EPS (LKR) 0.69 0.51 0.54 0.78 0.94 ASPI -1.7% 1.0% 2.1% ... Sri Lanka PLC, Cargills (Ceylon) PLC, Carsons Cumberbatch, GlaxoSmithKline Pharmaceuticals, Coca-Cola is exported to countries

First Capital Research Analyst: Atchuthan Srirangan

Earnings Update

SRI LANKA

P a g e | 1

GLAS performs above expectations in 2QFY18: GLAS earnings jumped to LKR 49Mn in spite of the slow economic conditions prevailed in the country and higher than expected finance cost. Stronger than expected revenue growth has led FC Research upgrading its revenue forecasts by +4% (LKR 375Mn) for FY18E and +2% (LKR 180Mn) which resulted in a boost in the expected earnings as well. We expect a stable growth in revenue within coming quarters as well, as GLAS starts to fully utilize its newly expanded capacity. We have upgraded our GLAS earnings expectations for FY18E by +40Mn to LKR 517Mn and in FY19E by +65Mn to LKR 743Mn. However, despite of the upgrade our GLAS fair value is maintained at LKR 8.8 as the rise in PER valuation has been off-set by the dip in DCF valuation amidst higher than expected gearing structure of GLAS which has moved from 70:30 to 60:40 structure likely to be maintained. Our recommendation for the counter stands at STRONG BUY with stronger expected returns as price marginally dips amidst market volatility.

Earnings Performance 2QFY18 earnings up by 134%YoY: GLAS 2QFY18 earnings saw an upward movement of 134%YoY to LKR 49Mn despite an acceleration in finance cost and taxation costs, while 2HFY18 earning grew by 110%YoY to LKR 154.6Mn opposed LKR 73.4Mn recorded in 2HFY17.

NOV 2017 Current Price – LKR 6.00 Fair Value – LKR 8.80 2QFY18 Earnings 134%YoY

PIRAMAL GLASS CEYLON PLC CSE: GLAS.N0000 Bloomberg: GLAS SL STRONG BUY

“Stronger revenue upgrades earnings”

Disclosure on Shareholding: First Capital Group and its affiliates does not hold shares of GLAS and will not trade in this share for the three trading days following the issue of this document.

Price – Volume Chart

ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 6

KEY DATA

Share Price (LKR)

Average Daily Volume (Shares) 316,661

Average Daily Turnover (LKR) 2,211,307

950

5,701

Price Performance (%) 1 mth 3 mths 12mths

GLAS -4.8% -1.6% 11.1%

ASPI -1.7% 1.0% 2.1%

56.5%

9.5%

2.9%

1.9%

1.7%

CITI Bank New York S/A Norges Bank Account 2

CB NY S/A Salient International Dividend Signal Fund

Union Assurance PLC/ Account No.05

Public Holdings 43.5%

Issued Share Capital (Shares mn)

Market Capitalisation (LKR mn)

