annual report 2015/16 progress through perseverance...while the matrix, as illustrated on our...

TEA SMALLHOLDER FACTORIES PLCAnnual Report 2015/16

Progress ThroughPerseverance

Tea Smallholder Factories PLCAnnual Report 2016/17

TE

A S

MA

LLHO

LDE

R FA

CTO

RIE

S P

LC

‘Persistence and perseverance!’ has long been our battle-cry. Over decades of operations, we have persisted and overcome challenge after challenge.

In the year under review, Tea Smallholder Factories PLC implemented a series of strategic initiatives that have led to a year of profitability and sustainable growth. Our enduring spirit has strengthened our triple bottom-line; adding value to every stage of our value chain and most importantly all stakeholders with whom we engage.

Tea Smallholder Factories PLC

Progress through Perseverance

4 Tea Smallholder Factories PLCAnnual Report 2016/17

Contents

Vision, Mission and Goals 05Our Integrated Report 06Management Team 09Milestones 10Year at a Glance 12Performance Highlights 13Chairman’s Review 16

Management Discussion and Analysis

About Us 21Business Review 22Our Value Creation Model 30Stakeholder Engagement 32and Material Aspects Capital Management Review

Financial and Manufactured Capital 35Human Capital 41Social and Relationship Capital 47Natural Capital 56Intellectual Capital 59

Governance

Risks, Opportunities 60and Internal Controls Board of Directors 65Corporate Governance 68Report of the Board 89Audit Committee Annual Report of the Directors 89Statement of Directors’ Responsibility 95

Financial Statements

Independent Auditors’ Report 99Statement of Profit or Loss 100Statement of Comprehensive Income 101 Statement of Financial Position 102Statement of Changes in Equity 103Statement of Cash Flows 104Notes to the Financial Statements 106

Supplementary Information

Statement of Economic Value Added 145Information to Shareholders and 146Investors Five Year Financial Summary 151and Key Indicators Quarterly Financial Information 153GRI Index 155Glossary of Financial Terminology 162Notice of Meeting 164Form of Proxy 165Corporate Information Inner Back Cover

Financial CalendarInterim Financial Statements

1st Quarter July 21, 20162nd Quarter October 20, 20163rd Quarter January 23, 20174th Quarter May 31, 2017

Annual Reports2015 / 2016 June 03, 20162016 / 2017 May 31, 2017

Meetings22nd Annual General Meeting June 28, 201623rd Annual General Meeting June 23, 2017

Dividends 2016 / 2017First and Final (Declared) Rs. 1.70 per share to be paid June 14, 2017

Highlights

Tea Smallholder Factories PLCAnnual Report 2016/17 5

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Supplimentary Inform

ation

Vision

Mission

Our Goals• Enhancing the quality of the product, so as to achieve the best gross sale averages

in the respective regions as well as nationally.• To introduce / improve machinery components in manufacture, which while reducing

costs, will ensure better management in key areas of the process. To automate selected processes in manufacture.

• To increase productivity of our workforce in order to reduce cost of manufacture.• Training of the workforce in order to improve their knowledge, skills and attitudes.• To improve Management Information Systems of the Company.

To be the best managed bought leaf processing company in Sri Lanka and to contribute to the socio-economic growth of the country.

To be recognized as a leading manufacturer and seller of quality tea, to improve the economic well-being of tea small holders and to make a positive contribution to all our stakeholders.


Our Integrated Annual Report

As the Industry celebrates 150 years of Tea, we pride ourselves to present our second integrated Annual Report to our stakeholders.

Scope and Boundaries

The report aims to share the unique value creation over the short, medium and long term to the stakeholders of

Standards and PrinciplesReporting

• Integrated Reporting Framework of the International Integrated Reporting Council (IIRC).

Governance, Risk Management and Operations

• The laws and regulation of the Companies Act No. 7 of 2007.

• Listing Rules of the Colombo Stock Exchange (CSE) and subsequent revisions to date.

• The Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the Securities and Exchange Commission of Sri Lanka (SEC).

Financial Reporting

• Sri Lanka Accounting Standards (SLFRS / LKAS) issued by the CA Sri Lanka.

Sustainability and Corporate Social Responsibility Reporting

• Voluntary adoption of Global Reporting Initiative (GRI) G 4 Sustainability Reporting Guidelines.

Tea Smallholder PLC for the period 1st April 2016 to 31st March 2017. The holistic approach of the report will describe and quantify how we create financial and non-financial value along with sustainability, to our stakeholders to provide a longer-term view of the business. Whilst comprehensively detailing, we ensure to deliver

a relevant report adhering to the recommendations of the International Integrated Reporting Council (IIRC) for the year under review.

Determining Materiality

Materiality analysis is a key process that enables the Company to define key triple bottom line issues that are of greatest significance to our businesses and stakeholders, both internal and external, in the short, medium and long term. Our focus on materiality, through emphasis on 15 material aspects recognized by both internal and external stakeholders is vital as we drive performance, improve our sustainability framework and institutionalise the Company’s corporate governance philosophy at all levels.

While the matrix, as illustrated on our Management Discussion and Analysis section of this report on page 34 indicates the prioritisation of these material aspects the Company continues to assess its internal and external materiality and disclose the performance of such aspects. Its reporting scope will be expanded as and when an aspect becomes material to the Company and its stakeholders.

Disclaimer for the Publication of Forecast Date

The report contains information about the plans and strategies of the Company for the medium and long

term and represent the group view of the management. The plans are forward looking in nature and their feasibility depends on a number of economic, environmental, political and legal factors which are outside the influence of the Company such as global and domestic financial, economic and political situations, the situation of key markets, changes in tax, environmental legislation, weather patterns and so forth. Given this, the actual performance indicators in future years may differ from the forward looking statements published in this Report. The reader is advised to seek expert professional advice in all such respects.


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Information Verification

The Information contained in this Report has been reviewed as applicable by;

• The Board of Directors

• The Board Audit Committee of the Company

• Independent Auditors confirming the accuracy of the annual financial statements

• The Senior Management of the Company

In our effort to reduce the carbon footprint of our Company, we have created this report in the form of a CD-ROM and made it available to all shareholders. In addition, we have taken measures to post or deliver a printed copy to any shareholder upon request.

Any feedback or inquiries regarding the content of this report can be directed to:

The Chief Executive Officer,Tea Smallholder Factories PLC.,No. 4, Leyden Bastian Road,Colombo 1.E-mail: [email protected]


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Senior ManagementMr. V. A. A. Perera

Chief Executive Officer / Vice President

Ms. P. A. P. Perera

Sector Financial Controller / Assistant Vice President

Mr. H. R. A. Wanasinghe

Head of Operations / Assistant Vice President

Mr. M. R. Ismail

General Manager - Finance

Mr. M. K. S. L. D. Amarathunga

Manager - Extension

Mr. A. N. B. Dissanayake

Engineer

Factory ManagersMr. S. I. S. Dissanayake

Neluwa Medagama Tea Factory

Mr. D. K. Hewabeddege

Hingalgoda Tea Factory

Mr. B. W. T. Nadeeshana

Kurupanawa Tea Factory

Mr. F. J. Blom

New Panawenna Tea Factory

Mr. E. M. W. N. Weerasinghe

Broadlands Tea Factory

Mr. E. A. M. P. Epitawala

Karawita Tea Factory

Management Team


Milestones

The Company received two Awards of “Excellence for Outstanding Performance” at the Specialty Tea of the Year 2006 conducted by the Colombo Tea Traders’ Association

1991

1994

1996

1999

2000

2003

2006

Incorporation of Tea Smallholder Factories Limited (TSFL) under the provisions of the Conversion of Public Corporations and Government Owned Business Undertakings to Public Companies Act No. 23 of 1987.

Divesting of 51% of the shares of TSFL by Secretary to the Treasury to a Consortium comprising of John Keells Holdings Limited, Central Finance Company Limited and National Development Bank of Sri Lanka.

Hingalgoda tea factory was awarded the Specialty Tea of the Year Award for manufacturing quality CTC teas by the Colombo Tea Traders’ Association.

Construction of a new automated tea factory.

Divesting of 19% and 20% shares to registered tea small holders of the Company and the general public respectively. Gifting of the balance 10% of the shares to the employees of the Company.

Construction of a Warehouse at Peliyagoda.


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ation

2010

2011

2012

2015

2016

The Company was honoured at the launch of the 2008 – 2012 National Plantations Development Programme in recognition of achieving ISO 22000 : 2005 / HACCP certification for its factories.

The Company won the Silver Flame Award in the Manufacturing Sector at the Sri Lanka National Energy Efficiency Awards.

Hingalgoda tea factory was adjudged Best Tea Factory (Medium Scale) in the Galle Region at the National Plantation Awards.

A project was launched to assist tea small holders to replant their lands which continues to date.

The Company recorded the highest price per kilogram at the Colombo Tea Auction in comparison with all institutions in the category of sale “Low Growns”.The Company achieved all-time

record average price for tea in the Colombo Tea Auction.

The Company invested in automating the green leaf and fired tea weighing process at New Panawenna and Karawita tea factories.

2008


Year at a Glance

A special incentive payment totalling Rs. 3.5 million was paid to the tea small holders attached to Neluwa and Halwitigala Tea Factories

A compost project was initiated to encourage the use of organic fertilizer and circumvent the higher costs incurred for recommended chemical fertilizer mixtures.

APRIL

MAY

• Automated green leaf weighing systems were installed at Karawita and New Panawenna Tea Factories.

• Harvesting of green leaf commenced by the small holders selected under Phase I of Replanting Project III launched by the Company in 2012.

• Automated fired tea weighing system was installed at Karawita Tea Factory

JUNE

AUGUSTAutomated fired tea weighing system was installed at New Panawenna Tea Factory

• Mr. R. S. Fernando stepped down from the Board of Directors of the Company.

• Machines for weed control were introduced to selected small holders attached to Neluwa Tea Factory.

SEPTEMBER

DECEMBERThe Company was awarded with a Certificate of Compliance in the Manufacturing Companies at the presentation of Annual Report Awards 2016 organised by the Institute of Chartered Accountant of Sri Lanka.

Automated fired tea weighing system was installed at New Panawenna Tea Factory

OCTOBER

FEBRUARYMr. M. H. De Silva was appointed as an Independent Non-Executive Director of the Company.

