Highlights

• Profit attributable to equity holders of the parent increased by 45 per cent to Rs. 5.12 billion
• Group revenue excluding associates increased by 27 per cent to Rs. 41.81 billion
• Earnings before interest and tax increased by 34 per cent to Rs. 8.20 billion
• Profit before tax increased by 37 per cent to Rs. 6.58 billion
• Fully diluted earnings per share increased by 32 per cent to Rs. 8.00 per share
• Cash earnings per share increased by 27 per cent to Rs.9.54 per share
• Return on capital employed increased marginally from 3.6 per cent to 13.7 per cent
• Return on equity increased from 11.4 per cent to 12.3 per cent

2007/08 was a challenging year characterised by high inflation, rising fuel and food prices, both locally and globally, the escalation of military operations in the North and the East and a sharp increase in incidence of ethnic conflict related violence outside the formal hostilities theatre of the North and the East. Resultantly, the economy has slowed from the highest ever recorded 7.7 per cent growth in 2006 to 6.8 per cent growth in the calendar year 2007. Growth in all three sectors, namely, services, industry and agriculture declined, with services, the largest component of the economy, growing by 7.1 per cent compared with 7.7 per cent last year. This growth was led by the posts and telecommunications, cargo handling, transport and financial services segments. This was mirrored by the group's businesses as the Transportation and Financial Services industry groups performed well during the year on the back of increased volumes. However, the impact of the ongoing hostilities and unfavourable travel advisories from the main tourism generating countries adversely affected the performance of the Leisure industry group with the total number of tourist arrivals dropping by 12 per cent to 494,008 from the 559,603 witnessed in the previous year.
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The New Colombo Consumers' Price Index (CCPIN) continued to rise, with the annual average inflation at 17.7 per cent as at 31st March 2008. The pointtopoint inflation as at end April was recorded at 25 per cent. The soaring inflation was due to a combination of factors, including increases in international oil prices and food related commodities, such as sugar, wheat, milk powder and rice and also partly due to the government's borrowing from the banking system in the middle of the year. Monetary policy was kept under tight control throughout the year and interest rates in all markets increased in line with the monetary policy. Call money market rates, however, fluctuated widely, ranging from a low of 12.36 per cent to a high of 42.25 per cent during the financial year. The average weighted prime lending rate (AWPLR), which is the base for a majority of the group's borrowings, decreased to 18.61 per cent as at 31st March 2008 from 20.01 per cent at the beginning of the financial year. However, the mean AWPLR during 2007/08 increased to17.57 per cent from an average 13.75 per cent during the previous year. This had an impact on the finance expense of the group, in spite of a reduction in the overall debt.

The above factors had a varied impact on the group's performance. On the one hand, high inflation affected the purchasing power of consumers due to increased prices of essential commodities, which in turn affected volumes and profitability of the Consumer Foods & Retail industry group, in particular, the beverage segment. The high inflation environment also affected the rate of new investments because of steeper hurdle rates. On the other hand, the group thrived on the volatility of interest rates and a stronger Sri Lankan Rupee (LKR) by proactively managing its exposures and opportunities. Further, the group's remuneration model which is founded on a fixed element and a variable component tied to performance/profitability helped to buffer the negatives of high inflation.

Contrary to expectations, the LKR appreciated against the US dollar by 1 per cent from the Rs. 109.32 to close at Rs.107.78 as at 31st March 2008. During the first half of the financial year, the LKR depreciated against the US dollar in line with expectations, reaching Rs. 113.50 in September 2007, with forward premiums on US dollar forward contracts having implied interest rates of 20 per cent. The Government of Sri Lanka's maiden sovereign bond for USD 500 million at a fixed interest rate of 8.25 per cent was successfully concluded in November 2007. The impact of receipt of bond proceeds, coupled with policy changes regarding the limits on bond investments for foreign investors had a favourable impact on the LKR, with the LKR steadily appreciating against the US dollar, reaching a peak of Rs. 107.50 in March 2008. The appreciation of the LKR posed a challenge to all exporters having rupee cost structures. This was no different for the JKH group, which has a majority of its revenue streams denominated in US dollars, such as receipts from SAGT and LMS, apartment sales, hotels (particularly in the Maldives), destination management business and the software development business. The group was able to successfully mitigate adverse impacts through appreciation of the LKR by entering into a series of forward contracts based on its cash flow projections. Similarly, the import related businesses benefited from the appreciation of the rupee by managing its exposures in accordance with perceived trends.

