At the conference, I had the chance to meet face-to-face with many Sri Lankan company executives across various sectors for the first time in more than three years. The key takeaway from the meetings was that the bottom-up fundamentals of most companies are very stable. This is because these companies have very well-established brands which have been built up over the past few decades and have withstood previous crises as well.
One of the key highlights of the conference was the presence of the President of Sri Lanka, Ranil Wickremesinghe, at the conference dinner as the chief guest, and it was a pleasure to be able to speak with him one on one in person!
Having said that, Sri Lanka is not out of the woods yet, given the scale of its external debt repayments in the coming few years. However, talks with the International Monetary Fund (IMF) and bilateral creditors appear to be progressing, and there is an expectation that there could be an agreement on the restructuring of both external and domestic debt sometime in early 2023, after which there will be greater comfort on receiving the IMF funds.
Sri Lanka has already carried out quite a few reforms and taken some tougher decisions in the last few months. Fuel and electricity prices have been increased, tax rates have been raised, interest rates have risen, the Sri Lankan Rupee has been devalued significantly, and the government is working very actively on privatising or reducing its stake in various state-owned enterprises.
Furthermore, other important steps like introducing a new gaming law have been executed, which should be a long-term positive for the important tourism sector. The Colombo Port City has also seen investment commitments in various sectors like education, healthcare, and leisure and this project is something to watch over the next 5-10 years as it could change the face of Colombo.
Though I mentioned that Sri Lanka is not out of the woods yet, valuations are at extremely depressed and all-time low levels. The Colombo All Share Index now trades at a P/E ratio of only 4x! All blue-chip companies trade at a P/E ratio of less than 10x, with Ceylon Tobacco and Nestle Lanka, which the fund holds, trading at a P/E ratio of only 6x! And this includes strong fundamentals and RoEs of greater than 15-20% for most blue chip companies.