Horana Plantations Plc Horan a Plant a Tions P L

Horana Plantations PlC

AnnuAl RepoRt 2017/18

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New

Contents

About Horana Plantations Non-Financial Highlights

23

Financial Highlights

4

Chairman’s Message

6

Managing Director’s Review of Operations Board of Directors Management Team Sustainability Report Statement of Corporate Governance Risk Management

10 16 18 20 29 34

Annual Report of the Board of Directors on the Affairs of the Company Statement of Directors’ Responsibilities Report of the Remuneration Committee Related Party Transactions Review Committee Report

35 39 40

41 43

Audit Committee Report

Financial Reports

Financial Information

44 45

Independent Auditors’ Report Statement of Proﬁt or Loss and Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Signiﬁcant Accounting Policies Notes to the Financial Statements Value Added Statement Ten Year Summary Shareholder and Investor Information Statistical Information Our Plantations Quarterly Results Notice of Meeting

49 50 52 53 55 65
107 108 110 115 117 118 119 120 123

Notes Form of Proxy Corporate Information

Inner Back Cover

With a challenging year behind us, diversity was our strong suit and with new ventures in Oil Palm, Cinnamon and Coconut that utilised our unique strengths and resources, we girded ourselves for a year of opportunity. All while enhancing the lives of our team and assisting them in creating better living standards for themselves as well as their families. From our corporate outlook, to our positive ventures, we think different, and think new.

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Horana Plantations PlC | AnnuAl RepoRt 2017/18

2

About Horana Plantations

Horana Plantations PLC is one of Sri Lanka’s premier Plantation Companies, comprising of sixteen prime estates. Since being incorporated on the 22nd of June 1992, following the privatization of plantation estates into the hands of the Regional Plantation Companies (RPC), Horana Plantations has grown into a leading producer of the ﬁnest Tea, Rubber and other agricultural produce in Sri Lanka.

The Company’s sixteen estates are spread over a total area of 7534 hectares (18,458 acres), primarily in the Central and Western provinces of Sri Lanka. 29% of the cultivated area has been dedicated to Tea, 31% to Rubber, 7% to timber, and 5% to other diversiﬁed agricultural crops. Horana Plantation has an annual production of 4 Mn Kg of Tea and 1.4 Mn Kg of Rubber.

Horana Plantations product range is renowned for its excellent quality and high standards. A significant proportion of the Company’s estates have been internationally certified with quality standards such as HACCP, ISO:22000:2005, Rain Forest Alliance, Ethical Tea Partnership, Fair Trade and Forest Stewardship Council certification.

Horana Plantations PLC is a public quoted limited liability Company and its shares are listed on the Colombo Stock Exchange bearing the stock symbol HOPL. The Company is a subsidiary of the Vallibel Plantation Management Ltd, with its ultimate Parent Company being Vallibel One PLC. Vallibel One PLC spans a widespread of interests in Retailing, Hospitality, Ceramics & Tiles, Finance and Hydro Power Generation.

3

Non-Financial Highlights

No of Estates

Extent 7,534 Ha

08

16

Up Country

Low Country

Sound Reputation and Brand Image for Quality Tea

No of Top Prices Recorded

High Grown Gross Sale Average - Ranking No. 01 ( CTA Ranking)
Tea - 36 Invoices

2017/18

Resident Population

New Revenue Streams

183 Ha

67 Ha

Oil Palm

Coconut

74 Ha

62 Ha

Cinnamon

Fruits and Other Crop

31,600

Tea

1,323 Kg / Ha 1,158 Kg / Ha 2.8 Kg / Man Day

High Grown Yeild

Low Grown Yield

Worker Productivity

Tea Production Volume

Rubber Production Volume

3,037,686 Kg

832,855 Kg

4

Financial Highlights

For the Year ended 31st March

2018

Rs'000
2017 Rs'000
Change
%

Financial Performance

Revenue Gross Profit Profit from Operations Net Finance Expenses Profit before Taxation Tax (Expense)/ Reversal Profit after Taxation
2,248,462
265,514 191,586
86,914
104,672
(20,329) 84,343
1,947,278
102,743
45,774 88,656 (42,882)
1,161
(41,722) 27,095 (14,627)
15.5
158.4 318.5
2.0
344.1
(1,851.7)
302.2 (229.9) 436.0
Other Comprehensive Income/(Expense) Total Comprehensive Income/ (Expense)
(35,196) 49,147

Financial Position

Shareholders' Funds Borrowings Total Liabilities (excluding Borrowings) Total Assets
1,420,798 1,250,800 1,022,407 3,694,006
1,371,652 1,259,879
920,748
3.6 0.7
(11.0)

