Balasuriya and C. R. Jansz.