MARCHThe Company achieved an all-time record average price for tea in the Colombo Tea Auction


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Performance Highlights

Pro�t Before TaxRs.’000s

2013

2014

2015

2016

2017

90,7

86

112,

244

29,4

10

(20,

506)

110,

239

Our Natural Capital Our Human Capital

Electricity Intensity0.80 kWh / kg

Water Withdrawal 12,328 litres

20,567 Metric Tons of Green Leaf

Fuel Consumption 126,494 litres

Bio-mass Output184 kg / m3

Water Disposed in to Soakage pits

11,712 m3

Financial Highlights

RevenueRs.Million

2013

2014

2015

2016

2017

2,31

2

1,91

3

2,51

8

2,67

6

2,42

6 110Mn

594

1.4Bn

Profit Before Tax

Employees

Total Assets

+21%

+57%

Increase in Revenue

Increase in Operating Cash

Cash Generated from OperationsRs.’000s

2013

2014

2015

2016

2017

153,

413

100,

259

123,

577

99,4

43

156,

257

Total AssetsRs.Million

2013

2014

2015

2016

2017

1,20

1

1,27

2

1,25

1

1,23

5

1,40

5

3763Training man hours


Performance Highlights

Financial Highlights 2017 2016 2015

Key Performance IndicatorsProduction Kg. '000 4,286 4,554 5,295

Net Sale Average Rs. / kg 537.21 412.41 464.88

Premium over Low Grown Elevation Average % 1.35 2.76 2.66

Results of the Year

Total Revenue Rs.’000s 2,312,330 1,912,841 2,517,818

Profit from Operating Activities Rs.’000s 85,879 (48,386) 26,538

Profit Before Tax Rs.’000s 110,239 (20,506) 29,410

Profit After Tax Rs.’000s 85,020 (8,762) 35,999

Earnings per Share (EPS) Rs. 2.83 (0.29) 1.20

Dividend Paid Rs.’000s 15,000 15,000 30,000

Return on Total Assets % 4.2 (0.5) 1.9

EPS Growth % 1,076 (124) (56)

Price Earning Ratio times 8.5 (66.8) 32.9

Interest Cover times 34.4 (7.6) 3.9

Pre-tax Return on Capital Employed (Pre-tax ROCE) % 7.7 (1.3) 2.8

Return on Equity (ROE) % 5.8 (0.6) 2.7

Financial Position at the Year End

Total Assets Rs.’000s 1,405,074 1,235,347 1,251,203

Total Equity Rs.’000s 1,022,409 910,814 918,086

Net Current Assets Rs.’000s 273,072 170,422 229,058

Current Liabilities Rs.’000s 167,225 128,882 131,639

Non Current Liabilities Rs.’000s 213,894 193,732 199,185

Capital Employed Rs.’000s 1,022,409 911,040 931,229

Market / Shareholder Information

No. of Shares in Issue ‘000s 30,000 30,000 30,000

Net Assets per Share Rs. 34.08 30.36 30.60

Market Price per Share - End March Rs. 24.00 19.50 39.50

Debt / Equity times - - 0.01

Market Capitalisation Rs.’000s 720,000 585,000 1,185,000

Annual Turnover Growth % 20.88 (24.03) (5.90)

Current Ratio times 2.63 2.32 2.74

Gross Turnover per Employee Rs. 3,906 2,989 3,507

Dividend per Share Rs. 0.50 0.50 1.00

Dividend Payout % 18 (171) 83

Dividend Yield % 2.08 2.56 2.53

Market Value Added Rs.’000s (302,409) (325,814) 266,914


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Non Financial Highlights 2017 2016 2015

Financial Capital

Direct Economic Value Added Rs.’000s 2,373,063 1,967,541 2,588,712

Natural Capital

Total Carbon Footprint CO2 / per kg of Made Tea 0.61 0.60 0.59

Electricity Intensity kWhr / kg 0.80 0.80 0.79

Bio-mass Output kg / m3 184 178 180

Significant Environmental Fines Number Nil Nil Nil

Human Capital

Total Workforce Number 594 642 721

Employee Benefit Liability as of 31 March Rs.’000s 42,255 37,531 36,075

Attrition (as a percentage of total workforce) % 38 30 37

Number of Work Related Injuries Number 3 7 3

Lost Days due to Injuries Days 20 267 45

Total Training Man hours 3,763 6,476 7,928

Incidences of Child Labour (below age 16) No. of Incidents Nil Nil Nil

Incidents of Forced Labour during the year No. of Incidents Nil Nil Nil

Social and Relationship Capital

Total Tea Small Holders Number 17,125 16,583 22,077

Number of Extension and Community Services

Seminar / Group Discussions Number 220 200 377

Crop Clinics Number 21 7 11

Field Demonstrations Number 412 272 662

Extension Visits Number 3,924 2,317 2,327

Chairman’s Review



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On behalf of your Board of Directors, I have pleasure in presenting the Annual Report and the Financial Statements of your Company for the year ended 31st March 2017.


The Tea SectorGlobal tea production for 2016 was 5.5 billion kilograms compared with 5.2 billion kilograms in 2015, recording a gain of 5 percent. Sri Lanka’s tea production recorded 292.4 million kilograms in 2016, a decrease of 36.3 million kilograms over 2015. The production in all three elevations, high, mid and low recorded a decline due to unfavourable weather conditions.

The tea auction averages per kilogram for January to December 2016 totaled Rs. 468.61 as against Rs. 402.31 during the corresponding period of 2015, recording an increase of Rs. 66.30. The low grown teas averaged Rs. 486.74 in 2016, recording the highest gain of Rs. 70.30 followed by high and mid growns. The dwindling supply situation pertaining to green leaf had a positive impact on overall tea prices.

Sri Lanka’s tea exports totaled 288.7 million kilograms in 2016 as against 306.9 million kilograms in 2015. The total revenue in Rupee earnings in the calendar year 2016 was Rs. 184.7 billion compared with Rs. 182.1 billion in 2015.

Company PerformanceThe tea production of the Company in the financial year was 4.3 million kilograms, a decrease from the 4.5 million kilograms recorded in the previous year. The decline in production was as a result of extremes of weather experienced in the last three quarters, where drought conditions with high ambient temperatures were observed. As a result of lower production nationally, the low grown monthly averages ascended from the second quarter establishing a record high at year end.

During the calendar year of 2016, your Company recorded a gross sale average of Rs. 500.90 per kilogram which was the highest sale average achieved by any institution in the low grown elevation as reported by the Sri Lanka Tea Board.

The Company caters to a small holder base comprising of 9,583 direct suppliers and 7,542 indirect suppliers, amounting to a total of 17,125 small holders supplying leaf to the factories. This is an increase of 542 suppliers in comparison with the previous season. In the year under review, the tea small holders were paid a sum of Rs. 1,661 million compared with Rs. 1,348 million in the previous year.

During the year, the Company continued its efforts on the pioneering project to grant development assistance to growers to improve the productivity of their lands. The first two projects have been completed successfully where an extent of 104.25 acres have been replanted, benefiting 140 suppliers. Projects III, IV and V are at hand where 104 small holders are being supported to replant 73.50 acres. The Company has also commenced assisting small holders to infill lands towards optimizing the productive area.

Our green leaf suppliers benefited from the overall policy of manufacturing a good quality end product where the Company paid a maximum of Rs. 98.52 per kilogram of green leaf during the year. The average rate paid for green leaf in the year was Rs. 80.75 per kilogram.

Our green leaf suppliers benefited from the overall policy of manufacturing a good quality end product where the Company paid a maximum of Rs. 98.52 per kilogram of green leaf during the year.

Green Leaf Rate Paid - 2016/17(Average of 8 factories)Rs./kg Green Leaf

April

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Feb

Mar

60

80

100

Chairman’s Review




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WelfareWe continued to improve the welfare and working conditions of our workforce of 502 employees. Residential facilities are being continuously upgraded in a planned manner.

Through its network of factories, your Company continued to support the initiatives of the John Keells Foundation. In addition to the activities of the Foundation, health camps were held together with crop clinics, for the benefit of the village community.

DevelopmentThe upgrading and replacement of processing equipment will continue to ensure minimum breakdown time whilst maximizing consistency in the quality of the product. Capital investments on energy conservation activities were given priority during the year.

Financial PerformanceThe Company recorded a profit before tax of Rs. 110.2 million as against a loss of Rs. 20.50 million in the previous financial year. Improved tea prices together with the introduction of cost efficiencies in processing collectively contributed to this performance.

ConclusionI wish to place on record, our appreciation to our small holders and other leaf suppliers, buyers, brokers and bankers for their co-operation and assistance.

I thank our employees at all levels for their commitment and loyalty.

Mr. Sanjeeva Fernando stepped down from the Board at the beginning of September 2016. Mr. Ranjeevan Seevaratnam who is over the age of 70 years and having served the Board for nine years, has informed us that he would not be seeking re-election. I would like to place on record our sincere appreciation to both of them for the valuable contribution made during their tenure and wish them all the best in their future endeavours. I also take this opportunity to welcome Mr. Manjula De Silva to the Board of Directors and thank my colleagues on the Board for their guidance and support.

Chairman31st May 2017


About Us

The Company is registered as a Limited Liability Company incorporated and domiciled in Sri Lanka, under the Companies Act No. 17 of 1982 (re-registered under the Companies Act No. 7 of 2007) and is listed in the Colombo Stock Exchange under the “Beverage, Food and Tobacco” Sector. The Company is a subsidiary of John Keells Holdings (JKH) PLC and is managed by John Keells Teas (Private) Limited, a fully owned subsidiary of JKH.

The registered office and principal place of business of the Company is located at No. 4, Leyden Bastian Road, Colombo 1, Sri Lanka.

The Company operates eight (8) tea factories in the low grown region of Sri Lanka and is located in the districts / areas of Galle, Matara, Ratnapura and Ginigathhena. Teas which are grown on an elevation up to six hundred (600) meters from the sea level are identified as “Low Grown”. The principal business activity of the Company is processing green leaf procured from suppliers comprising of tea small holders and leaf collectors and sale of processed black tea (made tea) through the Colombo Tea Auction which is conducted by the Colombo Tea Traders’ Association [CTTA] under the aegis of the Ceylon Chamber of Commerce.

The Company employs a workforce of over five hundred and caters to a green leaf supplier base of over seventeen thousand (17,000), which is approximately 5.8 percent of the total tea small holders registered in the low grown region. The production of the Company in 2016 / 2017 was 4.2 million kilograms of made tea.

