Highlights

Balance sheet structure

Total non current assets increased by 27 per cent to Rs. 48.35 billion from Rs. 38.19 billion in the previous year, on account of increases in PPE of Rs 8.77 billion and investment in associates of Rs 1.37 billion. Non current assets comprised primarily of PPE of Rs. 29.17 billion, investments in associates of Rs. 9.89 billion and leasehold property of Rs.4.64 billion.

Leisure accounted for a majority of the PPE within the group, with Rs. 18.81 billion of PPE. The increase in PPE was also primarily attributable to Leisure on account of the addition of Rs. 3.31 billion of PPE on account of the acquisition of TPL, the holding company of Alidhoo, as well as capitalisation of refurbishment costs of Dhonveli and Ellaidhoo. The addition of the new bottling lines at CCS also had an impact on the increase in PPE by Rs. 456 million. The group also revalued its real estate portfolio during the year. The net addition to PPE as a result of the revaluation was Rs. 3.96 billion. The bulk of the increase came from AHPL and CCS.

Investments in associates increased on account of the group's investment of Rs. 545 million in Auxicogent International, the BPO operating arm of the group, and Rs. 313 million in the NTB rights issue.

Working capital
Net working capital decreased to Rs. 10.38 billion from Rs. 12.88 billion the previous year due to a proportionately larger reduction in current assets compared with current liabilities. The divestment of Keells Business Systems and Unawatuna Walk Inn (UWL), which no longer are treated as subsidiaries of the group, had an impact of Rs. 191 million and Rs. 163 million on current assets and current liabilities respectively due to elimination of inventory, debtors and creditors of the company. Short term investments and cash reduced by Rs. 5.12 billion on account of the holding company infusing Rs. 2.90 billion as capital to Keells Hotels, which was in turn used to repay debt, and repayment of debt at the holding company level. Current liabilities decreased by Rs. 1.82 billion due to repayment of short term borrowings and reductions in overdrafts, although partially offset by an increase in trade and other payables of Rs. 2.07 billion. JKH utilised part of the proceeds from the rights issue to repay short term borrowings that were taken to fund the investment in SAGT last year.

Activity and liquidity ratios

Activity
Although turnover including associate companies grew by 29 per cent during the year, the average asset base of the group also increased by 31 per cent. As a result, the asset turnover of the group at 0.73, remained in line with that of last year. The PPE turnover remained at 1.7 in 2007/08.

Liquidity
Both liquidity ratios declined marginally in the year under review from its high base in the previous year. The current ratio decreased to 1.8 from 1.9, while the quick ratio decreased to 1.5 from 1.6 the previous year.

Cash flow
Cash generated from operations prior to working capital changes increased to Rs. 5.38 billion in 2007/08 compared with Rs. 4.83 billion the previous year. Cash generated from operations increased compared to the previous year, due to positive working capital changes when compared with last year. As a result, net cash generated from operating activities increased to Rs. 6.91 billion against Rs. 2.52 billion the previous year. Growth in cash from operating activities also emanated from the increase in interest received from Rs. 494 million to Rs. 2.08 billion, as well as growth in dividend income.

Net cash used in investment activities was Rs. 4.37 billion during 2007/08, as against Rs. 10.09 billion the previous year. The group invested a total of Rs. 1.16 billion in BPO related investments in Auxi BPO Solutions India, currently treated as an associate, and Quatrro F&A.

During the year, the group repaid higher cost short term borrowings using funds generated through the rights issue. In summary, the group repaid Rs. 3.17 billion, net of proceeds received from new borrowings. The declaration and payment of a special dividend, coupled with regular dividends increased the total dividend outlay of the group, including dividends to minority shareholders, to Rs. 3.38 billion in 2007/08, compared with Rs. 1.70 billion in the previous year. As a result, the net cash used in financing activities increased to Rs. 6.25 billion compared with net receipts of Rs. 18.42 billion the previous year. The net decrease in cash and cash equivalents was Rs. 3.71 billion, with cash and cash equivalents as at 31st March amounting to Rs. 9.24 billion.

Interest cover
The increase of EBIT by 34 per cent to Rs. 8.20 billion in 2007/08 had a positive impact on the interest cover of the group which increased to 5.1 from 4.6 in the previous year. The cash interest cover of the group decreased marginally to 3.3 from 3.7 in the previous year due the high growth in finance expense. The cash interest and tax cover of the group was 2.0 compared with 2.2 in the previous year. In spite of a drop in the cash cover ratios, these are considered healthy levels.

Leverage and capital structure

Capital structure
Total assets of the group increased to Rs. 71.79 billion as at 31st March 2008, compared with Rs. 65.95 billion in the previous year. Assets were funded by shareholders funds (62 per cent), minority interest (7 per cent), long term creditors (13 per cent) and short term creditors (18 per cent).

Long term funding of assets was Rs. 58.74 billion, which amounted to 82 per cent of total assets, funded in the proportion of 75 per cent, 8 per cent and 17 per cent by shareholders funds, minority interest and long term creditors, compared with 77 per cent, 7 per cent and 16 per cent respectively in the previous year.

Debt
Total debt of the group declined by Rs. 2.70 billion to Rs.12.67 billion as a result of repayment of debt using funds generated through the rights issue last year. The reduction of debt was timely, given the significant increase in interest rates during the course of the year. The net debt position of the group was Rs. 20 million, compared to a net cash position of Rs. 2.40 billion in the previous year. Utilisation of cash available to repay higher cost short term debt resulted in the debt to equity ratio of the group declining to 25.9 per cent from 35.8 per cent the prior year. Whilst the group has a target of increasing its debt to equity ratio, increasing leverage at current market interest rates is not justifiable. The composition of debt in the group changed during the year under review, with a higher portion of long term debt in the portfolio. As a result, the long term debt to total debt increased to 61.8 per cent from 42.2 per cent in the previous year.

Of the total debt of Rs. 12.67 billion within the group, Leisure accounted for the majority of debt with Rs. 7.05 billion of debt, with a large portion relating to borrowings to finance its expansion in the Maldives. The balance debt in Leisure was primarily due to term borrowings outstanding relating to refurbishment of the Cinnamon Grand. The holding company also accounted for Rs. 3.46 billion of debt, which consists primarily of Rs. 2 billion of long term debentures raised last year at attractive market rates.

Statement of changes in equity
Total shareholders funds increased by Rs. 4.98 billion to Rs.44.22 billion on account of an increase in profit for the period of Rs. 5.12 billion, Rs. 2.90 billion as surplus on revaluation of land held by the group, offset by payment of dividends amounting to Rs. 3.18 billion, which includes the special dividend made during the financial year.