Group Finance Review

As the operating environment gradually stabilised during the reporting period under a long overdue macroeconomic reform programme, the sectors Sunshine does business in made significant recovery, resulting in the Group making much headway in its growth agenda.

The macroeconomic climate during the year under review was influenced by three fundamentals: interest rate, exchange rate, and inflation, each of which this review will examine in detail.

An easing interest rate

To curb galloping inflation that was eroding real incomes and tailspinning the economy at the height of the 2022 financial crisis, the Central Bank tightened its monetary policy by record levels, with interest rates peaking at 28%. However, as the impact of stabilisation efforts began to take root, the authorities eased the policy rates, averaging at 14% during the year, providing businesses including our own with much needed breathing room in the wake of the crisis.

The availability of credit allowed for greater support for working capital. Sunshine’s working capital leverage, capped at a rule-of-thumb maximum of 40% at the Group level, reached 36-39% during the crisis but has since decreased to 29% due to conservative borrowing practices. Approximately 75-80% of our borrowing is for short-term working capital, with the remainder for long-term purposes, including a loan for the acquisition of Daintee funded through the International Finance Corporation (IFC), which is hedged at a fixed rate of 12.5% for seven years.

At the outset of the new fiscal year, the interest rate stands at around 10%, which is sufficiently favourable for businesses in the current climate. We expect rates to remain between 11-12% for the rest of the 2024-25 period, allowing for more credit growth in the market and higher utilisation of working capital borrowings from our end.

A stable exchange rate

Several of our business activities are import-dependent and, as a result, are highly sensitive to exchange rate fluctuations. The US dollar peaked at Rs. 395 during the previous financial year but had since stabilised around Rs. 330 and subsequently dropped to somewhere around Rs. 295-300. The appreciation of the rupee has proved notably beneficial to our healthcare segment and also other businesses that rely on the import of raw materials. It did have a negative impact on our tea export business.

We appreciate the Central Bank’s efforts over the last 12 months to maintain currency stability, especially in view of increased Forex inflows from tourism and worker remittances, and we are hopeful that this will continue into the new financial year.

Inflation

Sri Lanka saw unprecedented levels of inflation during the 2022-23 financial year, with the rate of price increases reaching as high as 70% at the peak of the crisis. Thanks to a number of factors, not the least of which were the International Monetary Fund (IMF)-backed reforms, inflation came down to single digits under a year later, a remarkable achievement to say the least. Despite a slight uptick to around 2 to 3% in December 2023, headline inflation by March 2024 had dropped to 0.9%.

Financial Performance

During the reporting period, Sunshine Holdings PLC (SUN) recorded a consolidated revenue of Rs. 55.5 Bn. for the year ended 31 March 2024, representing a 7.0% year-on-year growth. The revenue was driven by Healthcare (50%), Consumer brands (35%), and Agribusiness (15%).

Gross profit margin improved by 500 basis points to 31.0%, resulting in a gross profit increase of Rs. 3.7 Bn. (27.6% YoY). Operating profit (EBIT) grew by 23.7% to Rs. 8.7 Bn., despite higher operating expenses. Profit after tax (PAT) rose significantly to Rs. 6.0 Bn. from Rs. 3.6 Bn. the previous year, aided by the improvement of gross profit margin, finance costs decreased to Rs. 1.2 Bn., down from Rs. 1.5 Bn. last year, supported by favourable interest rates. Profit attributable to equity shareholders (PATMI) nearly doubled, reaching Rs. 4.5 Bn.

We wish to note that, going into the new financial year, Sunshine maintains a strong financial position with a satisfactory debt-to-equity ratio, keeping borrowing primarily for short-term working capital. Our credit rating also remained stable at AA+lka (Outlook Stable), as affirmed by Fitch Ratings, during the review period.

Dividends

Our dividend policy remained unchanged during the year under review. The Group has access to the necessary funds to finance and interim dividends of Rs. 1.00 and the proposed final dividend of Rs. 2.00 per share, totalling to Rs. 3.00, and the Company’s independent auditors will certify the requisite solvency levels for the payment of the proposed dividend.