Factories – 1Small Holders – 3,374



Factories – 1Small Holders – 995

Ginigathena

Ratnapura

Galle

Matara

Location Of Our Tea Factories

GRI-G4-4,5,7 & 9



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Small Holders

Warehousing

Tea Exporters

Tea Brokers / Auctioneers

The Value Chain

Global EconomyThe global economy experienced a slow growth in the first half of 2016. However the economy gained momentum in the second half of the year with advanced economies registering a stronger than expected ‘pick-up’, while slackened economic activity persisted in emerging markets and developing economies.

The agreement to limit oil production by a number of major producers led to a gradual increase in oil prices during the year. However, oil prices stabilised at higher levels in the second half of the year and resultantly economic activity in oil producing countries including Russia, showed some improvement.

Prices of most commodities including food commodities and base metals displayed an increasing trend, particularly towards the latter part of the year. Policy stimulus to rebalance growth in China towards improving domestic demand and lesser reliance on investment continued, creating uncertainty in global commodity markets in which China is a major buyer of key commodities such as petroleum and base metals. In the face of these developments and expectations, global interest rates moved upwards.

The referendum in the United Kingdom to leave the European Union too created uncertainties in financial markets and the global economic outlook.

During the year, the US Dollar appreciated vis-à-vis other major currencies. The currencies of commodity exporting countries including those of oil producers appreciated, whilst the Pound Sterling, Euro and the Japanese Yen depreciated.

The Russian Ruble remained resilient in 2016 / 2017 mainly due to the stability in oil prices. Russia being the number 1 export destination for Sri Lankan teas, the resiliency of the Ruble had a positive impact on the Colombo Tea Market.

Business Review

Tea Manufacturers


Global Market RoundupOn a global scale, tea production for 2016 recorded a gain of 5 percent compared to the previous year, as firm growth in Kenya offset shortfalls in South India and Sri Lanka. Production in China, the world’s largest producer, also increased year on year, albeit at the slowest pace seen in nearly a decade. Sri Lanka showed the largest deceleration of tea production among other tea producing countries in 2016.

Meanwhile, overall tea consumption grew at a faster pace driven mainly by population growth in India and China. Despite the obvious demand and supply disparity, the price of tea remained highly market-sensitive in Sri Lanka, mainly affected by lower quantities of orthodox teas.

The top global tea producers in the years 2016 vs. 2015 (MT – million kilograms) is identified below:

China 2,350 2,249India 1,238 1,209Kenya 474 399Sri Lanka 292 329Vietnam 165 170

Origin 2016 2015

National EconomyEconomic Growth

The Sri Lankan economy (measured by GDP) in 2016 grew by 4.4 percent in real terms compared to 4.8 percent in 2015. Large scale Government infrastructure projects and expansion in private sector investments supported the economic growth at large.

However, continuation of fiscal consolidation measures specifically related to revenue enhancement, increase in inflationary pressure towards the latter part of 2016 driven by supply side impediments and tax policy measures, tightening of the monetary policy stance of the Central Bank and adverse weather conditions experienced throughout the year dampened the growth momentum.

As far as the activities concerned, the economic growth was mainly driven by expansion in Industry and Services related activities amidst the contraction recorded in Agriculture activities due to unfavourable weather conditions that prevailed throughout 2016.

Growth in Services, the major contributor to the GDP, was buoyed by a significant increase in financial services activities and transportation services. Industry activities recorded a noteworthy growth in 2016 largely boosted by the recovery in construction activities and mining and quarrying activities.

External Sector – Export Performance

Earnings from exports contracted in 2016 for the second consecutive year mainly due to lower Agricultural exports, which account for around one fourth of total exports in 2016. Earnings from exports at US Dollars 10,310 million reflected a decline of US Dollars 236 million or 2.2 percent, from US Dollars 10,546 million in 2015. Drop in export earnings attributable to Agricultural exports was significant in 2016 and drop in tea exports contributed a major portion to the drop in Agricultural exports. Export earnings from spices too recorded a decline while rubber and coconut showed improvement.

Earnings from industrial exports, which account for around three fourths of total export earnings, contracted by 1 percent to US Dollars 7,940 million in 2016 in comparison to the previous year. Lower export earnings on transport equipment, petroleum products, gems, diamonds and jewellery largely contributed to this decline.

Overview of Sri Lanka’s Tea IndustrySri Lanka Tea Production

Commencing from the second half of 2015, Sri Lanka’s tea production has continued to deteriorate throughout 2016, ending the year with 292.4 million kilograms, down by 11 percent from the 328.8 million kilograms recorded in 2015. Low grown tea production, which accounted for around 63 percent (61 percent in 2015) of the total tea production in 2016, declined by 9.3 percent to 183.4 million kilograms. High and medium grown production recorded declines of 16.3 percent and 10.4 percent respectively.

Notably, while all elevations registered a decline in tea production, the lower elevations were severely affected due to erratic weather throughout the year. The calendar year commenced with dry weather followed by heavy rainfall in May. Dry weather conditions prevailed thereafter with less rainfall compared with the previous year.

Sri Lanka Tea production by elevation, sector and institution is given in the following page.



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Sri Lanka Tea Production by Elevation / Category

Sri Lanka Tea Production 2016

63% 22%1%

14%

High Grown Medium GrownLow GrownGreen Tea

Total

292.4 Mn


61% 23%1%

15%

High Grown Medium GrownLow GrownGreen Tea

Total

328.8 Mn

Sri Lanka Tea Production by Sector

The tea small holder sector which consists of approximately 370,000 small holders continued to play a dominant role, contributing 73 percent to the national production in 2016.

Source – Sri Lanka Tea Board

Institution wise classification of Sri Lanka Tea Production

The production by Regional Plantation Companies (RPCs) in 2016 was registered at 99.26 million kilograms. RPCs are in the business of growing and processing of tea. The factories other than those managed by RPCs whilst manufacturing 193,102 million kilograms essentially cater to the tea small holder sector.

The market share of the state sector managed estates / factories contributed approximately 2 percent to the national production.


27%

73%

Small Holder SectorEstate Sector

Total

292.4 Mn


64%2%

34%

State SectorRPCsPrivate Factories

Total

292.4 Mn

Source – Sri Lanka Tea Board

Key issues faced by the local tea industry in 2016

• The prolonged drought in tea growing areas during early 2016, the changes in weather patterns with overcast conditions in mid-2016 and the severe drought experienced during the third quarter had an adverse impact on the production of tea at all elevations.

• The curtailment of the fertilizer subsidy and delayed payments by the authorities under the new subsidy scheme, limited to a degree the application of fertilizer in the tea small holder sector. The prohibitive cost of weedicides and the banning of Glyphosate was another reason for the decline in production.

• Reduction in the availability of green leaf exerted pressure on the factories as the competition increased.

• Resultantly factories were compelled to pay a higher price for green leaf over and above the statute, towards optimizing the factory utilization factor.

Management Discussion and AnalysisBusiness Review


Sri Lanka Tea Exports

Earnings from tea exports declined in 2016 to US Dollars 1.26 billion from 1.34 billion in 2015 mainly as a result of a drop in export volumes. Sri Lanka’s tea export volumes in the year 2016 dropped by 18.2 million kilograms (5.3 percent) from 306.9 million kilograms in 2015 to 288.7 million kilograms in 2016, which is the lowest export volume since 2002. The volumes dropped mainly as a result of the decline in the national production as stated previously.

Export Volumes In million kilograms

2013

2014

2015

2016

288

.77

306.

96

327.

79

319

.63

FOB PriceRs./kilogram

2013

2014

2015

2016

639.

88

593.

08

649.

37

623.

91

Tea exporters benefited from the depreciation of the Sri Lankan Rupee against the US Dollar by 3.8 percent during 2016, whereby the export price in Rupees registered an increase of 7.9 percent, from Rs. 593.08 per kilogram in 2015 to Rs. 639.88 per kilogram in 2016.

Key Markets for Sri Lanka Tea

The lower global commodity prices and the decline in oil and gas revenues of key tea importing countries, affected the overall demand for tea in the first half of 2016. However in the second half, a recovery was observed positively impacting the tea prices.

Russia continues to remain as the No. 1 destination for Sri Lanka Teas importing 34.4 million kilograms in 2016, a negative variance of 2.3 million kilograms in comparison with 2015. Iran came in second, followed by Iraq and Turkey. The volume of exports to Turkey in 2016 recorded a significant decline due to the Mersin in-transit trade dwindling because of the border restrictions, wherein re-exports to neighbouring countries suffered. Additionally, cross border trading between Kuwait and Iran as well as Jordan and Iraq was restricted due to political tensions.

Resultantly the demand from Kuwait and Jordan declined substantially. Despite all odds, Syria has continued to patronize Sri Lankan Teas and has imported 12.1 million kilograms, a positive variance of 1 million kilograms over the previous year. Libya with a marginal restoration of normalcy and enhanced sale of crude oil to the world market, imported 12.6 million kilograms in 2016 as against 9.9 million kilograms in 2015.

China who is the largest consumer of tea has been identified as a growing market for black tea consumption. Sri Lanka is increasing its market share in China whose imports of the beverage is growing despite being the world’s largest producer. Sri Lanka who exported 1.5 million kilograms in 2010 has increased exports to 7.6 million kilograms in 2016.

Destination 2016 2015Volume

VarianceFOB

VarianceExport

VolumeFOB

ValueMarket

ShareExport

VolumeFOB

ValueMarket

Share

Mn kg Rs. / kg % Mn kg Rs. / kg % Mn kg Rs. / kg

Russia 34.43 602.78 11.92 36.74 579.53 11.97 (2.31) 23.25

Iran 33.93 661.96 11.75 30.05 597.71 9.79 3.88 64.25

Iraq 32.56 464.15 11.27 31.36 427.89 10.22 1.19 36.26

Turkey 27.07 533.43 9.37 33.71 554.43 10.98 (6.64) (21.00)

UAE 18.38 585.15 6.37 23.44 560.72 7.64 (5.06) 24.43

Libya 12.65 523.91 4.38 9.98 443.20 3.25 2.66 80.71

Syria 12.11 649.03 4.19 11.09 575.07 3.61 1.02 73.96

Azerbaijan 10.56 617.86 3.66 11.18 547.39 3.64 (0.62) 70.47

Japan 7.76 800.81 2.69 8.46 682.61 2.76 (0.70) 118.20

China 7.60 612.40 2.63 7.46 628.08 2.43 0.15 (15.68)

Top Ten Export Destinations for Sri Lanka Tea Financial Statements


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Colombo Tea Auction Prices

Average prices at the Colombo Tea Auctions ‘hit’ a record high in 2016 with most of the gains being recorded towards the second half of the year, mainly attributed to the shortfall in the quantities on offer at the Colombo Auctions. The overall national average in 2016 was recorded at Rs. 468.61 with the previous best being Rs. 461.86 achieved in 2014.

