Confectionery industry told to move into cash cycle, explore overseas expansion to weather crisis

• Top banker tells confectionery firms to look outside for growth through possible partnerships
• Emphasises on opportunities particularly in India and Africa for those willing to move out of comfort zone
• Advices companies in stress to term out working capital facilities with their banks without delay

By Nishel Fernando 

Ahead of the challenging period expected, marked by looming tax increases, coupled with fears of a potential domestic debt restructuring, a top banker in the country advised the local manufacturing sector to prioritise safeguarding their employees and to term out working capital facilities by moving into a cash cycle with retailers while focusing on possible global expansions for growth.
“For most of you, tax liability has gone up by almost 100 percent. It’s a crazy situation to be in. The companies will feel it in 1Q and 2Q next year.

Firstly, you have to look after your people with inflation  at 70 percent. You need to put more money, not for 20 percent growth, but just to protect the business and for nothing else. 
A lot of people have already started leaving the country. The banking industry has seen thousands leaving the country (for overseas jobs). You need to give them some comfort ensuring their take home salary is stable, while taxes have gone up,”Standard Chartered Bank Sri Lanka Chief Executive Officer (CEO) Bingumal Thewarathanthri said.

He was speaking at the Annual General Meeting of Lanka Confectionery Manufacturers Association held in Colombo last Friday.
Thewarathanthri warned that a potential domestic debt restructuring (DDR) exercise could create severe liquidity issues in the banking sector worsening the current operating environment for businesses that are already grappling with high finance costs due to high interest rates.

“We (banking sector) are now in the process of getting ready for a very difficult period of nine months to one year. If there’s a domestic debt restructuring, the capital adequacy rate will come down to single digits in some of the banks. Although we can overcome this with regulatory overbalance, there will be liquidity issues. 

So, even If it’s a small bank, there will be a domino effect. You won’t be able to operate. It’s a very narrow path, you have to be very patient. It’s not the time for other investments. Some might be thinking, this is the time to buy very cheap assets, but you have to be very careful, because there is always 20-30 percent chance of things not happening soon,” he elaborated.
Thus, Thewarathanthri advised the local manufacturers to cut down the size of working capital facilities and to move away from usual practices of selling goods on credit to retailers.

“You have to term out your working capital facilities. If you are in stress, talk to your bank and negotiate early on, because everyone will rush. We can see banks  restructuring like crazy. Banks will also not have lot of funding in terms of long-term funding. 

So, my advice is that you should reach out to your banks early and reduce your working capital facilities, so your monthly commitment is small. Your net working capital (NWC) should come down similar to the multinationals. They all sell on cash. It’s either buy on cash or out. It’s very harsh, otherwise you will also lose. You can’t run large receivable books in a scenario like this. You have to move into a cash cycle,” he said.

As the economy is projected to contract in the coming year as well, Thewarathanthri pointed out that the confectionery industry must seize this opportunity to look outside for growth through possible partnerships. 
“You have a huge opportunity to go out. You don’t generally think about it when you are comfortably in an Island with a 20 million population. When the country is not growing, you won’t grow. That’s the reality. You have really good brands with good quality. So, you have to partner and expand. I’m not trying to take the capital away from Sri Lanka,” he added. Specially, Thewarathanthri highlighted that there are ample opportunities for local confectionery players in India and Africa if they are willing to move out of their comfort zones and island mindset.

“Many Indian and OECD multinationals are out there predominantly through agents. Some of our companies are already out there, but it’s not enough. Sri Lankans are generally in a comfort zone; once you build your business and make couple of million dollars, then you are happy. 

Then, you don’t want to expand, you think what for, why should I do it. My kids have a good life. My second and third generations already happy. But, do it for the larger purpose. Do it for the country. That’s how all the multinationals have grown,” he said.