Major Shareholders as at 31st September 2017

Piramal Glass Limited

Employees Provident Fund

6.00

52w High/Low (LKR) 6.40 / 5.20

-

1

2

3

4

5

6

7

8

9

10

5.2

5.4

5.6

5.8

6.0

6.2

6.4

6.6

6.8

Pri

ce L

KR V

olu

me

-M

n

Source: CSE

P/E 31 March FY16 FY17 FY18E FY19E FY20E

Revenue (LKR mn) 6,755 6,783 7,706 9,245 10,163

Net Profit (LKR Mn) 654 485 517 743 893

Net Profit (LKR Mn) 654 485 517 743 893

EPS (LKR) 0.69 0.51 0.54 0.78 0.94

YoY % Growth 49% -26% 6% 44% 20%

Valuations

PER (X) 8.7 11.7 11.0 7.7 6.4

PBV (X) 1.4 1.4 1.3 1.2 1.1

Dividend Yield (%) 5.8% 4.3% 4.6% 6.6% 8.0%

NAVPS 4.3 4.4 4.7 5.1 5.5

DPS (LKR) 0.4 0.3 0.3 0.4 0.5

Payout Ratio 51% 51% 51% 51% 51%

LKR (Mn) 2QFY18 2QFY17 YoY 2HFY18 2HFY17 YoY

Revenue 1,679 1,445 16% 3,082 3,129 -1%

Gross Profit 345 94 265% 696 401 74%

EBIT 203 (33) 620% 418 119 250%

Income tax expense (72) 12 619% (106) (20) 434%

Profit for the year 49 (37) 134% 154 76 103%

LKR (Mn) 3QFY17 4QFY17 1QFY18 2QFY18 QoQ

Revenue 1,979 1,675 1,403 1,679 20%

Gross Profit 533 438 351 345 -2%

EBIT 332 331 215 203 -5%

Income tax expense (56) (42) (34) (72) 113%

Profit for the year 202 210 105 49 -53%


Earnings Update

SRI LANKA

P a g e | 2

GP Margin increased 21%: GLAS showed improvement in GP margin which rose to 21% during 2QFY18 as compared with 2QFY17. Improvement in GP Margin was possible due to the reduction of trading sales. Well stabilized new in-house capacity has managed to cater to the domestic and export market replacing the imported bottles. Last year due to capacity constraints a considerable portion of the domestic sale was done through imports. Revenue growth supported by export sales: Topline improved by 16%YoY to LKR 1.7Bn in 2QFY18 compared to the 2QFY17 LKR 1.4Bn. The Domestic sale 2QFY18 stood at LKR 1.1Bn as against LKR 1.2Bn in 2QFY17, reflecting a de-growth of 11%. A dip in the overall domestic market was experienced which impacted the sales mainly in the food & beverage segments. GLAS made special efforts to expand in the export market to offset the domestic setback. Therefore the high growth seen in the export market is an outcome of the initiatives proactively converted to sales in the newer markets. GLAS has demonstrated its capability by achieving export sales for 2QFY18 of LKR 579Mn as against the LKR 206Mn received in 2QFY17 which depicted a growth of 181%. EBIT margins improved YoY & dropped QoQ: EBIT margins for 2QFY18 registered 12.1% in 2QFY18 illustrating a significant improvement compared to -2.3% in 2QFY17 and 8.9% in 1QFY17. Higher finance cost: GLAS incur high finance expenses 1HFY18 579%YoY increased to LKR 158Mn arising from the debt absorbed for the furnace refurbishment. Total borrowing increased 25%YoY in 2QFY18 to LKR 3.5Bn compare with 2QFY17.

Investment case

GLAS fair value to be at LKR 8.80: FC Research expect GLAS’s earnings to record at c.LKR 827Mn for FY19E, growing by 54%YoY. We expect a fair value of LKR 8.80 [LKR 10.30 DCF based and LKR 7.40 PER based] providing an annualized return of c.+34% for FY19E. (Total return of c.+47% includes a dividend yield of c.4%) at current market price of LKR 6.0.

Significant capacity expansion and strong customer relationships, leading to attractive business mode: With the relining of the furnace and infrastructure upgrade in line with the latest international standards, the GLAS is fully geared to attain greater heights in the local market as well as in the international market. This additional tonnage would be channeled first towards satisfying the local market demand for virgin coconut oil exports, water bottles in various sizes, incremental demand for aerated bottles due to shift in consumer preference over PET/ Plastics, returnable bottles in liquor segments and then towards specialty segment in the international market. The upgraded facility will also enable GLAS to deliver more innovative designs in different sizes and colors. Strong market share in each of its business segments: GLAS also operates South East Asia’s only fore hearth color bottles production facility. Raw materials include Soda Ash (which are being imported from China and Turkey), Dolomite and Silica (which are being obtained locally (Naththandiya). Main local customers include Distilleries Co. of Sri Lanka PLC, Cargills (Ceylon) PLC, Carsons Cumberbatch, GlaxoSmithKline Pharmaceuticals, Coca-Cola Beverages Sri Lanka and Unilever Sri Lanka Ltd. Around 25% is exported to countries like Australia, New- Zealand, Kenya, UAE, Philippines, Mauritius, Maldives.

