Brokerage Bartleet Religare Securities (BRS) gave a ‘Buy’ signal for Lanka Tiles PLC (TILE) amidst continued protection and the reduction in corporate tax to 15 percent from 28 percent in Budget 2016.

“Our case for TILE further solidifies given the continued protection and the halving of taxation post Budget,” a BRS report said.

Finance Minister Ravi Karunanayake had promised that protectionism on the tile sector would be removed, allowing the locals to buy quality tiles cheaply.

“The industry continued to be protected by the government with total import duty increasing further by 5 percent to 85 percent. The import cess remained at 35 percent while general duty, NBT and PAL increased further by 2 percent each and 2.5 percent, respectively,” the report said.

What the Budget had done was to remove the tile industry from the Board of Investment (BoI) negative list. This allows foreigners to set up tile manufacturing plants in Sri Lanka. However, setting up businesses is measured in months and years in Sri Lanka.

“We believe the removal from the BoI negative list would not have a significant impact on TILE, as 90 percent sales are to the local household category. According to industry sources, the local tile market has seen a commendable growth of 10 percent so far this year,” BRS said.

It said that even though TILE may lose some of its market share to competition, it can afford to have a reduction in price compared to its peers.

Business magnate Dhammika Perera, through TILE’s parent Royal Ceramics Lanka PLC, controls nearly 80 percent of Sri Lanka’s tile and sanitaryware market.

TILE’s cost of sales is also in decline, falling 23 percent year-on-year to Rs.677 million in the second quarter ended September, due to the fall in fuel prices.
BRS said that TILE’s external markets—especially in Australia—have weakened in the second quarter due to impacts from Australian foreign exchange and lower demand during the Christmas season.

“An immediate recovery is not expected from the export market given the current global scenario. However, TILE continues to focus on its exports given the prospects in the mid to long term,” the report said.