VAT impact hampers Cargills September performance

Despite the company reporting a 10.30 percent year-on-year (yoy) growth in revenue to Rs.16 billion, cost of sales rose at a faster pace of 12.52 percent yoy to Rs.14.6 billion, resulting the gross profit to dip 8.5 percent yoy to Rs.1.4 billion.Distribution expenses during the quarter rose 10.79 percent yoy to Rs.487.6 million while administrative income increased 21.13 percent yoy to Rs.758.8 million. Net finance costs during the period fell 31.56 percent yoy to Rs.230.5 million, probably helped by low interest rates.

As at September 30, 2014 the company’s borrowings under current liabilities stood at Rs.14.3 billion, against Rs.12.8 billion twelve months ago.
The biggest blow to the company’s bottom line came from the retail segment which saw its operating profit for the six months ended September 30 contracting 45 percent yoy to Rs.554.3 million, despite revenue surging by Rs.2.3 billion to Rs.26.2 billion.The company said profits were impacted by deemed VAT, as a result of the mix of VAT liable, VAT exempt turnover.“The management of the segment has focused on increasing efficiency and productivity with a view to reduce operational expenses while reviewing its business strategy to mitigate the VAT impact,” the company said.The company further said the current policy environment for retail business is challenging.

“While commending the proposal in the 2015 national budget to reduce the VAT rate from 12 percent to 11 percent, the removal of VAT from liquor, arrack and tobacco potentially has a significant downside impact on the retail business. We are seeking greater clarity in the application of VAT on NonVAT liable items,” Cargills noted.The FMCG business segment of the company reported an operating profit of Rs.223 million up from Rs.100 million with a revenue of Rs.6.4 billion, slightly down from 6.5 billion.

The profits were boosted by strong contribution from the company’s dairy subsidiary Kotmale Holdings PLC for which Cargills announced a voluntary offer to get it delisted from the Colombo Stock Exchange.The profits were also helped by the company’s exit from the soft alcohol business.Subsequent to the quarter under review, Cargills completed the disposal of Millers Brewery to country’s largest brewer Lion Brewery PLC for a consideration of Rs.5.15 billion.

“The proceeds from the above transactions are being utilized to strengthen the group’s balance sheet,” Cargills said.The restaurant segment reported an operational loss of Rs.56 million against an operating profit of Rs.61.1 million. The revenue improved to Rs.1.1 billion from Rs.1 billion.“The deteriorating performance of the restaurants segment continues to be a concern. Increased competition in the dining segment is resulting in lower than expected footfall, while rising operational costs are impacting margins.”

The company also noted that the closure of three restaurants during the period under review also impacted the segment’s growth.Cargills is the local franchise holder for KFC and TGI Fridays.During 2Q15, Cargills subsidiary Cargills Food Company (Pvt) Ltd entered into an agreement with World Bank Group member International Finance Corporation (IFC) for an equity injection of US $ 20 million for an 8 percent stake.

Cargills further said, during the quarter under review, it upped its stake in its banking operations, Cargills Bank, by 5 percent through a Rs.247.5 million investment. Cargills now holds 20 percent of Cargills Bank.It is believed that the initial two investors of Cargills Bank, Germany’s DEG and World Bank’s IFC which had 10 percent stakes have exited the bank.