Investment risks

Commodity Price Risk: The Entity is affected by the availability & price of certain commodities. The main impact for GLAS is through energy & Imported Raw Material. The imported Raw material price risk is mitigated through long term agreements & central purchasing done by GLAS Procurement division. The energy cost consists of LPG, Furnace oil & Electricity. In managing the commodity price risk part of the cost increases are passed on to the customer through the annual price increases. Interest Rate Risk: Interest rate risk is the risk that the GLAS’s financial position will be adversely affected by movements in floating interest. All of the GLAS’s interests are linked to variable rates. The GLAS exposure to interest rate risk is minimized by maintaining an appropriate mix between Rupee borrowings & Dollar borrowing. The fluctuating rate variance of Rupee borrowing is minimized by the LIBOR linked Dollar borrowing whilst the Exchange exposure of the Dollar loan is minimized by the Rupee loan. Exchange Rate Risk: Exchange risk arises out of the commercial transactions that the entity enters into outside Sri Lanka. The major part of the foreign transactions is dealt with US Dollars. GLAS has a natural hedging by way of its operational transactions as the inflow of foreign currency through export sale off sets the import cost and the US dollar loan premium and interest.


Earnings Update

SRI LANKA

P a g e | 3

WACC

Ke 17%

Kd 10%

D/E Assumption 40 / 60

Terminal Growth (%) 3%

WACC 14%

PER based Valuation

FY19E Earnings (LKR 'Mn) 743

No. of Shares ('Mn) 950

FY19E EPS 0.78

Expected PER 10x

Price at 10.0x FY19E Earnings 7.4

Valuations FY19

NPV 11,674

Debt (-) -2,632

Cash (+) 721

Total Value of Equity 9,764

No. of Shares 950

Value of Equty per Share 10.3

Valuation Summary DCF Based Valuation PER Valuation

Recommendation criteria

Categorization Company Category Strong Buy Buy Hold Sell

Grade A S&P SL20 CompaniesT.Bill + 10%

& Above

T.Bill + 5% &

Above

T.Bill + 1% &

Above

Below T.Bill

+ 1%

Grade B Rest of the CompaniesT.Bill + 13%

& Above

T.Bill + 8% &

Above

T.Bill + 3% &

Above

Below T.Bill

+ 3%

Grade CCompanies less than

LKR 1Bn Market Cap

T.Bill + 16%

& Above

T.Bill + 11%

& Above

T.Bill + 6% &

Above

Below T.Bill

+ 6%

Note: 1 year T-bill rate as of 15 Nov 2017: 9.46%

Expected GLAS Price FY19E

DCF Valuation based target price 10.3

PER based target price 7.4

Average Target Price 8.8

GLAS

Return FY19E

Target Price 8.80

Current Price 6.00

Capital Gain (LKR) 2.80

Dividend(LKR) 0.25

Capital Gain % 47%

Dividend Yield % 4%

Total Return % 51%

Annaulised Return % 34%

COE (K e)

Rf 9%

Rm 18%

1.10

Ke=Rf+ (Rm-Rf) 18%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

4.00 6.00 8.00 10.00 12.00 Price

Source: CSE and Research Estimates


Earnings Update

SRI LANKA

P a g e | 4

Profit & Loss Statement


Revenue 6,755 6,783 7,706 9,245 10,163

Cost of Sales (5,258) (5,412) (6,142) (7,265) (7,963)

Gross Profit 1,497 1,371 1,563 1,980 2,200

Other Operating Income 5 29 33 40 44

Profit on Disposal of Investment Property - - - - -

Distribution Costs (218) (212) (238) (276) (309)

Administrative Expenses (405) (409) (434) (499) (554)

PBIT 879 779 925 1,245 1,381

Finance Cost (74) (176) (207) (214) (141)

