No Halal, No CEPA

Laugfs chairman Wegapitiya isn’t one to hide his nationalist views. In an interview he says Sri Lankans have managed without Halal since time immemorial, that India is not our friend and that there was no corruption in the sale of Laugfs shares to the EPF

By Echelon.

Published on April 21, 2013 with No Comments

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The entrepreneur from rural Ratnapura today heads a highly diversified group with interests ranging from supermarkets and bottled water to hotels and hydropower and has enough political clout, as part of a nationalist business lobby, to block a trade deal with India. The cash-rich company aims to expand further but India is not in his sights, says Laugfs chairman W. K. H. Wegapitiya. Trying to have joint ventures with Indians is suicidal, he believes. Having begun by converting vehicles to run on liquefied petroleum gas, the group has expanded steadily and might appear to have gone into too many unrelated business. But Wegapitiya maintains they have largely stuck to the rationale they began with, of getting into businesses with high entry barriers and products that are essential consumer requirements, and which are mainly cash-based. In this interview, Wegapitiya talks about the group’s forays into new ventures and expansion of its core LPG business, where he is about to start building a storage tank farm costing over Rs2 billion in the new port of Hambantota.

With accusations of corruption being no laughing matter, Wegapitiya was concerned enough to explain what happened in the controversial Rs1.6 billion EPF deal to buy a stake in Laugfs Gas at what was seen as an artificially jacked up price on which the pension fund lost money. And Laugfs goes hi-tech with its latest venture to develop nano titanium dioxide using the rich mineral sands deposit in Pulmoddai in what could be another billion-rupee project once commercial production starts.

Laugfs group has expanded and diversified rapidly in the last couple of years. Could you explain your expansion strategy and describe what areas you see as having potential?
A: Outsiders, when looking at Laugfs, might feel we have unnecessarily and unwisely diversified. We have 20 different companies. But this did not happen accidentally or in an unplanned way. Ours’ is a very complex kind of operation, ranging from LGP to restaurants to water. Outsiders who do not understand our rationale would think we’re crazy, trying to be a ‘jack of all trades’.
Actually, behind this complex diversification there is an underpinning rationale. If you look at most of the businesses we are in, you can find certain commonalities. Our strategy is based on Harvard business guru Michael Porter’s ‘five forces’ framework model. These are the five forces affecting any business.
The first is threat of new entrants. When you look at most of our businesses, except a few, threat of new entrants is almost marginal. Gas you can’t enter easily. There are a lot of entry barriers in LPG, petroleum, lubricants. These are highly regulated products and you need to have heavy infrastructure on the ground. The industry itself has its own entry barriers.
Secondly, bargaining power of the buyers. Look at LPG. You don’t have any bargaining power. However much we increase prices, you have to buy because there are very few substitute products.
Third is the threat of substitute products. For LPG there’s no substitute product. It could be natural gas but we don’t have it. For petroleum there’s no substitute product, nor for lubricant. Fourth is the bargaining power of suppliers. These are all global products. Any bargaining power is commonly applicable to all the market players, not only to us. And the fifth force – rivalry among industry players. Most of the players face the same industry fundamentals. Therefore, nobody has extraordinary strengths.
Going beyond that, to justify the rationale for our diversification, in most of our businesses there are two underpinning principles. One, these are all essential commodities – people are compelled to buy; these can be called pre-sold products. Secondly, these are all cash businesses, whether you go to a supermarket, a filling station or an emission station. We don’t have to send debt collectors to collect money. So a home-grown company like ours’ with very little capital in the beginning, had to find the most suitable ways for survival and growth.
We have diversified into 19 companies each of which has a justification, a link and rationale. Also, it is based on internal and external perspectives, looking at how the economy will grow in the next 5-10, maybe 15 years.
When we started 15 years ago in 1995, we had a very clearly defined long-term plan – how we’re going to position our company and brand, and the overall business in the future marketplace. We knew exactly where we are heading. At that time we introduced LPG as an alternative fuel for motor vehicles. Our aim was to become an energy player, a household brand in 15 years time.

