ANNUAL REPORT 2019/2020 Creating Synergy Contents About Horana Plantations PLC 2 Non Financial Highlights 3 Financial Highlights 4 Chairman’s Message 6 Managing Director’s Review 8 Board of Directors 13 Management Team 15 Statement of Corporate Governance 16 Risk Management 20 Annual Report of the Board of Directors on the Affairs of the Company 21 Statement of Directors’ Responsibilities 25 Report of the Remuneration Committee 26 Related Party Transactions Review Committee Report 27 Audit Committee Report 28 Financial Reports Financial Calendar 30 Independent Auditor’s Report 31 Statement of Profit or Loss and Other Comprehensive Income 36 Statement of Financial Position 37 Statement of Changes in Equity 39 Statement of Cash Flows 40 Significant Accounting Policies 41 Notes to the Financial Statements 55 Annexures Value Added Statement 93 Ten Year Summary 94 Shareholder and Investor Information 96 Our Plantations 99 Quarterly Results 100 Corporate Information 101 Notice of Meeting 102 Form of Proxy 103 2 HORANA PLANTATIONS PLC About Horana Plantations PLC 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 privatisation 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 7,534 hectares (18,458 acres); primarily in the Central and Western provinces of Sri Lanka. 29% of the cultivated area has been dedicated to Tea, 26% to Rubber, 7% to Timber, and 16% to other diversified agricultural crops. Horana Plantation has an annual production of 2.4 Mn Kg of Tea and 0.6 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:22000:2005/2018, Rainforest Alliance, Ethical Tea Partnership, Fair Trade and Forest Stewardship CouncilTM 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. Annual Report 2019 | 2020 3 NON FINANCIAL HIGHLIGHTS 2,441,613Kg Tea Number of Estates Production Kg Rubber 16 Volume 593,507 Total Extent 7,534 Ha 08 Employees by gender Up Country Resident Population 3,058 Female 08 Low Country 29,425 2,341 Male Existing Revenue New Revenue Streams Streams 304 Ha 516 Ha 2,198 Ha Oil Palm Timber Forestry Tea 1,901 Ha 153 Ha 122 Ha Rubber Fruits and Other Crop Coconut 4 HORANA PLANTATIONS PLC Financial Highlights For the Year ended 31st March 2020 2019 Change Rs'000 Rs'000 % Financial Performance Revenue 1,762,154 2,020,360 (12.8) Gross (Loss)/Profit (217,542) 196,608 (210.6) (Loss)/Profit from Operations (324,002) 136,970 (336.6) Net Finance Expenses (146,373) (129,622) (12.9) (Loss)/Profit before Tax (470,375) 7,348 (6,501.6) Tax Expense (24,493) (2,546) (862.0) (Loss)/Profit after Tax (494,868) 4,802 (10,406.2) Other Comprehensive Income (18,155) (75,184) 75.9 Total Comprehensive Income (513,023) (70,382) (628.9) Financial Position Shareholders' Funds 811,578 1,337,916 (39.3) Borrowings 1,694,579 1,340,097 (26.5) Total Liabilities (excluding Borrowings) 1,215,237 1,118,112 (8.7) Total Assets 3,721,394 3,796,125 (2.0) Cash Flows Operating Activities (152,285) 14,217 (1,171.0) Investing Activities (160,954) (170,736) 5.7 Financing Activities 99,219 64,598 53.6 Total Net Cash Outflow for the period (214,020) (91,919) (132.8) Cash & Cash Equivalents at the end (584,620) (370,600) (57.7) Key Indicators per Ordinary Share Earnings per Share (Rs.) (19.79) 0.19 (10,403.8) Market Value per Share (Rs.) 17.00 17.00 - Dividend per Share (Rs.) - 0.50 (100.0) Net Assets per Share (Rs.) 32.46 53.52 (39.3) Price-Earnings Ratio (times) (0.86) 88.51 (101.0) Earnings Yield (%) (116.44) 1.13 (10,406.3) Key Ratios Current Ratio (times) 0.27 0.49 (45.3) Interest Cover (times covered) (2.21) 1.06 (309.1) Revenue to Capital Employed (times) 0.70 0.75 (7.2) Property, Plant & Equipment to Shareholders' Funds (times) 3.39 2.05 65.6 Gross Profit Margin (%) (12.35) 8.17 (251.1) Operating Profit Margin (%) (18.39) 6.78 (371.2) Net Profit Margin (%) (28.08) 0.24 (11,916.4) Return on Equity (%) (60.98) 0.36 (17,091.3) Return on Capital Employed (%) (12.93) 5.11 (352.8) Gearing (%) 67.62 50.04 (35.1) Equity to Total Assets Ratio (%) 21.81 35.24 (38.1) Annual Report 2019 | 2020 5 Revenue Total Assets Rs Millions Rs Millions 2500 4,000 2000 3,000 1500 2,000 1000 1,000 500 0 0 2015/16 2016/17 2017/18 2018/19 2019/20 2015/16 2016/17 2017/18 2018/19 2019/20 Gross Profit Shareholders’ Funds