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Recent rate hike to reduce corporate profits: CT CLSA 

22 Apr 2022

CT CLSA Securities (Pvt.) Ltd., in its report “Impact from Rising Borrowing Costs” published on 20 April 2022, predicted that the recent interest rate hike by newly appointed Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe will have a negative effect on the financials of corporate entities, as a result of increased cost of borrowings.  According to CT CLSA, the interest rate hike will negatively affect the Profit Before Tax (PBT) of “highly leveraged” companies. As per CT CLSA, the loss of Rs. 3.2 billion in FY2021 recorded by Softlogic holding PLC (SHL), when adjusted for the interest rate increase on borrowings, increases to Rs. 4.7 billion.  Similarly, Odel PLC (Odel) is expected to record an adjusted loss of Rs. 2.2 billion for FY 2021, up from the loss of Rs 2.1 billion recorded prior to the interest rate hike. Furthermore in the case of John Keells Holdings (JKH), it noted that the adjusted PBT for FY2021 is expected to be Rs. 4.0 billion, down by Rs 1.7 billion from the recorded PBT of Rs. 5.7 billion for FY2021.  According to the report, due to the commencement of discussions by the Government of Sri Lanka (GoSL) and the CBSL with the International Monetary Fund (IMF) over securing a potential Extended Fund Facility (EFF) arrangement, the country’s interest rates are expected to continue to increase with the potential reduction in money printing in the near term.  The report further provides that following the 8 April 2022 decision by the Monetary Board headed by the CBSL Governor to increase policy interest rates by +700bps, the 12-month Treasury yield has increased by +800bps, and the call money rate of the economy has also increased by +701bps to 14.5% following the rate hike. This has resulted in the yield curve inverting from a year ago. CT CLSA in its report has further stated that due to the interest rate hike, its has revised up their Risk-Free Rate (RFR) used for Target Price (TP) calculations from 16% to 23% as of 20 April 2022.


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