Agribusiness

Our agribusiness comprises cultivation, agricultural processing, and dairy farming. Our palm oil venture, the first and so far the only entity in South Asia to attain Roundtable on Sustainable Palm Oil (RSPO) certification, continues to be the primary revenue generator for this segment.

OVERVIEW

As of March 2024, our Agribusiness is the third largest revenue generator for the Group, accounting for Rs. 8.3 Bn. With a legacy that spans over a quarter of a century, the Sunshine Agribusiness at present comprises two primary upstream business units: oil palm cultivation and dairy farming, both of which have had to contend with multiple crises over the past three years that posed almost an existential threat to the segment. Meanwhile, the dairy business made an enviable recovery, showing much promise.

The 2023-2024 financial year was a period of exceptional recovery and rejuvenation for the Agribusiness, which had been hit hard by the 2022 financial crisis. The impact of a ruinous ban on inorganic fertiliser and debilitating shortages in animal feed which proved a major distraction for the plantation segment as it had to concentrate on growing its own maize, and a host of other issues had threatened to grind our business activities to a halt. Both palm oil and dairy segments recovered at an unexpected rate in the months that followed, recording notable growth during the year under review.

The plantation business is also encouraged by ongoing conversations at the national policy level on lifting of the prevailing ban on oil palm cultivation that has been a thorn in the side of the business for some years. Irrespective of the outcome, we are confident that the business will continue to grow, supported by our strategic expansion and active replanting prior to the ban.

Palm oil

Generating over Rs. 6.8 Bn. for the Group annually, our oil palm cultivation, managed by Watawala Plantations PLC, had expanded over the years to cover 3,393 hectares and operates one palm oil mill. In addition to oil palm, we also cultivate rubber, tea, cinnamon and coconut, though the investments into these areas are significantly small in comparison to palm oil.

As a joint-venture between Sunshine Holdings PLC and Pyramid Wilmar Plantations Pvt Ltd., Watawala Plantations PLC stands as a true pioneer, setting the regional benchmark for environmentally and socially responsible oil palm cultivation that is simultaneously sustainable and profitable. Adhering strictly to the highest international cultivation standards, our plantation is the first and only oil palm management company in South Asia to receive the prestigious Roundtable on Sustainable Palm Oil (RSPO) certification, underscoring our commitment to sustainable agricultural practices. The ISO 45001 (Occupational Health and Safety) certification received by our palm oil mill is also testimony to our unwavering commitment to ensuring the safety and well-being of our workers.

Palm oil locations

The 1,500-strong workforce at Watawala Plantations undergoes regular training on international best practices, ensuring their proficiency in an ever-evolving industry landscape. Their collective efforts contribute to the production of premium palm oil, which we supply to a total of six refiners and brands, with over 15,700 tons of oil sold in 2023-2024. As of 31 March 2024, the company commands an impressive market share of approximately 50% of palm oil production in Sri Lanka, maintaining its status as a leading producer of this highly sought-after product.

No crop is without a certain degree of impact on the environment. However, oil palm, whose roots don’t go very deep, consumes little groundwater and nutrients compared to other crops like tea, rubber and coconut. Nonetheless, Watawala Plantations conducts regular experiments to evaluate any potential effects of our plantations on the water table and freshwater streams that surround our plantations. Our stakeholders can rest assured that our in-house teams of experts routinely and meticulously monitor our compliance levels at all levels of the production cycle.

In fact, our company goes above and beyond to ensure comprehensive environmental protection measures. Treated wastewater from our oil palm mill in Nakiyadeniya serves a dual purpose: providing moisture, nutrients, and organic matter to the soil while reducing reliance on chemical fertilisers. Prior to discharge, the water undergoes rigorous testing to ensure compliance with Central Environment Authority (CEA) standards, mitigating the risk of groundwater pollution and disturbance to aquatic ecosystems. Meanwhile, the effluent from the water treatment plant is used as fertiliser in our fields, saving costs.

We also take great pains to ensure that our carbon footprint is as minimal as possible. One innovative solution that we have implemented in this sector in order to reduce our reliance on fossil fuel energy is to generate our own electricity. Our palm oil mill saves 50% of its energy cost by turning a turbine using the steam generated from our boiler, which in turn is run using the kernel shells, fibre and other byproducts from the palm we cultivate.

We anticipate a lifting of the ban on oil palm replantation and on cultivation by the end of 2024, and we are hopeful that the authorities will take these factors into consideration in its decision. Until such time, and statutory hurdles notwithstanding, Watawala Plantations remains the industry leader in palm oil, and, with years of expertise and state-of-the-art technology at our disposal, we are ready to take charge again no sooner than the Government revokes the gazette. If the ban is lifted, as we anticipate, we plan to suspend our diversification efforts into other crops such as coconut and focus more on the palm oil business, though our ongoing venture into cinnamon cultivation and production will remain.