4.0

3,552,279

Cash Flows

Operating Activities Investing Activities Financing Activities Total Net Cash Outﬂow for the period Cash & Cash Equivalents at the end
284,016 (252,141)
(38,353)
(6,478)
48,366
(202,572) 109,132
(45,074)
(272,203)
487.2
(24.5)
(135.1)
85.6

(278,681)

(2.4)

Key Indicators per Ordinary Share

Earnings per Share (Rs.) Market Value per Share (Rs.) Net Assets per Share (Rs.) Price-Earnings Ratio (times) Earnings Yield (%)
3.37
22.00 56.83
6.52
(1.67)
16.50 54.87
(9.89)
302.2
33.3
3.6
166.0

251.6

15.34

(10.11)

Key Ratios

Current Ratio (times)

0.49

2.20 0.84 3.46 2.31
0.53 0.52 0.74 (1.07) 2.30
91.85 38.61
(8.3)
326.9
13.7
424.4
0.6
Interest Cover (times covered) Revenue to Capital Employed (times) Return after Taxation on Net Assets (%) Property, Plant & Equipment to Shareholders' Funds (times)

Debt to Equity Ratio (%)

88.04

38.46
4.2

(0.4)

Equity to Total Assets Ratio (%)

5

Revenue

Gross Proﬁt

Proﬁt after Tax

Rs. Mn
2,400
Rs. Mn
300
Rs. Mn
160

240 180 120
60
120
80 40
0
2,000 1,600 1,200
800
0
(40)
400

2013/14 2014/15 2015/16 2016/17

2017/18

Total Assets

Shareholders’ Funds

Operating Cash Flow

Rs. Mn
4,200
Rs. Mn
1,800
Rs. Mn
300

3,500 2,800 2,100 1,400
700
1,500 1,200
900
250 200 150 100
50
600 300

2013/14 2014/15 2015/16 2016/17

2017/18

6

7

Horana Plantations will continue in its direction of growth by developing its diversiﬁcation strategy to enhance revenue streams.

Mohan Pandithage

Chairman

8

Dear Shareholde r ,

GlObal RubbeR InduStRy

demand from some of the major importers. The average price at the CTA for the year 2017 increased significantly by 31% to Rs. 618.14 per Kg, compared to the previous year.
It gives me great pleasure to present the Annual Report and audited Financial Statements of Horana Plantations PLC for the Financial Year 2017-18. Your Company has been able to turnaround this year reporting a Profit Before Tax of Rs. 104.6 Mn as against a loss of Rs 42.8 Mn reported during the comparative period last year.
Global natural Rubber production rose 6.8% last year to 13.3 Mn MT, compared to the 12.4 Mn MTs produced in 2016. Global natural Rubber consumption, meanwhile, rose by a mere 1.4% to 12.9 Mn MTs during 2017. While there were signs of recovery in natural Rubber prices in December, this was linked to higher crude oil prices and the agreement by Thailand, Malaysia and Indonesia to reduce natural Rubber exports by 350,000 MT.
In terms of exports of Ceylon Tea, Turkey was the largest buyer of Sri Lankan Tea in 2017, followed by Iraq and Russia. In addition, Tea exports to Vietnam, Taiwan, China and UK have increased significantly.
I took over as Chairman in March 2017, and your Company is now managed under the Hayley’s Plantation Sector. The Company is now in the process of an internal realignment to integrate with the Hayleys Plantation Sector governance and internal control framework, policies and management practices. We believe that these changes will improve overall financial sustainability of the Company by strengthening its business model and internal controls. A core objective of this change process is to develop an innovative, more resilient, plantation management model for the Company.
Rubber production in Sri Lanka grew by 5.1% to 83.1 Mn Kg in 2017, from 79.1 Mn Kg recorded in 2016. This growth in natural Rubber production was achieved amidst unfavourable weather conditions, particularly during the first half of the year. Among the major categories of Rubber produced, sheet Rubber production, the largest component of total Rubber production, increased by 4.4% to 41.5Mn Kg, while crepe Rubber production decreased considerably by 23.3% to 11.5 Mn kg in 2017.

SRI lanKan eCOnOmy

The Sri Lankan economy grew at a moderate pace of 3.1% in 2017, compared to the growth of 4.5% in 2016, amidst the challenges arising from both domestic and external fronts. Severe drought conditions that prevailed particularly in the major cultivation areas hindered the growth in agriculture activities, even though a rebound was observed during the last quarter of the year, beneﬁting from the recovery in paddy production during the 2017/18 Maha season.

