Excise duty reforms on beer has made everybody a winner, says Lion Brewery

• Doubles 1Q net profit to Rs.738mn
• Revenue up 74% YoY to Rs.9.4bn

The excise duty reforms on beer in November last year have delivered social and financial returns to all stakeholders, Sri Lanka’s largest brewery, Lion Brewery (Ceylon) PLC (LION) said releasing its first quarter results for the 2018/19 financial year.

In November 2015, the then Finance Minister Ravi Karunanayke raised excise duties on beer by as much as 70 percent compared to the 25 percent increase in duties on local spirits with little or no regard for consequences. 

LION considered the tax policy as highly discriminatory against the beer industry which offered a distinct competitive advantage to hard alcohol. 

However, this situation was corrected by the new Finance Minister Mangala Samaraweera in his November 2017 budget.

As a result, LION returned to profit in the final quarter of FY 17/18 on higher beer sales and continued its upward performance in the first quarter of FY2018/19 (1Q19) as well.

According to the interim financial accounts released to the Colombo bourse yesterday, LION more than doubled its net profit to Rs.737.7 million during 1Q19 compared to the Rs.315.8 million net profit reported for the corresponding period, last year.

The earnings per share for the period improved to Rs.9.22 from Rs.3.95.

LION said 1Q19 performance cannot be compared with the corresponding quarter of the last year due to dramatic changes in the operating environment.

However, the LION’s consolidated revenue for the quarter under review rose 74 percent year-on-year (YoY) to Rs.9.4 billion, while operating profits rose over 100 percent YoY to Rs.1.5 billion.

LION said continuing growth in the tourism sector contributed to its performance during the year. 

“As arrivals continue to increase, this sector will become increasingly more important to our business. Importantly, we are seeing a greater influence from the tourist sector in the retail alcobev (alcoholic beverage) shops rather than from the larger hotel chains. 

This seems to confirm the available empirical evidence that more and more tourists are moving into accommodation in boutique hotels, hostels & the informal sector,” LION said in an earnings release.  

For the first seven months of the year Sri Lanka has attracted little over 1.38 million tourists.

Meanwhile LION said its exports during the quarter under review 21 percent in volume terms.

The company exports to 19 countries and remain market leader in the Maldives.

However, LION called on the policy makers to apply the earlier concessionary income tax rate of 14 percent on export profits instead of the current 40 percent. 
“Whilst we are making every effort to grow our export business, it is unfortunate that profits from these revenues no longer attract the concessionary rate of 14%. Instead our export profits are taxed at the highest applicable rate of 40 percent. 

Since the country needs to drive a significant growth in exports in the short & medium term, we call on policymakers to apply the concessionary income tax rate on all export profits as was done previously,” LION said.  

During this quarter, the beer industry‘s contribution to government in the form of excise duty increased by 46 percent. LION said since the November 2017 reforms, excise duty from the beer industry has averaged over Rs 2 billion a month. From VAT, the industry has contributed an increase of 51 percent. 

“Further, we are seeing evidence of a reduction in the consumption of illicit alcohol. Thus, the excise duty reforms of November 2017 have resulted in both social and financial returns to all stakeholders,” LION noted. 

Carson Cumberbatch group owns 60.75 percent of shares in LION both directly and through subsidiaries. Carlsberg Brewery Malaysia Berhad owns 25 percent of shares of the company as the second biggest shareholder.