One of your newest investment areas is hotels. Can you explain how this diversification is proceeding?
A: We’re now developing three properties – in Chilaw, Passikudah and Waskaduwa. There is a rationale for it. Sri Lanka has been long a destination for visitors, being on the major trade route. We knew Sri Lanka is going to be a promising tourist destination in the future. We realised this about six years ago. But we needed to understand the industry fundamentals. To do so we first started managing a few hotels, rather than investing. We managed two properties in Wadduwa and got a good understanding of the management style, marketing and operational aspects.
During that time, it was still in during the war, we bought our first property in Chilaw in which we invested Rs1.5 billion. Now almost 80% of construction work is over. We’ll be opening the hotel in July this year. The second hotel is being built in Passikudah with an investment of about Rs2 billion. Our investment in the Waskaduwa hotel is about Rs3.5 billion.
We did go and look at a hotel in Negombo and were almost ready to buy. But since we have one in Chilaw, we’re now looking at a hotel, deep down south, in the Yala area. We want to build, but if there are good properties to buy, why not?. Once these three properties are up and running – our aim is to at least have six hotels. One will be in the Cultural Triangle – in the Dambulla – Sigiriya area.
When we listed part of our company, one of the objectives was to raise funds for Laugfs Leisure, that’s the Chilaw property. The other two we bought using our internally generated cash. We are a cash rich company. No credit. That has certainly helped during recessionary times. As a small home-grown company, most of our diversification has been fuelled by our own internally generated money.

Do you dislike borrowing?
A: We’re from the village. One of the things our parents taught us when we were young was not to become a debtor. So we have that mentality – we don’t want to borrow too much. Secondly, in the beginning, banks were very reluctant to lend money to us until we proved we’re a professionally managed, growing organisation. Now, of course, any bank will give me any amount.

What attracted you to the financial services sector which you entered recently?
A: The country has been maintaining 7-8% GDP growth for the last two years and we’re sure that at least 6% growth will continue. When the economy grows from US$2,500 to $4,000 per capita income – when that kind of momentum is maintained – then the financial sector is one of the important sectors that will support that growth and also become a lucrative business. So we thought it is a good area, especially since Sri Lanka is being positioned to be a hub in several sectors like shipping and aviation. We bought Softlogic Credit and changed its name to Laugfs Capital. Initially, we will do leasing, hire purchase, personal loans. Then we will become a full-fledged registered financial company in the next few months. Our aim is to make it a commercial bank one day.
We always believed in building things rather than acquiring. Most of the 19 companies are start-up companies. We are a bit reluctant to acquire businesses. There’s no happiness, no satisfaction in acquiring. When you acquire someone else’s company tomorrow can you claim that it’s your company? Technically, yes. But in actual fact it would be a company built by someone else. With Laugfs Capital we have internal opportunities. We have over 2,500 LPG dealers. They can do transactions with our finance company. Our aim is not to borrow funds from outsiders and play with it. That’s not our style.

litro quote2How do you plan to expand your core business – LPG. You’ve plans to have a storage facility in Hambantota and also talked of buying a gas carrier in the past?
A: We plan to build a 20,000 MT LPG terminal in Hambantota port with an investment of $20 million. The designs are being made now and we expect the Sri Lanka Ports Authority to give us the land soon. It should be operational by about 2016. We’re going to work with an international company which is strong in shipping. The terminal is not only for Sri Lanka’s market but the regional market as well – we’re going to cater to the Maldives, Bangladesh, Madagascar. Then we could be going into shipping and acquire a gas carrier. It’s too early to say when we will acquire a ship, although we did own a ship in the past that was later sold.

How have you been expanding in the rural market?
A: Almost 70-75% of the LPG market is in the Western Province. Penetration in other areas was much less. But now, especially with faster economic growth, more industries are coming up and with life style changes in the north and east, there’s a fast shift from traditional biomass to LPG. The main market still is in the Western Province but its growth has come to a certain level of maturity. All the growth is coming from the outstations. Industry customers are mainly in Colombo and suburbs except a few like a ceramic factory in Rattota.