Another noteworthy feature is that high and mid growns recorded the highest ever averages of Rs. 449.85 and Rs. 419.59 respectively surpassing the previous recorded averages of Rs. 420.36 and Rs. 410.06 respectively.

The average price of low grown teas at Rs. 486.74 recorded substantial gains in comparison with Rs. 416.32 in 2015. The gain was Rs. 70.42 per kilogram. The low grown averages depicted a positive growth throughout the calendar year 2016 and financial year 2016 / 2017, especially during the period October 2016 to March 2017. The low grown average reached an all-time record level of Rs. 648.90 in March 2017.

Low Grown Elevation Averages Rs./kg.

400

475

550

625

700

Jan-

16Fe

b-16

Mar

-16

Apr-1

6M

ay-1

6Ju

n-16

Jul-1

6Au

g-16

Sep-

16Oc

t-16

Nov

-16

Dec-

16Ja

n-17

Feb-

17M

ar-1

7

Performance of the CompanyProduction

Tea Prices and Competition

With the drop in availability of green leaf, there was unhealthy competition for leaf amongst the manufacturing entities. The Company adopted strategies to optimize production within the available green leaf in the operational areas by improving the quality of the end product thereby paying a commercial rate to the suppliers. From a sourcing perspective, the Company stepped up efforts to improve the quality of green leaf by offering a series of financial incentives as well as advisory services to encourage small holders to maintain quality standards.

Concurrently, the manufacture processes were aligned to improve the grade mix in order to cater to the specific demands of the market, given the low volumes on offer at the Colombo Tea Auctions. The Company benefited from the premium prices recorded for all grades as a result of these initiatives. The Company recorded an average price of Rs. 500.90 per kilogram of made tea in the calendar year 2016, in the category Low Growns, which is the highest unit price achieved by all institutions who operate in the said category, as per the statistics released by the Sri Lanka Tea Board.

Sale Averages by Institutions for 2016

Institution Sale Average Rs. / kg MT

Tea Smallholder Factories PLC 500.90Co-operatives 500.44Private Factories 487.82Management Companies 479.87Tea Research Institute 468.13

Tea Shakthi 448.72

Rainfall of Galle, Deniyaya and Ratnapura regions - Rainfall in millimeters

0

500

1,000

1,500

2,000

2,500

Janu

ary

Febr

uary

Mar

chAp

rilM

ayJu

neJu

lyAu

gust

Sept

embe

rOc

tobe

rN

ovem

ber

Dece

mbe

r

3 year Average2016

2016 was a challenging year brought on by erratic weather that had a negative impact on the crop availability in the small holder sector. As a result, the Company’s overall production declined from 4.55 million kilograms in 2015 / 2016 to 4.28 million kilograms in 2016 / 2017. Resultantly, the factory utilization factor declined by 8 percent compared with the previous year.

Management Discussion and AnalysisBusiness Review

Source – TRI Kottawa, Deniyaya and Ratnapura Stations

Production of Made Tea

Q1 Q2 Q3 Q487

6,21

5

1,17

0,70

5

1,06

9,90

6

1,16

8,93

6

Kg.


Key initiatives implemented by the Company to improve the triple bottom line performance

• One of the key strategic thrusts for the year was to maximize revenue and operating profits, prompting the

Company to improve the prices and closely monitor and control production costs and maintain financial discipline.

Efficiency improvements were initiated across all aspects of the business.

• To improve the efficiency of operations and to add value to our tea small holders, automated green leaf weighing

systems were installed at New Panawenna and Karawita Factories. The move was aimed at providing the small

holder with more concise information and to eliminate the human factor as far as practically possible. Coupled

with this initiative, a daily “SMS” alert is generated through the system to the small holder with his / her quantity

supplied thereby increasing the supplier confidence.

• As part of a long term focus on production and quality, the Company initiated a new replanting project, where 32

small holders with a collective holding of approximately 23.5 acres were selected and provided with the necessary

resources to commence replanting. Under the first phase of the project, which commenced in November 2016,

the growers were guided on proper land rehabilitation techniques that are needed to be followed, prior to the

commencement of replanting. This project is the fifth replanting project of the Company since the pioneering

programme that was initiated in 2010. Further details on this initiative could be found on pages 49 to 50 of this

report.

• An infilling programme was also initiated to encourage small holders to replant vacancies, thereby improving the

stand per unit of land cultivated. During the current financial year, a total of 40,650 plants were distributed for

infilling 8 acres belonging to 37 small holders. The initiative has proven to be a success, mainly on account of the

shorter turnaround times involved in the process.

• On the production floor, a concerted effort was made to improve the net out turn ratio (the ratio of green leaf to

made tea). Process efficiencies were introduced to ensure accuracy and amongst the key efforts in this regard was

the introduction of an automated fired tea weighing system. This initiative assisted in improving the Company’s

net out turn, which is a Key Performance Indicator. Benefit from this investment was the recording of a higher

conversion ratio in 2016 / 2017 in comparison with 2015 / 2016. Residual tea was maintained at lower levels in

2016 /2017.

• Efficient stock management which resulted in a lower stock carrying contributed to better operating cash flows.

GRI-G4-2



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Profitability

The Company recorded a Gross Profit Margin of 6.18 percent in the year 2016 / 2017 compared to a negative recorded in the previous year. The total economic value added to all stakeholders increased by 21 percent in the year to Rs. 2.37 billion compared to the previous year.


Net Sale Average

2014

2015

2016

480.92

464.88

412.41

529.17

Rs./kilograms

2017

Pro�t Before TaxRs.’000

2017

2016

2015

110,

239

(20,

506)

29,4

10

The operating segments performed well above the previous year except the Matara segment which was severely impacted by adverse weather conditions. Further details on profitability and segment contribution are given on page 38 under Financial Capital Management.

Key Achievements

Highest Sale AverageThe Company recorded an all time unit price for tea in the year 2016 / 2017.

Record Prices Achieved by the Factories – 2016 / 2017

Hingalgoda Tea Factory

Neluwa Tea Factory

Broadlands Tea Factory

Halwitigala,New Panawenna and

Karawita Tea Factories

Best Average in the John Keells PLC Low Grown CTC Catalogue

1 All Time Record Price 94 Top Prices

Third Best Average in John Keells PLC Low Grown Catalogue - Ruhunu Region

3 All Time Record Prices 12 Top Prices

Second Best Average in John Keells PLC Low Grown Catalogue - Sabaragamuwa Region

1 All Time Record Price 14 Top Prices

5 Top Prices

Business Review

Halwitigala Tea Factory


Future OutlookIn analysing the global tea production, it is apparent that excluding Sri Lanka, all other producer countries have recorded a growth year on year. However, the increase in the global production mainly comprises of CTC teas. Sri Lanka processes mainly orthodox teas. Production of orthodox teas in 2016 in Sri Lanka as well as in Vietnam recorded negative variances compared with 2015. Hence, there is a carried forward deficit in the orthodox tea production which is estimated at around 40 million kilograms and is likely to have a positive impact on prices in 2017, although globally the net position, that is orthodox and CTC combined, records an increase.

In estimating the likely production of Sri Lanka in 2017, factors that have to be reckoned are the weedicide policy (banning of Glyphosate), limitations on fertilizer subsidy, vis-à-vis its

impact on production. The authorities will have to address the Glyphosate issue, as a cost-effective alternate is currently not available to the Plantation Sector. Globally the improvement in consumption by producer countries will result in less availability for export and a positive impact on the tea prices. On the exports of tea, positive signs are emerging from Sri Lanka’s key export destinations. Political issues and drastic currency depreciations are showing some signs of recovery, in these importing countries. Crude oil prices are expected to remain at a reasonable level which would increase the buying power in the Middle East and in Russia. The devaluation of the Sri Lanka Rupee against the US Dollar, would also assist in recording satisfactory prices in Rupee terms. On the consumption side, India and China have been witnessing a steady growth due to an increase in population and the rising per capita income level.

In this backdrop, our Company will have a challenging task ahead. The resilience shown by the Company over the years, instills confidence to meet these challenges in a focused manner. We will continue to set key performance objectives towards improving the triple bottom line. Moreover, the Company will continuously concentrate on improving its in-house extension expertise and services, and promote its pioneering project on development assistance to tea small holders as a model for the industry. Our strength as a reputed Company in the industry will buoy our positioning as a key player in the Low Grown Sector which will pave the way for future growth.



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‘‘Our value creation model demonstrates how our capital inputs are affected through our value creating activities to generate sustainable value to our diverse stakeholders”.

The following illustrates our value creation process.

Capital Capital Inputs Value Creating Activities

Key Outputs Key Outcomes

Financial Capital The pool of funds thatis available for use for Value Creation

Manufactured CapitalManufactured physical objects available for use in production.

• Shareholders’ funds: Rs. 1,022 Mn

• Property, plant and equipment: Rs. 777 Mn

• Lease rentals paid in advance: Rs. 2.7 Mn

• Effective and responsible investment of shareholder funds

• Business development activities

• Cost reduction initiatives

• Net profit: Rs. 85 Mn

• Earnings per Share: Rs. 2.83

• Dividend per share: 0.50

• Financial stability and growth

• Creation of wealth

Human CapitalThe employees’ competencies, capabilities and experience, including their ability to understand, develop and implement the Company’s strategy. This encompasses their motivation for improving processes, taking a lead role, managing and collaborating.

• The workforce : 594

• Experience, values and attitude of our employees

• Channelling employee skills and expertise for business growth

• Employee training and development

• Structured career development programmes

• Employee survey initiatives

• Total staff expenses: 144 Mn

• Staff motivation

• Talented and efficient workforce

• Job satisfaction

• Career progression

• Safe work environment

• Improvement in worker productivity

• Job creation

• Enabling a rewarding environment with equal opportunities and work-life balance

• Opportunities for skill and career development

Social and Relationship CapitalRelationships established within and between each community, individual and group of stakeholders to enhance individual and collective well-being. Social and Relationship Capital includes key relationships, trust and loyalty that the Company has developed and strives to build and protect with its customers and suppliers

• Investment in small holder development

• Occupational health and safety

• Community development

• Stakeholder management

• Investment in small holder development and extension services

• Awareness creation and engagement of suppliers

• Regular dialogue with investors and other stakeholders

• Social impact assessments

• Identification of key stakeholders and related material aspects

• Supplier commitment and loyalty

• Well informed and sound investment decisions

• Strengthened supply chain

• Product quality and competitive pricing

• Uplift rural society

Management Discussion and AnalysisOur Value Creation Model

GRI-G4-1


Capital Capital Inputs Value Creating Activities

Key Outputs Key Outcomes

Intellectual CapitalIntangible assets

• Strong demand for quality teas

• Corporate brand image

• Top selling marks

• Ethical and sustainable management practices

• Strong relationship with key stakeholders

• Top / record prices

• Customer and supplier response and feedback

• Enhanced brand value and shareholder returns

Natural CapitalAll renewable and non-renewable natural sources which are used for the production of goods

• Green leaf: 20,567 Metric Tons

• Fuel Consumption: 126,494 litres

• Electricity Intensity: 0.80 kWh/kg

• Water Withdrawal: 12,328 litres.

