Group Chief Executive Officer’s Review

Dear Shareholders,

With the worst of the multiple crises that tormented the country now behind us, Sunshine Holdings closes the 2023-24 financial year on a decidedly high note. The year under review was a period of sharp focus for us as a Group, as all nine business units across the three sectors we operate in looked inward and worked to strengthen their respective market positions in an uncertain operating environment that continued to test our resolve.

Healthcare

The Healthcare segment, which accounts for 50% of our business, recorded a remarkable rebound during the reporting period, having overcome some truly unprecedented challenges the previous year.

The pharmaceuticals business, which had just survived a period of drug import restrictions, managed to achieve a slight growth of 0.3% year-on-year. Stringent price regulations against a fluctuating currency proved to be a major hurdle during the first half of the year, though this has since normalized as the currency stabilized during the second half. Healthguard Infinity, the distribution arm, also performed reasonably well amid seemingly unrelenting challenges in terms of rising energy costs, wrapping up the year on a hopeful note.

Lina, our manufacturing business, enjoyed tremendous growth enabled by its Metered Dose Inhaler (MDI) product line, which the company enjoys an enviable monopoly in, culminating in Lina becoming a Rs. 2 Bn. enterprise by the end of the year. Revenue doubled from the previous year while profits soared, due in large part to our uninterrupted supply of this essential product to the government sector. The medical devices business as a whole enjoyed considerable traction during the year under review from sales to public and private healthcare customers, both of which had resumed investment initiatives that had been put on hold the previous year in the wake of the economic downturn. The Healthguard retail pharmacy chain saw notable growth as well, at 19%, with profits also on an upward trajectory.

Overall, 2023-24 was a markedly positive year for Sunshine Healthcare thanks to a committed focus on the fundamentals, and we are determined to maintain the momentum going into the new fiscal year.

Consumer Goods

The year that passed was one of steady growth for domestic facets of our tea business, though challenges persisted in the confectionery trade and tea exports. The record levels of inflation that had come to define the previous year continued to impact both domestic tea and confectionery sectors, though discretionary spending on the part of an inflation-ravaged consumer base proved particularly challenging for the latter during the reporting period.

The local tea business recorded double-digit growth in 2023-24, both in terms of revenue and volume, reflecting a gradual increase in purchasing power as the economy stabilized. Tea consumers showed a preference for our economy brand Rankahata during this period, while the Watawala line also maintained growth over the year. The more high-end Zesta brand, however, took a hit in volumes due to several factors.

The confectionery segment had some difficulty meeting revenue targets but made considerable progress nonetheless. However, the business was unable to make much headway in expanding its product portfolio, specifically with the introduction of chocolate. The market’s response to this new line was lukewarm at best, given ongoing purchasing power constraints despite improvements in the economy overall. Regardless, our efforts were not in vain, as we intend to use the experience as a learning opportunity going into the new financial year.

Sunshine Tea, our export arm, also faced challenges due to a steadily appreciating rupee towards the end of the financial year and concerns over cost versus margins. Geopolitical issues and weather conditions at home also negatively impacted our sales. The business moves into the new year with a more optimistic outlook, excited to explore fresh opportunities in new markets opening up in the Far East.

Agribusiness

Watawala Dairy, our dairy business, saw an excellent turnaround during the year under review, driven by innovative cost-control measures in animal feed and significant improvements in product quality. The hitherto loss-making enterprise ended the year having reached breakeven in operational profitability and is currently on the verge of profitability, recording Rs. 1.4 Bn. in revenue by 31 March.

Watawala Plantations, the palm oil company, was also largely stable during the reporting period, though pricing remained significantly lower than anticipated owing to low demand in the local market. This was primarily due to a drop in consumption and a marked preference in the market from palm oil and vegetable oil to coconut oil.

Notably, the nagging uncertainty over the long-overdue lifting of the ban on palm oil cultivation had little or no impact on the Agribusiness during the year, continuing a trend from the past four years that saw no further replanting of the crop. We remain focused on improving productivity on the palms we have already cultivated.

Macro Picture

The Sunshine Group had a reasonably comfortable year in terms of performance across all three sectors, despite some persistent as well as novel challenges. The diversified nature of the business allowed the Group to weather the many storms that came its way during the year and absorb the various shocks faced by each business unit, delivering a stable topline and a growing bottom-line.

Of special significance was the imposition of value-added tax (VAT), which particularly impacted the tea business, going from 0 to 18% in a rude awakening for a market more or less addicted to the beverage. As a socially conscious corporate, we made a concerted effort not to pass the burden to our consumers wherever possible, and we were able to absorb much of the impact without revising the Maximum Retail Price (MRP). This certainly was a challenge, to say the least, and we are happy to note that any volatility in this regard had greatly stabilised by the end of the financial year.

As stated previously, reduction in discretionary spending by consumers as well as a broadening of the income tax rate led to significant changes in consumer behaviour, which had a noticeable impact on our confectionery business in particular. Though consumers were less tight in their spending towards the end of the reporting period, there is room for improvement as consumer confidence remains low. This, we feel, is a new normal that will remain as the status quo for another year or two at least, and the Consumer Goods segment will no doubt have to adjust accordingly.

On the exchange rate front, the recent upward trend of the rupee did have an impact on the tea export business, but it must be noted that, overall, the appreciation of the rupee was far more beneficial to us at the Group level as it helped us mitigate many of the cost escalation issues, particularly in the import-dependent healthcare sector. The strengthening of the currency provided the opportunity to reduce prices, adjust for certain cost increases, and helped margins, which proved invaluable at the Group level. Broadly speaking, a stronger rupee has been and continues to be of significant benefit to Sunshine Holdings overall at a far greater measure than it had adversely impacted the export business.

Investments

The Group was bullish on pharmaceutical manufacturing during the reporting period and continued to invest in Lina, targeting sustained growth. With more equipment in the pipeline during the current financial year, we expect to double the production of our MDI line by early 2025.

We also continued to invest in the Consumer segment during the year under review with more investments made into mechanization of the manufacturing processes.

At the Group level, significant investments were made during the reporting period in enhancing digital and technological capabilities and synergies, and we envision a boost in productivity in the coming year as a result.

On the human capital front, we continue to invest in training our employees in the latest software solutions and enabling them to be device-connected in a bid to drive productivity through performance augmentation. We were quite aggressive in investing in improving productivity during the reporting period, a trend that will continue into the new year.

Talent migration was perhaps the single biggest challenge posed by the lingering effects of the economic crisis, and it continued to be a major hindrance across all sectors during the year under review. This was largely addressed by the end of the financial year, though retaining talent remains a significant challenge. In light of this, we have doubled down on investing in talent acquisition, training, and developing existing talent.