The year under review was also extremely volatile from a global standpoint. The sub prime crisis in the US directly impacted economic growth in the US, foreign exchange markets and interest rates, resulting in unprecedented volatility. With the aim of boosting growth, the US Federal Reserve (Fed) began an aggressive monetary easing policy cycle, which resulted in the LIBOR borrowing rates reducing from its high of 5.70 per cent in September 2007 to 2.70 per cent by 31st March 2008. This had a positive impact on the cost of the group's US dollar borrowings in the Maldives, which are primarily on floating rates. The sub prime crisis and consequent write downs by large, reputed international banks resulted in a shortage of liquidity in the market. Considering the environment, JKH concluded a standby loan facility of USD 75 million with the International Finance Corporation (IFC) in February 2008 to fund its expansion plans in Sri Lanka and the region. The loan is repayable over 9 years from the date of drawdown, with interest payable at LIBOR plus 275 basis points, which is attractive in the current Sri Lankan market environment. In order to lockin the credit spread, JKH drew down on the total loan on the 4th of April 2008. These funds are now held in foreign currency and would be available to fund the group's overseas investments. The currency exposures arising due to the drawdown are being proactively managed.

Revenue

• Revenue, including share of associate company turnover, recorded strong growth of 34 per cent from Rs. 12.43 billion to Rs.    16.71 billion during the year.

• Growth led by South Asia Gateway Terminal (SAGT) and the bunkering subsidiary, Lanka Marine Services (LMS) on the back of    increased volumes.

• Growing volumes also helped DHL Keells (DHL) increase turnover by 21 per cent over the previous year.

• The Airlines segment revenues remained flat as compared to the previous year, mainly due to capacity constraints on    movement of cargo from Colombo.

Earnings before interest and tax (EBIT)

• Increased by Rs. 194 million to Rs. 3.10 billion from Rs.2.91 billion in the previous year.

• Growth was primarily due to increased EBIT contributions from Ports and Shipping, led by SAGT.

• The increase was offset by the decrease in EBIT in the Logistics and Airlines businesses.

• DHL recorded lower margins on account of a higher depreciation charge on investments in automated operational processes    and the quality control centre in its new facility.

• Start up costs relating to the third party logistics operations of John Keells Logistics, and a difficult year for freight forwarding in    India and Sri Lanka, also adversely impacted EBIT of the Logistics segment.

• Increased by Rs. 35 million to Rs. 1.12 billion from Rs. 1.09 billion in the previous year.

• The EBIT of both the Sri Lankan and Maldivian resorts decreased when compared to the previous year.

• This decrease was more than offset by the increase in EBIT in City Hotels, Destination Management and the Hotel    Management sectors.

• EBIT of the Maldivian resorts declined as two of the resorts, Dhonveli and Ellaidhoo, were operational for only a part of the year    on account of refurbishments; whilst Cinnamon Island Alidhoo, which commenced operations in July 2007, became fully    operational only in October due to teething issues.

• Given the unfavourable travel advisories issued by some major tourism generation countries and the resultant drop in    volumes, the Sri Lankan resorts experienced lower margins due to the lower absorption of fixed costs.

• The resorts in Yala and Habarana experienced disruptions in operations during the year owing to the security situation in these    areas.

• Destination Management companies performed well mainly on account of the cost savings generated from process    efficiencies at Walkers Tours and the sale of its subsidiary, Unawatuna Walk Inn Limited.

• Hotel Management companies also recorded a higher EBIT on account of expansion of its portfolio of providing technical and   other services.

• Declined by Rs. 65 million to Rs. 580 million from Rs. 645 million in the previous year.

• JayKay Marketing (JMSL), the owners of the “Keells Super” brand of retail outlets, did extremely well and more than doubled    their EBIT during the year supported by the opening of 11 new outlets, which progressively dilute the fixed costs of operations at    the centre.

• The Convenience Foods segment also increased its EBIT by 45 per cent, driven by growth in revenue and an increase in    margins.

• However, these increases were offset by the decrease in EBIT at Ceylon Cold Stores (CCS). In spite of revenue growth of 15    per cent, the CCS EBIT declined due to longer than expected time required for installing the two new bottling lines and the    higher depreciation arising from its capitalisation. The delay also resulted in an increase in operating costs and a loss of sales    volumes which resulted in an underabsorption of fixed costs.

• High commodity prices and local cost increases also had an impact on the margins.

• Increased by Rs. 84 million to Rs. 422 million from Rs. 338 million in the previous year.

• Strong performances of associates NTB and UA with increases of Rs. 92 million and Rs. 28 million respectively were the    primary reasons for the increase.

• Increase partially offset by the reduction in EBIT of the stock broking business which was affected by reduced activity at the    CSE.

• Declined by Rs. 4 million to Rs. 98 million from Rs. 102 million in the previous year.

• Reduction primarily due to losses in the business process outsourcing (BPO) business, albeit within plan, owing to the    insufficient dilution of its high fixed cost base.