COmPany PeRFORmanCe
GlObal tea InduStRy

In spite of the setback in the Rubber sector mainly due to adverse weather condition that prevailed during the year, I am pleased to report an overall improvement in the ﬁnancial performance of Horana Plantations during 2017-18. The Company recorded a 16% increase in turnover to Rs. 2.2 Bn, while its Proﬁt After Tax amounted to Rs. 84.3Mn, which is an improvement from a loss of Rs. 41.7 Mn in the previous year.

Global black Tea production increased marginally from 5.5 Bn Kg, to 5.6 Bn Kg in 2017. China has been the main contributor in terms of the growth recorded and Sri Lanka, India and Malawi have recorded marginal increases against the corresponding year 2016. Asian countries contributed to the highest volume and value of global Tea exports. Given Kenya’s status as one of the world’s largest exporters of Black Tea, a decrease in their production level has a considerable impact on global demand – supply dynamics for the year under review.
Tea production recorded a positive growth in 2017, reversing the declining trend of the past four years. Accordingly Tea production recovered with a growth of 5.2%, resulting in an output of 307.7 Mn Kg in 2017, compared to 292.6 Mn Kg in 2016.

The average prices at the Colombo Tea Auction (CTA) witnessed a continuation of the upward momentum recorded since the last quarter of 2016, with increased
The improvement to the Company’s Tea Board ranking to No 1 in the High Grown Category, is also a signiﬁcant indicator of

9

the consistent high quality standards that were maintained during the year. The Tea sector recorded a profit of Rs 276.5 Mn against a profit of Rs 98.1 Mn recorded in the previous year. The Rubber sector reported a loss of Rs 35.5 Mn, mainly due to the erratic weather conditions that prevailed throughout the year,which resulted in a decrease in Rubber yield. Horana Plantation’s crop diversification strategy into Oil Palm, could not be continued as planned during the year as the planting had to be suspended due to various externalities.

weakening of the traditional plantation

encouraging and must be commended.

Another positive development has been the reinstatement of the fertilizer subsidy wage model. Plantations are facing increasing labour shortages and rising labour costs, while remaining highly labour intensive due to topographical and quality reasons. which is again appreciated by the industry.

dIReCtORate

I would also like to take this opportunity to express my appreciations to Dr S Selliah, Independent Non – Executive Director who resigned in February 2017, for his contributions to the Company during his tenure, and welcome on board Mr. Sarath Ganegoda, who was appointed as an independent Non-Executive Director in September 2017.
The plantation sector must also contend with national policy inconsistencies that disrupt investment planning, hindering recovery of the sector. The Government policy inconsistency towards Horana Plantations’ Oil Palm cultivation and acquisition of cultivated lands for nonagricultural purposes is a cause for

concern.

During the year, Horana Plantations

commemorated the Tea industry’s 150th anniversary by including estates communities in the celebrations.
I thank the Board of Directors for their guidance and the management team, estate managers and all employees for their commitment to the Company and our stakeholders for their unwavering support and confidence in the Company.
Horana Plantations will continue in its direction of growth by developing its diversification strategy to enhance revenue streams. Company’s relatively high dependence on Rubber, crop diversification away from Rubber, remains the only viable solution. We are also considering other business diversification opportunities. We are planning to introduce a new labour management structure for Horana Plantations that deviates from the traditional daily-wage model.

GOveRnanCe and COmPlIanCe

The Hayleys Group has a long tradition of responsible corporate citizenship founded on exemplary compliance with all applicable regulations, which is a core business ethic ingrained in all our companies.

mohan Pandithage

Chairman

During the year, the Company’s internal controls were tightened and reporting structures were aligned with the Hayleys Plantation Sector governance framework. Under the risk management framework of the Hayleys Plantation Sector, the Company’s risk monitoring and responses have been re-examined for greater effectiveness.
25th May 2018
I would also like to take this opportunity to call on national policy makers to adopt a more inclusive policy of industry consultation, prior to making decisions that have far reaching consequences on the ﬁnancial viability of the plantation sector. Given the plantation sector’s signiﬁcant contribution to the national economy the government’s decision to lift the ban on glyphosate is indeed

a new dIReCtIOn

The key issue facing the entire plantation sector in the country is the steady

10

Managing Director’s Review of Operations

Horana Plantations has posted commendable ﬁnancial results during the period under review, while overcoming unexpected challenges, to build a stronger foundation for sustainable growth.