Profit/(Loss) Before Tax 805 603 717 1,031 1,240

Taxation (150) (117) (201) (289) (347)

Net Profit 654 485 517 743 893

EPS 0.69 0.51 0.54 0.78 0.94

Annex I – Income Statement Annex II – Balance Sheet

Source: Company Annual Reports and FC Research Estimates


Balance Sheet


Assets

Non - Current Assets

Property, Plant and Equipment 3,692 6,178 5,789 5,573 5,326

Leasehold Land 25 24 22 21 20

3,725 6,210 5,819 5,603 5,354

Current Assets

Inventories 1,444 1,446 1,695 1,942 2,134

Trade and Other Receivables 1,319 1,098 1,580 1,803 1,982

Other 6 39 39 39 39

Cash and Bank Balances 161 274 207 381 18

2,931 2,856 3,521 4,164 4,173

Total Assets 6,656 9,066 9,340 9,767 9,526

Equity and Liabilties

Capital and Reserves

Stated Capital 1,526 1,526 1,526 1,526 1,526

Reserves 131 129 129 129 129

Retained Earnings 2,410 2,555 2,809 3,175 3,614

4,067 4,211 4,465 4,830 5,270

Non - Current Liabilities

Interest Bearing Loans and Borrowings 472 2,719 1,575 1,448 970

Deferred Tax Liabilities 149 277 277 277 277

Retirement Benefit Obligations 121 142 154 167 181

742 3,139 2,007 1,892 1,428

Current Liabilities

Trade and Other Payables 1,355 923 1,536 1,816 1,991

Dividends Payable 59 44 44 44 44

Income Tax Payable 36 - - - -

Interest Bearing Loans and Borrowings 396 749 1,289 1,184 794

1,847 1,716 2,868 3,044 2,829

Total Equity & Liabilties 6,656 9,066 9,340 9,767 9,526


Earnings Update

SRI LANKA

P a g e | 5

Annex III – Cash Flow Statement


Cashflow Statement


Net Profit Before Tax 805 603 717 1,031 1,240

Adjustments 573 736 921 956 917

Changes in Working Capital 203 (324) (118) (189) (197)

Inerest paid (74) (176) (207) (214) (141)

Defined Benefit Obligations paid (19) (12) (12) (13) (14)

Tax Paid - (45) (201) (289) (347)

Net cashflow from operating activities 1,488 781 1,101 1,283 1,458

Investing Activities

Fixed Assets (392) (2,962) (300) (500) (500)

Net cashflow from investing activities (390) (2,934) (300) (500) (500)

Financing Activities

Net Borrowings (850) 2,598 (604) (232) (868)

Dividends (215) (325) (262) (377) (454)

Net Cashflow from financing activities (1,065) 2,273 (867) (610) (1,321)

Net cash and cash equivalents 33 120 (66) 173 (363)

At start of the year 107 140 260 193 367

At the End of period 140 260 193 367 4

Cash of Balance Sheet 140 260 207 381 18

Bank Overdraft - - (14) (14) (14)

Net cash from Cashflow 140 260 193 367 4


Earnings Update

SRI LANKA

P a g e | 6

Research Disclosure

NOTICE TO US INVESTORS

This report was prepared, approved, published and distributed by First Capital Equities (Pvt) Ltd, company located outside of the United States (a “non-US Group Company”). This report is distributed in the U.S. by LXM LLP USA, a U.S. registered broker dealer, on behalf of First Capital Equities (Pvt) Ltd only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to the exemption in Rule 15a-6 and any transaction effected by a U.S. customer in the securities described in this report must be effected through LXM LLP USA.

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EPS (LKR) 0.69 0.51 0.54 0.78 0.94 ASPI -1.7% 1.0% 2.1% ... Sri Lanka PLC, Cargills (Ceylon) PLC, Carsons Cumberbatch, GlaxoSmithKline Pharmaceuticals, Coca-Cola is exported to countries