EUR 45.60 For Business Accounts Only

JKSB Sri Lanka Market Strategy_February 2020

The dominant services sector which accounts for a share of about 60% of total GDP recorded growth of 4.1% for Q1, 1.6% for Q2 and then a slight rebound in Q3 to 2.8%. Telecommunications and IT segments have maintained strong double digit growth momentum over the six months. Accommodation, food and beverages services, transportation of goods and passengers as well health and education all saw declines in Q2. Growing demand for IT services together with the digitalization initiatives introduced in several sectors might have contributed to the expansion in IT related services in the economy.

 In the medium to long run we expect growth to stem from the construction, tourism, manufacturing, transportation, banking, and trade related sub-sectors. The contribution to GDP growth from the agricultural sector, and utilities sub-sector will be largely dependent on prevailing weather conditions. Per capita GDP in US dollar terms stood at US dollars 4,102 in 2018, almost similar to 2017 level of US dollars 4,104, which recorded a 5.6 per cent growth in 2017.

 The Monetary Board, led by the new Governor cut rates by 50bps on the 30th of January (with deposit rates now at 6.5% and lending facilities at 7.5%), with the intention of spurring recovery in credit growth. Inflation was expected to stay below 5% for 2020 and stablize between 4-6% thereafter. Private sector credit grew in December by 4.5% while net credit to the government and public sector credit grew by 9.9% and 8.3% respectively. Previously policy rates were reduced by 50bps in May 2019 and by another 50bps in August 2019 along with improvement of liquidity conditions through the reduction of the Statutory Reserve Ratio (SRR) by 2.5 percentage points in two in November 2018 and March 2019. The Central Bank started the easing cycle by reducing their lending rates by 25 bps to 8.50% in April 2018.

 Cumulative earnings (+6.0% YoY over January to November) from textiles and garments has increased. However for September earnings from textiles and garments declined for the first time since July 2018, on a YoY basis, (subsequently October and November were +3.5% and +3.2%). During January-November, the US retained its position as Sri Lanka’s top apparel importer. with exports to the US growing 3.76% YoY during the period while apparel exports to the EU grew at a faster rate of 6.13% YoY to surpass the US $ 2bn mark. The industry is expecting growth to be around 6% overall for 2020, coming equally from both the United States and European Union markets.

For FY20E and FY21E our coverage universe trades at PERs of 9.9x and 8.1x respectively with earnings growth for FY22E expected to grow by 15% on the back of economic growth rebounding to the 4.0% level. We expect the new administration to carry out far reaching reforms in taxation which should alleviate the fiscal situation and lead to lower interest rates and consequently higher valuations for equities.