Roshan Rajadurai

Managing Director

11

12

Managing Director’s Review of Operations

Yield -Total (Tea)

Horana Plantations (HOPL) has posted commendable financial results during the period under review, while overcoming unexpected challenges, to build a stronger foundation for sustainable growth. In my review of operations I will briefly touch on the performance of the company’s core business activities for the benefit of our shareholders. of many challenges due to changes in the climate and the ban on glyphosate without any cost effective alternative, our Tea yield has increased, from 1,236 Kg per hectare, to 1,332 Kg per hectare during the year.

Kg/Ha 1,650 1,600 1,550 1,500 1,450 1,400 1,350 1,300 1,250 1,200

Importantly, we were able to contain the cost of production to a reasonable level. The Cost of Production for Tea increased marginally by 6%, from Rs. 500 to Rs. 530 per Kg. This cost increase was driven by increased labour costs associated with manual weeding in the absence of a cost–effective alternative weedicide.

FInanCIal PeRFORmanCe

During the Financial Year 2017-18, Horana Plantations returned to profitability with an after tax profit of Rs. 84.3 Mn, following two years of losses. This was achieved through a total revenue growth of 16%, reaching Rs. 2.2 Bn due to an exceptional year for Tea prices. Gross profit increased from Rs.102 Mn, to Rs. 265 Mn, supported by a tight rein on expenses and stringent management and agricultural practices.

2013/14 2014/15 2015/16 2016/17

2017/18

These almost all-round improvements in our Tea business reﬂects our consistent quality policy, where only the best leaf is used in production and good agricultural practices are observed at all times.

Gross Sale Average (GSA) HPL Vs. High Grown
Tea - COP & NSA

PeRFORmanCe OF the tea SeCtOR

I am pleased to report that Horana

Rs/Kg
700

Plantations’ Tea sector has recorded a proﬁt of Rs. 276 Mn, against the previous year’s proﬁt of Rs. 98 Mn. The Company has out performed the industry average on Tea, by commanding above average prices for High Grown Teas, achieving the number one position among Regional Plantation Companies at the Colombo Tea Auction for the year 2017. Supported by our robust prices, total Tea revenues surged ahead by 27%, to Rs.1.9 Bn, from Rs. 1.5 Bn reported in the previous year.

GSA (Rs/kg)
735
600

500 400 300 200
635 535 435
100
0
2013/14 2014/15 2015/16 2016/17
2017/18

Total Tea production increased marginally from 2.9 Mn Kg in 2016-17, to 3.0 Mn Kg in the current Financial Year. Despite

COP NSA
HPL

High Grown

13

Gross Sale Average (GSA) (Rubber)
Production - Tea & Rubber

PeRFORmanCe OF RubbeR SeCtOR

Rubber sector performance continued to decline, primarily due to unprecedented rain/ ﬂoods that prevailed in the planting district, which prevented timely tapping. The Rubber sector recorded a loss of Rs 35 Mn, from a loss of Rs. 9 Mn reported in the previous year.

Kg ‘000
4,000 3,500 3,000 2,500 2,000 1,500 1,000
GSA (Rs/kg)
340

320 300 280

Rubber production fell from 1.0 Mn Kg, to 833,000 Kg and yields fell from 657 Kg per hectare to 565 Kg per hectare. Further, cost of production increased from Rs. 352 per Kg of Rubber, to Rs. 441 per Kg, mainly due to low yield.

500

2013/14 2014/15 2015/16 2016/17

2017/18

Despite the lower production, our NSA increased from Rs. 248.78, to Rs. 307.22, testifying to our stringent quality controls. However, the Rubber sector remained a concern, mainly due to uncertainty of weather patterns, high cost of production due to low yield, as well as the downturn in Rubber prices.

Tea Rubber
Month

Todate

PROGReSS OF dIveRSIFICatIOn PlanS

A change to the Horana business model was initiated in 2013 by diversifying the

Yield - (Rubber)

Rubber - COP & NSA

production base from Rubber to a number of non-traditional commercial crops, including Oil Palm. The objective was to rebalance portfolio risks by reducing dependency on Rubber, which is currently not a commercially viable investment. Therefore, an extent of 386 hectares was released for crop diversiﬁcation in low country Rubber plantations, while maintaining 2,300 hectares for Rubber.

Kg/Ha

Rs/Kg

890 860 830 800 770 740 710 680 650 620 590 560 530
500 450 400 350 300 250 200 150 100
50

However, it is extremely disappointing that Horana Plantation’s crop diversiﬁcation strategy into Oil Palm, could not be

0

2013/14 2014/15 2015/16 2016/17

2017/18

continued as planned during the year, as planting had to be suspended due to opposition from various groups. I would like to point out that other plantations in the