• Environment impact assessment and mitigation

• Carbon footprint measurement and reduction initiatives

• Adoption of water and waste management processes

• Reduced utility consumption

• Efficient disposal of industrial and domestic waste

• Reduction of carbon footprint

• Reduced energy cost

• Increased output of raw materials

• Sustainable natural resource utilisation

• Bio-diversity preservation

Inputs Outputs

Natural Capital Natural Capital

Human Capital Human Capital

Financial and Manufactured Capital Financial and Manufactured Capital

Social and Relationship Capital Social and Relationship Capital

• Shareholders’ funds• Cash flow from operations• Property, plant and equipment

• Green Leaf • Fuel• Electricity • Bio-mass• Water

• Workforce of 594• Experience, Value and attitude • Diversity

• Supplier Engagement • Relationship building• Community development

• Corporate brand image• Strong demand for quality teas

• Shareholder returns • Share price appreciation• Payment to other stakeholders

• Reduced utility Consumption• Efficient disposal of industrial and

domestic waste• Reduction of carbon footprint

Intellectual Capital Intellectual Capital

• Job satisfaction and Staff motivation• Talented and efficient workforce• Safe work environment

• Supplier commitment and loyalty• Well informed and sound

investment decisions• Community development

• Enhanced brand value and shareholder returns

Strategy,Resource

Allocation and Management

Financial and

Non-Financial Performance

BusinessOutlook

Risks andOpportunities

Capital deployed to create value

Value Creation Process Capital transformed

Stakeholder Returns and Engagement

Sustainability Framework

Human ResourceC

orporate Social Responsibility

Corporate Governance

IT Governance

Ente

rpri

se R

isk

Man

agem

ent Financial Statem

entsSupplim

entary Information

Governance

Highlights

Managem

ent Discussion


Employees

Employees play a major role in the primary activities of the Company and hence help achieve our strategic objectives

• Open door policy

• Staff meetings at multiple levels

• Annual performance appraisal

• Annual employee survey

• Quarterly news letters

• Job security

• Performance management

• Opportunities for growth

• Training and development

• Health and safety

Suppliers and Service Providers

Strong ties with green leaf and other suppliers are essential for the sustainability of operations

• Extension services and daily field visits

• Open door policy and one to one contact

• Frequent seminars and pocket meetings

• Group sessions and ceremonies

• Green leaf rate and quality of service

• Ease of transactions

• Prompt payments for supplies

• Production and productivity

• Labour shortage

• Diminishing yields and climate change

Customers and Tea Brokers

Brokers understand our customer needs and promote the factories’ selling marks

• Regular meetings and interactions

• Weekly broker visits

• Product quality and food safety

• Production level of the Company

Management Discussion and AnalysisStakeholder Engagement and Materiality Aspects

The Company conducts its commercial operations in several geographical areas and engages with a large number of stakeholders with diverse and numerous expectations of the Company which necessitates developing and sustaining relationships with these stakeholders. The Company has therefore, using a stakeholder mapping tool considered stakeholders that have a significant influence over the Company, or who would be significantly impacted by the Company’s operations.

The Company’s engagement with its significant / key stakeholders is carried out through formal and informal consultations, participation, negotiations, communication, mandatory and voluntary disclosures, as well as certification and accreditation. These mechanisms ensure that we clearly identify issues which matter most to our diverse stakeholders.

Key Stakeholders Importance of Engagement

Method and Frequency of Engagement

Key Topics and Concerns Identified

Shareholders and Providers of Capital

Shareholders and Investors provide capital required to fund future growth plans

• AGM (Annual)

• Quarterly results updates

• Annual Report

• JKH Website

• Open door policy

• Return on Investment and Sustainable growth

• Corporate governance and ethics

• Risk management, opportunities and future outlook

GRI-G4-24-27


Determining Materiality Aspects

Having identified issues that are most relevant to our stakeholders, material aspects are selected and prioritised to ensure that the metrics we measure and manage are aligned with the requirements of our stakeholders. Our process for determining material aspects also takes cognizance of the Company’s key strategic priorities as well as economic and market dynamics that could potentially affect our value creation process.

The structured process we adopt for determining material issues is as follows:

Identify matters that can impact our value creation process with reference to the impact to stakeholders and

contextual trends

Evaluate their significance to the Company and the impacted stakeholders

The Company’s key strategic priorities embody our approach towards creating value to our stakeholders. We continuously seek to reinvent ourselves in all strategic areas by reviewing and enhancing our way of thinking and working.

Our Key Strategic Priorities includes;

• Optimum use of factory capacity by increasing production

• Improve product quality with consistency and command premium prices

• Automation of certain processing activities

• Supplier development – Enhance the long term productivity of the tea small holder lands that uplifts the social status

Prioritize matters based on their relative importance

Determine matters to be disclosed in the Integrated Annual Report

Key Stakeholders Importance of Engagement

Method and Frequency of Engagement

Key Topics and Concerns Identified

Government and Regulatory Bodies

Provides an enabling environment for us to operate.

• Written communications

• Annual Reports and quarterly results updates

• Tax revenues

• Compliance to all laws and regulations

• Job creation

• Contribution towards uplifting communities

• Environmental conservation

Communities

Strong ties with local communities are essential for the sustainability of our operations

• Livelihood development programmes

• Frequent CSR and awareness programmes

• Community meetings

• Employment opportunities

• Environmental conservation and community service

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Material Aspect Corresponding GRI Aspect Aspect Boundary

Financial performance Economic Performance Internal

Production and productivity - Internal

Product quality - Internal

Product responsibility Customer health and safety (PR) Internal

Energy management Energy Internal

Occupational health and safety Occupational health and safety Internal

Responsible sourcing and supplier development Supplier environmental assessment External

Community engagement Local communities External

Nurturing the environment Materials, energy, bio-diversity, emissions, effluents and waste, products and overall (EN) environmental grievance mechanism

Internal

Water and waste management Water, effluents and waste (EN) Internal

Carbon footprint Emissions Internal

Training and development Training and knowledge transfer Internal

Employee engagement Labour practices and grievance mechanisms Internal

Remuneration and benefits - Internal

Compliance Compliance (EN), compliance (PR) Internal


1

7

8

9

10

11

12

13

2

3

4

5

15

14

6

We have highlighted the material aspects considering industry-specific factors that could affect our value creation process, in addition to the aspects prescribed by the GRI G-4 reporting criteria. The material aspects validated by the senior management are:

Sign

ifica

nce

to o

ur S

take

hold

ers

Significance to the Company Strategy High

High

Sustainable Growth Our Workforce Our Customers Corporate Responsibility

18 9 10 11

12 13 14

2 3 4 5

6157

Stakeholder Engagement and Materiality Aspects



Financial CapitalValue Creation Highlights

Capital 2016/17 2015/16 Variance %

Inputs (Rs. Mn)

Shareholders’ Funds 1,022 910 12

Interest Income 4.40 3.30 33

Revenue Reserves 469 401 17

Activities during the year

• Cost reduction initiatives• Effective and responsible investment of shareholder funds• Effective working capital management

Outputs

Net Profit (Rs. Mn) 85.02 (8.80) 1,066

Earnings per Share (Rs.) 2.83 (0.29) 1,076

Return on Equity (%) 5.80 (0.60) 1,067

Cash from Operations (Rs. Mn) 156 99 58

Share Price (Rs.) 24.00 19.50 23

Relevance of our Financial Capital

Obtaining and adequately managing our financial capital is essential for generating sustainable shareholder value. Financial capital is reinvested in the other capital inputs and is vital in fulfilling our growth aspirations.

Capital Management Review

Earnings per share

Dividends Net Assets per Share

Market Value per Share

Shareholder Value Proposition

Overview

Sri Lanka tea production continued to decline throughout the year 2016 / 2017 due to erratic weather experienced during the year coupled with the effects from the restrictions on fertilizer subsidies granted to tea small holders. The average tea prices in the Colombo Tea Auction increased sharply recording a 16 percent growth compared to the corresponding period of 2015 / 2016. A significant drop in production was noted in the low grown region where the Company operates its factories.

The dwindling supply situation to the Colombo Tea Auction and the increased demand from key export destinations for Sri Lanka Tea, together with depreciation of the Sri Lankan Rupee against the US Dollar, led to an increase in the tea prices.

The value creation of the Company was enhanced by implementing strategies such as manufacturing a superior quality tea that commands a premium price and the introduction of cost saving measures such as processing every other day when crop intakes were not economical to process daily.

A Strong Performance

Financial Year 2016 / 17 2015 / 16 Change

Rs.'000 Rs.'000 %

Revenue 2,312,330 1,912,841 21

Cost of Sales 2,169,426 1,915,418 13

Gross Profit 142,904 (2,577) 5,645

Other Operating Income 33,070 24,436 35

Administrative Expenses (60,820) (54,040) 13

Management Fees (29,274) (16,205) 81

Profit from Operating Activities 85,879 (48,386) 277

Profit / (Loss) Before Tax 110,239 (20,506) 638



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Management Discussion and AnalysisCapital Management Review

Revenue

The Company’s revenue comprises of income generated through the sale of black tea of which 97 percent are sold at the Colombo Tea Auction and the remaining quantity sold to leaf suppliers and issued to the workforce.

The revenue for the year 2016 / 2017 increased by 21 percent compared to the previous year. The sold quantities decreased by 6 percent compared to the previous year as a result of the decline in production.

Given the low volumes on offer at the Colombo Tea Auction, the Company implemented several initiatives to market the end product creating demand accentuated by consistency in the product mix offered. Resultantly the Company attracted greater buyer interest with attractive prices for its produce. The increased prices realized mitigated the impact from the decline in the quantity sold. Please refer page 28 which indicates the record / top prices achieved by the Company during the year.