Rs Millions Rs Millions 300 1,500 200 100 1,000 0 (100) 500 (200) (300) 0 2015/16 2016/17 2017/18 2018/19 2019/20 2015/16 2016/17 2017/18 2018/19 2019/20 Profit after Tax Operating Cash Flow Rs Millions Rs Millions 600 300 200 300 100 0 0 (100) 300 (200) 600 (300) 2015/16 2016/17 2017/18 2018/19 2019/20 2015/16 2016/17 2017/18 2018/19 2019/20 Rs.1,762Mn Rs.812Mn Revenue Net Assets 6 HORANA PLANTATIONS PLC Chairman’s Message Our Strategic Approach Our strategic drive focuses on long-term profitability and sustainable operations of the Company. As such, we continued to make progress in our crop diversification strategy whilst also working on enhancing the production process to obtain a better yield and increasing labour efficiency. During the financial year under review, the Company continued to invest in Oil palm and timber plantations, in view of the existing macro risk environment. Moreover, in line with the Company’s market insight driven strategy, we continued to concentrate on quality of production in tea to cater to emerging markets such as China. Social capital is a key component of sustainable growth in the heavily labour dependent plantation industry. Mindful of this fact, the Company carried out community welfare schemes to uplift the lives of our labour force. Our growth strategy continues to evolve in tandem It is with pleasure that I present the Annual Report and Financial with market realities, future trends and growing climatic Statements of Horana Plantations PLC for the financial year challenges. 2019/2020. Financial Performance Climate change severely impacted crop production during Faced with numerous economic and climate related the year under review, while the volatile nature in supply and challenges, Horana Plantations PLC ended the financial year demand, as well as the uncertain political climate in importing recording a loss before tax of Rs. 470 Mn. The Company countries, negatively affected the industry as well as the recorded a revenue of Rs. 1.76 Bn, recording a decrease Company. A number of other economic and operational realities of 13 percent vis-à-vis the previous year. The downward negatively impacted the Company’s profitability during the trend in major crops, specifically tea and rubber led to the financial year 2019/20. Higher labour cost led to the increased decrease in revenue generation despite the increase of cost of production while currency depreciation in tea importing revenue from diversified crops by 43 Percent. Revenue from countries resulted in higher prices in local currencies which tea and rubber was Rs. 1.4 Bn and Rs. 265 Mn respectively, in turn led to decreased demand. Moreover, unstable price recording a downward trend in comparison to the previous fluctuations in the world market negatively impacted Colombo financial year. The Company’s total assets and retained profit auction prices. for the year stood at Rs. 3.7 Bn and Rs. 492 Mn respectively as at 31st March 2020. The Company’s tea sector had to reckon with uncertainty arising from the suspension of tea exports to Russia, US sanctions COVID – 19 Impact on Iran; a country that is a key importer of Ceylon Tea and Post COVID – 19, the world is expected to face an internal conflicts in the Middle East. Tea prices experienced a unprecedented economic recession, which will have lower trend during the year under review in comparison to the far-reaching impacts on all businesses. However, we are previous year. Meanwhile, tea production slumped in the face of cautiously optimistic about the future of the plantation El Niño drought during the first three months of 2020. industry. The Ceylon Tea which has a relatively high level of Polyphenol is likely to result in higher demand given The Company vigilantly absorbed worrying economic challenges the current prevalence for healthy beverages which has during the year whilst concentrating on mitigating measures antidotal properties. Rubber prices to are expected to as well as innovation to cater to new market trends to pursue viable growth prospects. Annual Report 2019 | 2020 7 increase given the growing demand for manufacturing competencies and other November 2019 while his alternate health and safety related products.