Of phones, IT and family firms

by FS

(July 27, Colombo, Sri Lanka Guardian) A flurry of activity in some key sectors in Sri Lanka in recent weeks indicate that post-war growth in the economy is taking off. Of particular interest is the stockmarket where IT stocks have suddenly entered the picture and this week saw the launch of PC House’s public issue.

There is another interesting development with mid-sized to small companies like PC House entering the market: The age in which family companies are coming out of the closet. In recent weeks or months, at least three, closely-held companies - Raigam, Odel and PC House – have entered the fray providing a boost to the markets which has for long tried to entice family-held companies to the Colombo bourse.

With the market growing in size, depth and values, this trend augurs well for the future and would lead to more companies of this kind looking at the markets with interest as a means of raising capital. The other benefit in private companies going public is that they become more accountable to the public while governance structures also improve: A win-win for all stakeholders.

IT companies entering the market is also a significant development as this sector is the fastest growing, most profitable and where the least amount of infrastructure is required. In the backwoods of Maha Vilachchiya near Anuradhapura, a humble English teacher affectionately called ‘Wanni (short for Wanninayake)’ trained and guided a group of village kids to launch one of the first software companies in a village. These village kids, now very savvy, are producing software for local companies as well as foreign clients, showing the enormous potential in the IT sector, particularly in the rural countryside and in the post-war era.

Coupled with this are the giant strides expected by the telecom industry after the telecom regulator announced a floor (minimum) price for calls for all operators from mid-July. However one company, Airtel has gone to court disputing the decision which was aimed at ending huge price wars that benefited the customer but badly hurt revenues of all companies.

According to some latest statistics, the telecom industry is expected to grow rapidly in a war-free environment with broadband communications showing the way. According to one report, the broadband Internet market is expected to expand phenomenally by 4.3 million users in the next four year from around 330,000 now, a huge but not impossible leap given the way the mobile telecommunications market has grown.

Over four million users means most mobile phones, even those used at the lower end of the market, would have Internet access while all computers would have portable dongles, the small piece of hardware (just like a pen-drive) that connects to a laptop or desktop computer and provides an Internet connection.

Just like the mobile phone which has dropped in price from around Rs 60,000 in the early 1990s to a mere Rs 3,000 to Rs 5,000 now, dongles would also be a most-frequently used hardware.
Thus recent developments in the IT sector vis-à-vis the stockmarket and the emergence of family companies seeking public listing is positive for Sri Lanka’s economic future.

Another noteworthy development was this week’s entry of US-based Logan Rockefeller Global aiming to invest over two billion rupees in Sri Lanka. The US fund with links to the famed Rockefeller Foundation is the first big fund to enter Sri Lanka in a meaningful way compared to several other top fund managers and business barons who have expressed an interest but are yet to make it happen. Good examples are Mark Mobius and Jim Rogers, who both visited Sri Lanka.

Part of the problem however is that the Sri Lankan market is ill-liquid and foreign funds of the magnitude that Mobius manages are huge and need to make gigantic investments – meaning buy millions of shares in the market to make it profitable and worth their while. The Colombo market however is small in this context and thus unlikely to attract big funds.

The market, though vibrant, is also wayward and once again showing signs of a few big investors controlling it. This week frenzied activity on Thursday in the Hotel Reefcomber stock saw 147 million shares traded in a company which has just 157.3 million shares in public hands. Earlier on July 1, 130.2 million shares of Blue Diamond were traded when it had only 102.2 million shares.

In both cases, stock parcels changed hands a number of times with some investors making a ‘killing’ in the market, raking in huge profits. In recent times, speculation has taken over the market instead of investment decisions made on fundamentals. Be that as it may, the market is growing in strength and drawing more IPOs particularly from small but progressive companies.

Thus these developments indicate the economy is growing but also running parallel is Sri Lanka’s debt which is also growing with another government bond being offered to raise $1 billion.