RevenueRs.Million

2013

2014

2015

2016

2017

2,31

2

1,91

3

2,51

8

2,67

6

2,42

6

Revenue Analysis

4,36

9,72

6

4,63

8,21

4

2,31

2,33

0

2016 2017

1,91

2,84

1

Sale Quantity (Kgs) Revenue (Rs.'000)

Cost of Sales

The cost of sales of the Company is broadly categorized into three (3) components. They are cost of green leaf, direct production cost and production overheads.

Green leaf is identified as the single major cost component which comprises of 75 percent of the total cost of sale during the year compared to 72 percent in the previous year. The price payable for green leaf is determined by statute on the basis of a formula designed by the regulatory body, Sri Lanka Tea Board. This is linked to an individual factory’s gross sale average (GSA) compared with the low grown elevational average. The increase in the cost of green leaf was as a result of the enhanced tea prices and incentive payments made over and above the statute to meet the competition. This enabled the Company to maintain an optimum production level thus enabling the Company to control costs.

Direct production cost constitutes activities such as leaf transport, labour, power, biomass, produce transport, etc., which are variable costs related to the production of a processing unit.

Labour cost was reduced from Rs. 112.6 million (2016) to Rs. 102.8 million during the year giving a 9 percent saving. The cost of labour which could be identified as the second major component was efficiently managed by improving labour productivity and by outsourcing certain activities in the manufacture process, thus converting certain components from a fixed to a variable cost.

Leaf transport cost increased to Rs. 81.5 million which is a 6 percent increase compared to the previous year. Additional costs were incurred on incentives paid to transporters of green leaf and leaf collectors. The reduction in leaf quantities was also a major contributor for the increase in costs.

Cost of Sales

2017 2016Green Leaf Cost

Rs.

Direct Production CostProduction Overheads

Direct Production Cost %

Total

152ToTot

5

34%

23%

17%

12%

5%6% 3%

Labour CostLeaf TransportPowerBio-mass

32%

25%16%

12%

5%3%

7%

Packing MaterialsTransport of ProduceOther

2016 2017


Costs incurred on power and biomass declined through stringent cost control measures and improving the quality of material sourced, thereby generating higher outputs. Investments were made on ‘fast drying firewood sheds’ to improve the output of bio-mass.

The costs incurred for factory and machinery maintenance increased marginally due to general increases in prices of input materials / spares.

Production overheads mainly constitute costs at the factory level which are directly linked to production such as salaries, depreciation and general upkeep. Cost of production overheads declined by 3 percent due to the implementation of cost saving measures.

Other Income and Expenditure

Other Income

25% 20%6%

49%

Net margin on sale of Inputs

Others

Sale of Residual Tea

Rent Income

Total

Rs. 33 Mn

Other income during the year increased by 35 percent to Rs. 33 million from Rs. 24 million recorded in the previous year. Proceeds from sale of residual tea was Rs. 16 million, which was an increase of 43 percent compared with the previous year.

This was due to the increase in residual tea prices in keeping with the overall increase in the tea auction prices. Net margin from sale of inputs increased by Rs. 2.8 million with the revision in prices. Other miscellaneous income constitutes profit from sale of fixed assets, miscellaneous receipts and rent income earned from the investment property held by the Company.

Administration expenses which constitute salaries and other employee related expenses, rent, electricity, vehicles, building maintenance and depreciation increased by 12 percent compared to the previous year. The increase of Rs. 6.7 million is in line with the enhanced staff related costs and the general ascension in prices experienced during the year.

The management fees increased to Rs. 29 million from Rs. 16 million recorded in the previous year. This was in line with the increase in revenue and profitability of the Company in the year under review. The management fee is charged based on the contractual agreement between the company and the managing agent, John Keells (Teas) Private Limited.

Finance Income / Finance Cost

Finance income of the Company consists of Interest Income earned from short term investments on overnight call deposits and repos, loans granted to green leaf suppliers and loans granted under the staff motor vehicle scheme for Executives. Interest income from short term investments and green leaf supplier loans combined, increased by 39 percent compared to the previous year.

The company recorded a net finance income of Rs. 1.09 million during the year compared to Rs. 0.89 million on the previous year.

Although, the overall interest rates of the country increased gradually during the year, the Company was able to obtain lower interest rates for overdraft facilities through successful negotiations with banks which allowed the Company to maintain an average annual weighted lending rate of 9 percent.

Finance Income / ExpenseRs.’000

2016

2017

2016

2017

2,38

4

4,40

0

3,30

2

Finance Expense

3,26

4

Finance Income

The Company’s continuous efforts on embarking cost saving initiatives and efficient working capital management particularly on inventory control which represent 15 percent of the total assets of the Company contributed positively towards the reduction of finance costs, during the year.

Profitability

The increase in revenue through improved prices and cost control propelled the Company towards recording a gross profit of Rs. 142 million for the year in comparison to a loss of Rs. 2.6 million in the previous year.



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In the geographical segment, Galle was identified as the most profitable by recording a Gross Profit (GP) of Rs. 96 million from Rs. 16.8 million recorded in the previous year. Despite the impact from unfavourable weather, the segment’s revenue increased by 26 percent whereas the costs increased only by 19 percent, contributing positively to the increase in profits for the year under review.

GP of the Matara segment continued to decline as the segment experienced the worse effects of the erratic weather which resulted in significantly lower production volumes. The segment’s loss increased to Rs. 12.99 million from Rs. 8.27 million.

GP of the Ratnapura segment improved to Rs. 14.72 million from a loss of Rs. 22.31 million recorded in the previous year. The segment’s revenue increased by 16 percent whereas the costs increased only by 8 percent contributing to the increase in profit for the year under review.

The Nuwara Eliya segment was identified as the second best performing segment in the year as it contributed Rs. 45.14 million to the Company’s GP from Rs. 11.18 million recorded in the previous year.

Gross Pro�t

2013

Ratio %

2014

2015

2016

2017

0

1

2

3

4

5

6

The segment’s revenue increased by 26 percent whereas the cost increased only by 16 percent, contributing to the increase in profits for the year under review.

The profit before tax for the year under review was Rs. 110 million, compared to a loss of Rs. 20.5 million on the previous year. Return on Capital Employed (Pre-Tax ROCE) was recorded at 7.7 percent, with the increase in profits.

Change in Fair Value of Investment Property

Fair value of the investment property situated in Peliyagoda increased by

Rs. 23.26 million during the year under review, effectively increasing the value of the property to Rs. 176.26 million from Rs. 153 million recognized in the previous year.

Taxation

Profits from operations as well as interest income for the current year were taxed at the standard rate of 28 percent and hence the effective tax rate remained at 28 percent. The company set off Rs. 36 million against the losses made on the previous year. The income tax charge for the year was Rs. 18.92 million and the deferred tax charge on recognised temporary difference was Rs. 6.29 million.

Statement of Financial Position as at 31st March

Assets 2017 percent 2016 percent

Rs.‘000s Rs.‘000s

Property, Plant & Equipment 777,492 55 771,505 63

Investment Property 176,263 13 153,000 12

Other Non-Current Assets 11,022 1 11,538 1

Inventories 216,443 15 207,349 17

Trade and Other Receivables 80,382 6 71,484 6

Cash in Hand and at Bank 143,472 10 20,471 2

Total Assets 1,405,074 100 1,235,347 100

Equity and Liabilities 2017 percent 2016 percent

Rs.‘000s Rs.‘000s

Shareholders’ Funds 1,022,409 73 910,814 74

Non-Current Liabilities 215,440 15 195,651 16

Trade and Other Payables 154,056 11 124,971 10

Other Current Liabilities 13,169 1 3,911 0

Total Equity and Liabilities 1,405,074 100 1,235,347 100


A Strong Financial Position


Assets 2017

68%

Property, plant and equipment and Investment PropertyOther Non-current assetsInventoriesTrade and other receivablesCash in hand and at bank

1%

15%

6%

10%

Total

Rs.1,405 Mn

Equity and Liabilities 2017

73%

Shareholders’ fundsNon-current liabilitiesTrade and other payableCurrent liabilities

15%

12%

Total

Rs.1,405 Mn

The Company maintains a strong asset base with property, plant and equipment and investment property covering 68 percent of the total assets. Property, plant and equipment is made up of land and buildings which represents 66 percent whereas plant and machinery represent 31 percent. The Company incurred Rs. 13.2 million on capital expenditure during the year. The total asset base of the Company increased by 13 percent to Rs. 1.41 billion by end March 2017.

Inventory covers 15 percent of the asset base during the year under review. The value of inventory increased during the year due to the increase in the average tea price. The investment property held by the Company increased by Rs. 23.26 million during the year due to the change in the fair value.

Cash and equivalents increased as a result of better management of costs and working capital. Funds amounting to Rs. 142 million were invested on short term call deposits as at end March 2017.

The Company’s assets were primarily funded by shareholders’ funds which accounted for 73 percent of the Company’s balance sheet followed by non-current liabilities (15 percent) and current liabilities (12 percent). The Company did not have any debts as at end March 2017.

Cash Flow Generation

Cash generated from operations are utilized for debt repayments, tax commitments, dividends and capital investments. The Company maintained a strong cash flow generation over the years enabling the reduction of borrowings thus giving the management the opportunity to invest the funds towards better revenue generating options and thereby increase shareholder value. During the year under review, net cash flow from operating activities amounted to Rs. 150 million, compared to Rs. 94 million in the previous year. Overall cash and cash equivalents by end March 2017 was Rs. 143 million enabling the management to pay a higher dividend and invest meaningful capital investments in the year 2017 / 2018.

Cash Generated from OperationsRs.’000s

2013

2014

2015

2016

2017

153,

413

100,

259

123,

577

99,4

43

156,

257

Shareholder Returns

Shareholder value is returned primarily in the form of dividend payments and share price appreciation. The Company’s dividend policy is formulated taking into consideration economic and market dynamics, capital investment plans and the Company’s overall performance. During the year under review, earnings per share amounted to Rs. 2.83 whilst dividend per share was Rs. 0.50 (2015 / 16: Rs. 0.50). The Company’s share price increased by 23 percent year-on-year to close the year at Rs. 24/-. During the year, the Directors recommended and paid a first and final dividend of Rs. 0.50 per share on 16th June 2016.

2017 2016

Earnings per Share (Rs.)

2.83 (0.29)

Net Assets per Share (Rs.)

34.08 30.36

Dividend per Share (Rs.)