Year under review

Having made a significant recovery from the stresses of the economic downturn of the previous year, the palm oil business remained largely stable during the year under review though low demand caused by increased consumption of coconut oil led to costly price reductions. The 2023-2024 financial year thus saw a 9% drop in revenue, from Rs. 7.6 Bn. to Rs. 6.9 Bn. High prices for palm oil charged the previous fiscal year, which averaged around Rs. 520 a kilogramme of palm oil came down to Rs. 420 a kilo during the reporting period, which was a major contributing factor for the drop in revenue. Reduced purchasing power in the wake of the financial crisis was also a reason for the drop in demand for products that use palm oil as an ingredient, while businesses, too, found it cheaper to import coconut oil over the more expensive palm oil which is also levied a higher duty. The reporting period did, however, record growth in crop cultivation, at around 9% compared to the previous year.

The previous year’s macroeconomic emergency led to an impairment of the agriculture subsidiary. We are happy to note that we have made a remarkable turnaround during the year under review, with profits increased by 3% for the palm oil segment during the reporting period, from Rs. 2.3 Bn. to Rs. 2.4 Bn. year-on-year. This was owing to the discontinuation of our maize cultivation in July 2023 following the resolution of the animal feed crisis of the previous year. Watawala Plantations had to divert significant resources to produce its own maize for the dairy business, but the resolution of this issue meant those resources could be redirected to palm oil.

As we move into the new financial year, the palm oil business anticipates significant growth in crop yield, from 16.8 metric tonnes during 2023-24 to 17.4 metric tonnes during the New Year. This increase in yield is already contributing to an ongoing revenue boost for the company. We have also put in place plans for an improved crude palm oil extraction rate from our mill, from 22% to 23%.

In terms of profitability, however, we are protecting a loss in profits in the new fiscal year, due to the agriculture sector expected to be liable to a 30% tax.

Discussions will continue with the authorities on lifting the ban on oil palm cultivation. If, as is widely anticipated, the ban is lifted on replanting, we have formulated plans to replant some of our older fields that give a lower yield, which should take three to four years to generate revenue. If the ban is lifted for new planting, the plan at present is to replace our rubber and tea plantations with oil palm, as those two crops do not sufficiently meet our profitability targets at the moment. However, our diversification efforts will not cease entirely, as we intend to further cinnamon cultivation and production, with the new processing plant which was opened in September 2023. In the unlikely event the ban is not lifted, we will continue with our existing plantations for at least the next 20 years, as the oil palm tree has a lifespan of 30 years. Our rubber and tea businesses will also continue, as the lands would have to be maintained.

Dairy

Watawala Dairy Ltd., a Sunshine subsidiary valued at Rs. 1.4 Bn., produces around 1.5% of Sri Lanka’s total production of milk every year, which is significant for a market that sources only 40% of its annual dairy requirement locally. Sunshine’s long-term objective is to tap into the enormous potential in the market for 100% self-sufficiency in dairy, a prospect Watawala Dairy takes quite seriously.

Our herd of 900+ milking cows comprise of high-producing crossbreeds imported from Australia and New Zealand and their offspring. These animals contribute to our state-of-the-art facility’s production of nearly six million litres of fresh milk annually, having supplied four major food brands in 2023/24.

At Watawala Dairy, we believe in ethical and sustainable dairy production, a philosophy that underpins our business as demonstrated by our dedication to the wellbeing and welfare of our herd, recognising our responsibility towards the planet and a sustainable future. The Watawala Dairy Farm also utilises a fully automated Dairymaster milking parlour system imported from Ireland. This sophisticated piece of equipment is capable of monitoring the progress of each animal’s yield and quality of the milk produced. Sensors are clipped to the ear of each heifer to measure temperature, activity, resting time, rumination time, feeding behaviour, facilitating better care over the welfare of each cow.

Year under review

Our dairy business performed remarkably well during the year under review, demonstrating an excellent turnaround propelled largely by cost control measures with respect to animal feed, as well as significant improvements in quality. During the reporting period, the dairy business went from loss-making to breakeven, concluding the year with a significant reduction in losses.

We close the 2023-2024 financial year recording Rs. 1.5 Bn. in revenue, a notable increase from the Rs. 1.2 Bn. the previous year. In terms of profits, the losses incurred the previous year which amounted to Rs. 334 Mn., came down to Rs. 141 Mn. during the reporting period. This was largely due to a reduction in biological asset loss, increased production in milk and reduced feed costs. Net financing costs, too, reduced by Rs. 8 Mn.

During the ongoing financial year, we expect to increase profitability . There are restructuring efforts already underway, with 100 new heifers being purchased in 2023/24, which together with the farm’s replacement herd will lead to an increase in milk production and revenue.

As economic conditions improve, cost of sales is also expected to go down in the coming months, with cattle feed costs to be reduced by purchasing higher quality cattle feed at a lower cost.

There are no expansion plans for the dairy business at present, though we do intend to increase our herd from 800 to 1,200 cows over the next few years.