• This decrease was partially compensated by higher EBIT from the Software Services business, John Keells Computer    Services (JKCS) as well as the Office Automation business.

• The joint venture of JKCS with AirArabia is beginning to reap rewards, with its flagship reservation solution “AccelAero” in    demand with a number of low cost carriers.

• The appreciation of the rupee, the resultant lower input costs and rationalising of the product portfolio, enabled the Office   Automation business to improve its EBIT

• Plantation Services EBIT increased by Rs. 228 million to Rs. 466 million from Rs. 238 million in the previous year.

• Increased contributions from Tea Smallholders, John Keells PLC and John Keells Teas Limited on account of higher    revenues and margins.

• As a result, total EBIT from Others, including Plantation Services, increased by Rs.1.81 billion in 2007/08, owing both to the    strong performance of the Plantation Services sector as well as higher interest income arising from the effective management    of funds.

Industry group EBIT margins

Finance expenses

Taxation

Group tax expense increased to Rs. 1.05 billion from Rs. 852 million in the previous year, an increase of 24 per cent. Total tax expense comprised primarily of Rs. 949 million as income tax and Rs. 184 million as dividend tax.

Despite the higher contribution to group profits by taxable companies and the impact of LMS ceasing its tax exemption in December 2007, the overall effective group tax rate fell from 17.8 per cent to 16.0 per cent in the current year. This is primarily attributable to the holding company benefiting from setoff of tax losses in the current year, where the company had not recognised a corresponding deferred tax asset in the previous year. Moreover, resulting from changes in fiscal legislation, the group also benefited from the writeback of Economic Service Charge (ESC) of Rs. 33 million, which had been written off previously.

Profit after taxation (PAT)

Minority interest

Profit attributable to equity holders of the parent

Return on equity and return on capital employed

Though group EBIT margins increased to 16.3 per cent from 15.7 per cent last year, ROCE improved only marginally due to the decrease in capital employed turnover to 0.84 as compared to 0.87 in the previous year, indicating that revenues did not increase commensurately with the increase in capital employed.

• ROCE of 4.9 per cent, a 1.4 percentage point drop as compared to 6.3 per cent in the previous year.

• The average capital employed increased from Rs. 17.39 billion to Rs. 22.90 billion due to the capitalisation of refurbishments    costs of Dhonveli and Ellaidhoo and the acquisition of Tranquility (Pvt) Ltd.

• Turnover increases were in line with the increase in capital employed, resulting in similar asset turnover ratios.

• Decrease in ROCE is solely attributable to a fall in EBIT margins to 11.5 per cent from 14.3 per cent in the previous year.

• EBIT margins were impacted by part closure of the two Maldivian properties for refurbishments, the operating costs of    Cinnamon Island Alidhoo and lower margins at the Sri Lankan resorts.

• US dollar denominated contracts entered into previously at lower rates, coupled with increased rupee costs due to the high    inflation environment, affected margins in the Sri Lankan resorts

Consumer Foods & Retail
• ROCE of 15.7 per cent, 7.6 percentage point drop compared to 23.3 per cent in the previous year.

• Decrease on account of lower EBIT margins as well as a lower asset turnover ratio.

• EBIT margins dropped to 5.1 per cent during the year compared to 6.6 per cent during the previous year, mainly on account of    higher input costs and higher depreciation of the two bottling lines installed.

• Average capital employed increased from Rs. 2.76 billion to Rs. 3.69 billion as at 31st March 2008 due to the capitalisation of    the two new bottling lines at CCS.

• However, the asset turnover reduced to 1.97 against the previous year's 2.25 as the revenue generating capacity of the bottling    lines were not fully utilised, given that they became fully operational only in October 2007.

Financial Services
• ROCE of 25.7 per cent, an increase of 2.6 percentage points compared to 23.1 per cent in the previous year.

• Increase primarily attributable to the increase in asset turnover, off a low capital base, to 2.50 from 2.17 in the previous year,    which more than offset the 1 percentage point EBIT margin drop to 8.8 percent.

• The drop in EBIT margins was due to a fall in the margins of the stock broking business, while margins at NTB and UA    remained essentially the same.

Information Technology
• ROCE of 5.4 per cent, 4.0 percentage point drop compared to 9.4 per cent in the previous year.

• EBIT margins improved marginally to 4.3 per cent from 4.2 per cent.

• The reduction in asset turnover to 1.0 from 1.6 the previous year is a result of lower than expected performance of Keells    Business Systems and the unabsorbed higher fixed costs at the still developing BPO business.

• The average capital employed increased to Rs. 1.82 billion from Rs. 1.09 billion in the previous year as a result of more    investment in the BPO business.

Further details on ROCE are available in the portfolio movements and evaluation section.

Group outlook

Outlook for industry groups