0.50 0.50

Market Price per Share (Rs.)

24.00 19.50

Dividend Pay Out (percent)

18 (171)

Dividend Yield (percent)

2 3



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Economic Value Generation

The economic value statements depict the generation of wealth and its distribution amongst the stakeholders in all business activities through the entire value chain. It also reveals the amounts reinvested for replacement of assets and retained for the growth and future development. The Company generated Rs. 2.37 billion as total direct economic value, which is 21 percent higher than the previous year.

Economic Value Statement 2017 Rs ‘000s

2016 Rs ‘000s

Direct Economic Value Generated

Turnover 2,312,330 1,912,841

Finance Income 4,400 3,264

Other Income 33,070 24,436

Valuation gain on Investment Property 23,263 27,000

2,373,063 1,967,541

Economic Value Distributed

Cost of Materials and Services 1,850,224 1,534,893

Employees’ Wages and Benefits 211,131 211,919

Payments to Government as Taxes 18,929 578

Payments to Providers of Funds 18,303 17,384

Economic Value Retained

Depreciation 60,511 56,549

Reserves 213,965 146,217

2,373,063 1,967,541

Manufactured CapitalOur manufactured capital comprises eight tea factories strategically placed amongst the preferred tea cultivating areas in the low grown region of the country. Year on year, capital investments have resulted in the factories being fully equipped.

Factory / Investment Property

Location

District

Extent of Land Buildings NBV as at NBV as at

Freehold Leasehold No. of Buildings 31.03.17 31.03.16

A R P A R P Buildings Square Feet Rs'000 Rs'000

Neluwa Neluwa Galle 5 1 3 - - - 13 48,888 67,000 60,000

Halwitigala Thawalama Galle 9 2 18 - - - 12 48,747 61,000 52,500

Hingalgoda Hiniduma Galle 17 - - - - - 26 63,676 83,000 84,000

Kurupanawa Nagoda Galle 11 3 9 - - - 14 51,410 59,000 59,000

Pasgoda Pasgoda Matara 7 0 38 - - - 12 40,091 48,000 33,000

New Panawenna Kahawatte Ratnapura 10 2 14 - - - 5 44,568 48,000 42,000

Broadlands Pitawela N’ Eliya 4 0 22 - - - 11 56,478 54,000 63,000

Karawita Karawita Ratnapura - - - 4 3 37 8 80,364 95,000 81,000

Warehouse Peliyagoda Gampaha - - - 0 3 39 1 31,629 176,263 153,000

GRI-G4-EC1


Human Capital Management

Value Creation Highlights

Capital 2016/17 2015/16 Variance %

Inputs

Total head count 594 642 (7.5)

A competent workforce

A safe and conducive work environment

Investment in rehabilitating staff quarters and residential facilities

Employee welfare

Activities during the year

• 3,763 training hours in multiple disciplines

• Staff welfare facilities and staff engagement

• Career development and surveys

• Investment of Rs. 8.75 million in rehabilitating and maintaining residential facilities

Outputs

Injury rate 0.51% 1.09% (53.2)

Recruitment ratio 26% 30% (13.3)

As a manufacturing entity, the skills, experience and productivity of our people is a key source of competitive advantage. For us, our human capital is also essential in driving our strategic priorities and implementing expansion plans.

EmployeeEngagement

Training andDevelopment

Performance Management

Health andSafety

Employee Value Proposition

Key StatisticsWorkforce Profile 100 percent of our workforce comprise of local employees. Workforce by category, gender and age group is given below.

Workforce by Category

Category 2017 2016 2015

Male Female Total Total Total

Assistant Vice President and above

2 1 3 3 3

Managers 9 - 9 11 11Assistant Managers 1 - 1 - -Executives 3 5 8 8 8Non Executive Staff 54 17 71 77 79Daily Paid Workers 205 297 502 543 620Total 274 320 594 642 721

Employment Strength 2016/2017

98

3 1

71

502

Assistant Vice President & aboveManagers

Total

594

Non Executive StaffDaily Paid Workers

ExecutivesAssistant Managers

Gender Diversity of Employees

Mal

e

Fem

ale

Mal

e

Fem

ale

Mal

e

Fem

ale

2015 2016 2017

274

320

304

338

331

390

Age Breakdown of the Workforce

99

below 30 30 to 50 Over 50

341

154

Total

594

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New Hires and Employee Attrition

During the year, we recruited 152 new employees to our team, whilst 224 left employment. 100 percent of the new recruits were sourced locally. All employees who resigned / retired were local as well.

The profiles of our new recruits and attrition are as follows.

New Hires - Gender Representation

Female Male

68

84

Total

152

New Hires -Age Representation

50


76

26

Total

152

Attrition -Gender Representation

Male

97

127

Female

Total

224

Attrition -Age Representation

55


101

68

Total

224

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GRI-G4-9

AVP and above

Executives and above

BOARD OF DIRECTORS

President Plantation Services Sector

Sector Financial Controller

General Manager - Finance

Accountant

Chief Executive Officer

Head of Operations

Manager Extension Engineer Superintendents

Executives

Extension Officers Chief Clerks Factory Officers

Technical StaffClerical Staff

Daily Paid WorkersWorkers and Non-Executive staff

Our Organisational Structure

Employees form an integral part of the Company which is the prime asset. The Company remains strongly committed to nurture and develop the 594 strong workforce so as to provide them the opportunity of fulfilling their career aspirations. Our goal is to foster a secure, enabling workplace where every individual is valued and empowered to realise his or her full potential.

Closely following the changing dynamics of the industry, we have in recent years adopted a more proactive approach to inspire our employees to grow together with the Company by becoming an integral part of the corporate success.

This is achieved through our Human Resource framework, which is based on the commitments explained below and in the following pages.

An Inclusive Organisational Culture

The Company embraces an organisational culture that is inclusive and conducive to building a team with diverse backgrounds, skills and expertise with common objectives. Being an equal opportunity employer that embraces diversity in the workplace, we do not discriminate based on gender, race, age, religion or ethnicity. We strive to maintain an inclusive work culture that supports diverse talent to contribute positively to the growth and productivity in line with the core values of the JKH Group.

Human Rights

We ensure that, above all, the rights of employees are always respected. We stand firm against any form of violence, harassment or discrimination against race, religion, national origin, disabilities, pregnancy, age and gender. The Company does not tolerate any form of harassment of its employees, and considers any act of harassment as misconduct, warranting appropriate disciplinary action as per the JKH Code of Conduct and Sexual Harassment Policy.

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During the year, our employees participated in Project WAVE (Working Against Violence through Education), an ongoing initiative by the JKH Group to increase awareness regarding the issue of sexual harassment and abuse.

Further, child labour and forced or compulsory labour is strictly prohibited, whilst freedom of association is considered a right of each individual. In this context, the Company respects the individual’s right to be a part of an association or group as long as such a membership does not violate the fundamental rights of any other individual or group.

Competitive Remuneration and Benefits

The Company strives to ensure that remuneration schemes offered are competitive, in line with market benchmarks and are consistent with all applicable collective agreements and minimum wage policies.

As such in addition to their salary, all employees currently receive the following benefits.

• Medical and life insurance policies for Executives and above

• Indoor medical schemes for Non Executives staff members

• Annual ex-gratia payments

• Meals, staff tea allowance and uniforms

• Provision of accommodation, electricity and water for factory employees who are not from the immediate vicinity of operations

• Free medical screening for staff and workers in the factories

• Rest rooms for workers

The Company remains committed to review and revise employee remuneration in line with market demands and regulatory requirements and as such, in the current financial year the Company continued to pay the Budgetary Relief Allowance of

Rs. 2,500.00 mandated by the Government for employees earning below Rs. 40,000 per month.

The total workforce of 594 persons are covered under defined benefit plan obligations. The details of such a scheme are given on 139 of this report.

Performance Management and Career Progression

Through constructive employer-employee engagement, mutual understanding is strengthened, thus enabling us to help our people realize their full potential through a well-defined career progression path. This is facilitated through Company’s performance evaluation mechanism, whereby employees are evaluated to assess their performance and determine their capacity for progress within the Company. The results of these evaluations also help to identify


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Key Highlights

Year 2016/2017 2015/2016 2014/2015

Total workforce 594 642 721

Recruitment as a percentage of total workforce 26% 25% 30%

Attrition as a percentage of total workforce 38% 30% 37%

No. of work related injuries 3 7 3

Lost days due to work related injuries 20 days 267 days 45 days

Percentage of the workforce receiving regular performance review 3.5% 3% 3%

Total training man hours 3,763 6,476 7,928

Percentage of the workforce covered under defined benefit plan obligations 100% 100% 100%


the potential for career progression within the organisation and also determine the training needs of a particular employee. The employees categorised under Executives and above which represents 3.5 percent of the total workforce receive regular performance reviews.

Recognition and Rewards

As a member of John Keells Holdings (JKH), we are aligned to the Group’s recognition and rewards framework. The goal is to keep employees motivated by recognising their contributions towards realising corporate goals and / or honouring their exemplary behaviour in upholding Group values.

The main rewards and recognition platforms are;

• The Chairman’s Award - Rewards high performing individuals in the Manager and above category, who have contributed significantly and beyond expectations, whilst displaying the true spirit of JKH values.

• BRAVO – Rewards employee volunteerism and recognises the efforts made by employees in working towards the betterment of the community and the environment, over and above their job scope.

Training and Development

The Company invests in professionally conducted training courses for employees to enhance their competencies and deepen their knowledge in their respective specialisations.

At the operating unit level, a variety of capacity-building and technical training courses are regularly held for Managers and staff. Potential Field Supervisors have the opportunity to undergo a structured training programme designed to develop their skills and competencies. During the year, we have conducted training and development programmes, which covered a total of 3,763 man hours (an average of 6.34 training hours per employee).

Employee Engagement

We have continued to invest in strengthening our employee engagement, which encompasses our commitment to create a strong communicative culture which has led us to continuously engage with our employees through multiple channels, both formal and informal. These include frequent employee satisfaction surveys, performance appraisals, multiple forms of internal communications, an open-door policy, regular staff meetings and the ability to directly engage with the Chairman via e-mail.

Fairness, respect, impartiality, consistency and transparency remain the principles that determine how we engage with our workforce. We have found that the feedback we receive from our employees has helped us to better understand what they expect of us.

Key Engagement Initiatives are:

• An open-door policy which allows employees to directly approach their immediate superiors, whilst skip level meetings under the guidance of the Group HR Committee are held where employees are given the opportunity to discuss matters of concern with superiors who are at a level higher than their own immediate supervisor in an open but confidential environment.

