Lion Brewery returns to profit on benign beer tax

• Commends govt. for sane alcohol tax policy
• Says change in tax policy boosting govt. revenue 

The reversal of the government’s lopsided tax policy on beer and the recovery of operations from the production halt caused by floods helped Lion Brewery (Ceylon) PLC (LION) to return to profit as the lower tax on beer pulled more people into mild alcohol from hard liquor and illicit alcoholic beverages.  

LION, Sri Lanka’s largest brewery recorded Rs.10.5 billion in revenue for the January- March quarter (4Q18), a marked increase of 80 percent from the Rs.5.8 billion recorded for the same period in 2017. 

The positive top line brought the company’s bottom line into the green territory, as LION reported an after-tax profit of Rs.1.3 billion for the quarter under review from a loss of Rs.813.2 million in the same period of the previous year.

The LION’s share ended 0.93 percent or Rs.5.10 higher on Friday at Rs.555.40 with a market capitalisation of Rs.44.4 billion. 

The company attributes the transformative results purely to the change in the government tax policy—taxing alcoholic products based on alcoholic content—but said the results are not directly comparable with that of the previous year due to floods forcing the local beer production to a halt for about six months. 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. 

“Within months, spirits were accounting for over 65 percent of the country’s legal alcohol consumption. With illicit liquor factored in, hard alcohol accounted for an astonishing 85 percent of total consumption. It was the under-privileged consumer that paid the price; since hard alcohols – both legal and illegal - were more affordable, they consumed more of it”, LION said in an earnings release. 

Without stopping there, a year later, the government re-imposed Value Added Tax on alcohol products and introduced a tax on beer cans. 

As a result, the beer industry saw a volume contraction between 2014 and 2016 while hard liquor volume increased by almost 27 percent as excise duties per unit of alcohol of strong beer surpassed that of hard liquor, estimates from Fitch Ratings showed.

During the period November 2015 to October 2017, LION suffered an earnings loss of Rs 7.6 billion on account of the lopsided excise tax policy excluding the losses that arose as a result of the floods and the resultant shut down during May to December 2016, the company said.

“With a reasonable alcohol tax policy now in place, consumers, government and the industry will all emerge winners. Consumers, since they are no longer pushed by policy makers to drink hard alcohol; government, since its revenues will increase and industry since its performance will improve. 

Indeed, it’s winners all around and in stark contrast to November 2015; November 2017 saw policy making at its best”, the company said, hailing the new sensible tax policy of the new Finance Minister Mangala Samaraweera, on beer. 

LION has a leading market position in the local beer industry supported by its entrenched brand and widespread retail coverage with access to more than 2,250 outlets in the country. 

Lion also benefits from ample production capacity exceeding 1.5 million hectolitres per annum—sufficient to meet the demand over the medium term, Fitch Rating said.

Meanwhile, for the financial year ended in March 31, 2018, LION recorded Rs.30.5 billion revenues, up 44 percent year-on-year (YoY) from Rs.21.2 billion in the previous year. 

The company reported earnings of Rs.26.12 a share or Rs.2.1 billion compared to a loss per share of Rs.18.09 or a total loss of Rs.1.5 billion in the previous year. 
During the year under review, LION also received Rs.1.957 billion on account of flood related insurance receipts for business interruption and damages caused to the company’s property and inventory. 

This receipt marked the full insurance receipts by LION introspect of the flood-induced business destruction from May 2016 to December 2016. 

Meanwhile, the company said the change in tax policy had seen a sharp improvement in revenue to government from the beer industry. 

“Since November 2017 excise duty collections from Lion Brewery alone has increased by Rs.795 million a month. A further increase of Rs.208 million per month has been derived from VAT. Thus, from the company alone, the monthly revenue gain to government amounts to Rs.1.003 billion. 

The total revenue gain from the beer industry will be even greater”, the statement added. 

The 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.