In October 2011 the Employees Provident Fund bought a big stake in Laugfs Gas at Rs48 per share. The share price shot up just before the transaction. On what basis did you value the share?
A: One of the objectives in listing our company was to broad-base ownership. What happened was accidentally, at a function, I met the governor of the Central Bank who is very fond of local enterprise. He suggested we dispose of more shares, bring money into the company and expand the business. The EPF, ETF and state companies were very aggressively in the market at the time. I subsequently made a presentation to the EPF where I told them of the future of LPG and the energy outlook and convinced them. There was no underhand deal. We challenge anyone, like they are investigating The Finance, to investigate Laugfs. At that time there were a lot of people very actively involved in the share market. So, somehow or the other, someone probably got the information and the share price began to increase. So you can’t blame us. EPF bought it at Rs48. It had gone up to Rs55-60 per share. Soon afterwards, not only our share, but the whole market came down. Imagine if the market had gone up the way it had been rising till then? Nobody would have questioned it.
We agreed on the price after EPF did a lengthy due diligence. I actually asked for Rs60. Normally shares of a listed company cannot be sold 5% higher or lower than the going price. But when there is a big chunk the terms can be different as no one else has that kind of quantity. It was a clearly negotiated, ethically done transaction. We have not bribed anyone as some claim in other transactions. Unfortunately, it happened at a time the market turned in the other direction.
Recently you spoke of establishing joint ventures with Indian companies, and of your interest in the industrial zone in Trincomalee after talks during visits by Indian business delegations. What has come of it?
A: A – Well, they came and went. Nothing happened. We’re keen but so far there have been no positive business proposals.

You have been a vocal opponent of the proposed Comprehensive Economic Partnership Arrangement with India known as CEPA?
A: I’m totally against it. Looking at historical developments I do not treat India as a friend of Sri Lanka. I can’t blame them also because they have very different objectives. For example, if India really wanted to help Sri Lanka they would have stopped the LTTE problem 20 years ago. We suffered for almost three decades. We lost a lot of people, resources, wealth. Why we’re against CEPA is – CEPA is an extension of the Indo-Lanka free trade agreement with which we’ve had a lot of difficulties. It’s not equal. Of course you can’t expect equality with India – they are huge and we’re tiny. But at least it could have had a better balance. So far we have had a lot of bad experiences. Therefore, our request is first fix the existing agreement. Then we can proceed with CEPA. That’s the view of most of the people who objected to it. Extending it to services and investment is basically just opening the flood gates from India. Not that I don’t advocate an open economy, globalisation, regionalism – I do endorse these things. No country can remain isolated. They need trade and cross-border investments. I don’t rule out going into bilateral agreements with neighbouring countries.

litro quote1Doesn’t the huge market in India offer opportunities Sri Lankan businesses can exploit?
A: Yes, there’s a big market but show me one Sri Lankan company which has gone there and been successful? There are companies which have gone to India but whether they are successful or not is the question. It’s very difficult. You can’t go there and start a 100% owned business there. You have to have local partners. In Sri Lanka any foreigner can start a fully-owned business. Starting a joint venture with Indians in India is like committing suicide.

How do you view the recent halal certification controversy?
A: We don’t need halal certification. From time immemorial we Muslims, Tamils and Sinhalese have sat at the same table and eaten. Our Muslim friends come home and eat with us. We go and eat with our Muslim friends in hotels and restaurants. Did anybody ask whether the food is halal? No.
I do agree there has to be quality. Meeting quality standards for human consumption is a general requirement, not only for Muslims, but for Buddhists and Christians too. Everyone should be concerned about quality. What we have been taught is that halal is only for meat. But today even bottled water and cement is halal certified. It is an unwanted, unnecessary thing. It is an unnecessary controversy. Even my Muslim friends oppose certification. They say some extremist group is trying to create an unwanted controversy in our society.
The majority of our people are Sinhalese. If they refuse to take it, then there’s going to be a problem, no? I think both those who started this halal certification issue and those who oppose it should sit together and amicably resolve it rather than agitating over it.

You recently started a joint venture with Sri Lanka Institute of Nanotechnology (SLINTEC) to produce titanium dioxide. What opportunities do you see in this venture?
A: Sri Lanka as country spends very little on research and development even though we have some rich deposits of rare minerals and we boast of our natural resources. Unfortunately, we have been exporting our mineral sands in raw form. We have done very little value addition. We spend only a very small percentage of our GDP on R&D. South Korea and Taiwan spend a sizeable portion of their GDP on R&D. So as a Sri Lankan company we thought we must spend more on R&D. The aim of the joint venture with SLINTEC is to produce nano titanium dioxide using the Pulmoddai mineral sands – ilmenite. We have set up the lab and experiments are going on. Our initial investment is about Rs35 million.
When it comes to the commercial stage, it will be a few billions. In the joint venture, we provide the funds, they provide the knowledge. We jointly develop and own the product which is mainly used in the paint industry. There’s huge demand, within the country and abroad. Finding buyers won’t be a problem. The commercial plant will be in the east coast, close to a harbour, where enough water is available and there’s no risk to the environment.

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