• Through the participation in 360 Degree Surveys and Voice of Employee (VOE) Surveys, which are conducted annually, employees are able to voice their opinion about the Company and their respective superiors.

• A formal grievance procedure ensures complaints, if any, are addressed in a timely manner, systematically and equitably, in accordance with established processes and procedures of the JKH Group.

• The employees can report to the Chairman through a communication link named “Chairman Direct”, on any concerns about unethical behaviour and any violation of JKH Group values. Employees reporting such incidents are guaranteed complete confidentiality and such complaints are investigated and addressed via a select committee under the direction of the Chairman.

• The employees also have the opportunity to take part in the Great Place To Work (GPTW) Survey conducted by John Keells Holdings PLC giving them the opportunity to voice their opinion on the overall work environment.

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Ombudsperson

In a situation where an individual employee or a group of employees complain of an alleged violation of the published Code of Conduct, and feels that the alleged violation has not been addressed satisfactorily by internally available mechanisms, provision has been made to refer such complaints to an Ombudsperson. The findings and the recommendations of the Ombudsperson arising subsequent to an independent inquiry is confidentially communicated to Chairman or to the Senior Independent Director of the parent company, JKH upon which the duty of the Ombudsperson ceases.

No grievances in respect of the Company have been reported during the year under review.

Occupational Health and Safety

Occupational health and safety and is of utmost priority to us and we are fully committed to maintain a safe and healthy working environment at all times for all employees, as well as contractors and visitors to our work sites. All our factories comply with the internationally accepted Occupational Health and Safety Standard, OHSAS: 18001:2007, which enables us to imbue these values as a part of our day-to-day work culture.

No fatalities have been reported in the current financial year, due to the proactive steps taken by the Health and Safety Committee to minimize accidents. There were 3 work related injuries during the year causing 20 lost days which is a significant reduction compared to the previous year.

Employee Wellbeing

The well-being of our workforce is one of our primary concerns. Providing a comfortable environment for our workers to work and live in, forms part of this commitment. To this effect, a comprehensive range of amenities is provided, which include residential facilities, water and electricity supply, healthcare, meals, uniforms, staff allowance on tea, places of worship and other recreational amenities. We have invested Rs. 8.75 million in rehabilitating and maintaining managers’ bungalows and staff quarters during the year under review.

The Company also promotes a healthy work-life balance among employees, frequently organising recreational activities, including staff trips, sports days, celebrations of major religious and cultural festivals, and health and wellness-focused events.

GRI-G4-LA 6, LA 12

Workers engaged in manufacture process


Social and Relationship Capital Supply Chain ManagementTea Smallholder Factories PLC, over two decades of operation has developed a substantial supplier base. Over the years, we have nurtured and built long standing relationships, which stands as the platform for procurement within our value creation process

OUR SUPPLIERS

Process Operation Distribution Field Services

Green Leaf Suppliers

Leaf Transporters

Bio-massSuppliers

Electricity(National

Grid)

Packing Materials

FuelProduce

TransportWarehousing Fertilizer Chemical

Our supplier network primarily consists of tea small holders, green leaf and produce transporters, fertilizer and packing material suppliers, bio-mass suppliers and other service providers.We stand committed to treat all our suppliers equitably without prejudice and ensure that we maintain the highest degree of ethical standards adhering to corporate values and guidelines outlined by our parent company, John Keells Holdings PLC.

As the Company does not engage in growing of tea, it totally relies on the raw material supplied by the green leaf suppliers and hence we treat them as the backbone of the Company’s operation. We procure green leaf from over 17,000 small growers based in the Ruhunu and Sabaragamuwa tea growing regions of the country. We continue to invest each year towards enhancing their livelihood through extension services and development programmes, ensuring the sustainability of the small holders’ business, Company and the industry.

Our Tea Small Holder Base 2017

Direct 9,583

Indirect 7,542

Total Green Leaf Suppliers

17,125

The support we provide to our tea small holders has a multitude of benefits; it not only brings advantages to our business, but also plays a significant role in improving the livelihoods and health of the community and preserving the environment

Supplier Engagement

We persistently engage with our supply chain partners to ensure that the products sourced are of high quality, safe and offer value for money in terms of price and productivity.

Green Leaf Suppliers

As the core suppliers of the business, the Company maintains one-to-one contact with green leaf suppliers by constantly communicating with individual small holders, leaf societies and leaf collectors. Through this process, any gaps on awareness in

possible improvements in productivity are identified and addressed by mobilizing our internal resources.

Our commitment in this regard also include extension services to provide guidance regarding cultivation and harvesting techniques (Good Agricultural Practices). We have placed a greater importance to this service and the Company has continuously improved the strength of the extension team and its activities. Our extension team conduct regular field visits and engage with small holders, advising them on mitigating land degradation, integrated soil fertility and pest management in order to assist them to improve the viability of their land. Improving the biodiversity of tea small holding lands, reducing water demand through efficient irrigation, and preserving natural forests, are among other areas covered during these initiatives. The details of value added extension activities and services undertaken during the year under review are explained in the following pages.

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Soil Testing

To improve the productivity and sustainability of the small holder lands, frequent analysis of soil pH values is undertaken. An extent of 281 acres were tested for soil pH and 280 MT of Dolomite was distributed to the small holders for correction of the soil pH status during the year 2016 / 2017.

Soil Fertility Management

The organic status of soil in the low grow region is considered inadequate which leads to poor retention of soil nutrients (low fertility level), moisture level, and favourable micro-organisms. Hence, to improve the soil fertility, the addition of compost / green manure was introduced through a special project

by distribution of compost fertilizer to the small holders. A total of 134 MT of compost was distributed in 2016 / 2017 to small holders. This also assisted the small holders to reduce the cost incurred on fertilizer as the compost serves as an alternate to recommended chemical fertilizer mixtures.

Fertilizer Distribution Services

As a value-added service, TRI (Tea Research Institute) recommended fertilizer mixtures were procured from reputed fertilizer companies, stored and supplied to the small holders’ tea lands at their request. The Company provides these fertilizer mixtures to small holders on an easy payment scheme where recoveries are made over a period of two to three months.

During the year under review, the fertilizer application by the small holders declined due to the change in the Government’s policy on subsidy. This was also compounded by the prolonged dry weather conditions that were prevalent during most part of the year. The Company distributed 1,815 MT of fertilizer to the small holders during the year.

In addition to the basic fertilizer mixtures, Micro Tea Packs and Foliar Mixture were also issued during the year to rectify the magnesium and other trace element deficiencies.


Our advisory service on Good Agricultural Practices


Mechanization of Field Activities

The Tea Research Institute together with the Sri Lanka Tea Board embarked on a project to promote the use of mechanical harvesting and pruning in small holder tea lands through some of our factories. Neluwa, Halwitigala, Hingalgoda and Broadlands Factories were identified for the implementation of this project and the services were provided together with a skilled operator at a concessionary rate to the small holders and middle level estates where a shortage of labour was evident.

A pilot project on integrated weed management was also initiated by introducing modernized grass cutters to middle level tea holdings at Neluwa and Halwitigala feeding areas. This was promoted as an alternative measure consequent to the banning of the use of Glyphosate.

Small Holder Development Programme –

Replanting of Unproductive Tea Lands

The Company identified that the replanting of unproductive tea lands of the small holders was inadequate and is a core risk albeit another reason for the decline in the availability of green leaf. Accordingly, a pioneering project was initiated by the Company in 2010 to replant unproductive tea lands under the programme “Development Assistance to Tea Small Holders”. Since 2010, five such programmes spanning over 69.29 hectares with 244 small holders participating, have been initiated. Based on the supplier base and the extents in bearing, this is equivalent to a replanting percentage of 3.2.

Under these programmes, the extension team of the Company initially identifies unproductive tea lands for development. The small holders are educated by transferring knowledge on all related practices from uprooting old tea, rehabilitation of soils, preparation for replanting, planting and bringing in to bearing of newly planted areas. In terms of financial assistance, the Company grants loans for those small holders in the programme at a concessionary interest rate subject

to a well-defined recovery period. Additionally, fertilizer mixtures for the newly planted fields are provided at a concessionary rate where a part of the cost is subsidized by the Company. The success of replanting is primarily based on healthy robust nursery plants being made available. The Company has focused on ensuring that such plants are made available to the small holders wherein the recommendations by the Tea Research Institute on nursery management are strictly followed.

Mechanical Harvesting

Weed management using modernised Grass Cutters



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The cultivars made available for replanting include the TRI 4000 series which are high yielding and are drought and pest resistant. The yields realized on projects 1 and

Project Extent of Land

Small Holders

Current Status

Project 1 24.69 ha 89 Third year of harvesting, first pruning commenced

Project 2 14.27 ha 51 Second year of harvesting

Project 3 12.96 ha 47 Commenced harvesting

Project 4 7.29 ha 25 First year upkeep subsequent to planting

Project 5 10.12 ha 32 Planting is in progress

2 have been very encouraging given the weather conditions that prevailed during the year under review.

Our Replanting Project Lifecycle

How We Progressed Over the Years

A developed tea field of a tea small holder under Replanting Project 1 attached to Karawita Factory

A developed Tea Field under Replanting Project 2 A developed Tea Field under Replanting Project 3 A Tea Field under development - Replanting Project 4


Preparation of Land to receive plants from the

Nursery

Rehabilitation of Soil,

Conservation & Planting of

Grass

Identification of Unproductive

Lands

Fumigation of Nursery Soil

Selection of Quality Plants

Distribute Nursery Plants

to Small Holders

Planting

OUR EXTENSION

TEAM


Financial Year 2016/17 Rs. Mn

% 2015/16 Rs. Mn

%

Local Suppliers

Green Leaf Suppliers 1,661 89 1,348 73

Leaf Transporters 82 4 77 4

Bio-mass 37 2 40 2

Electricity 52 3 55 3

Packing Materials 14 1 15 1

Produce Transport 10 1 11 1

Total 1,856 100 1,546 83

Key Supplier Certification and Assessments

Suppliers Environment Assessment / Standard Achieved

Fertilizer and Agro-Chemicals

Hayleys Agro-Fertilizer (Pvt) Ltd • ISO 14001:2004 EMS

CIC Agri Businesses (Pvt) Ltd • ISO 9001:2008 QMS

Packing Materials

Uni-Dil Packaging Ltd • ISO 14001:2004 – EMS

Uni-Dil Paper Sack (Pvt) Ltd • ISO 22000:2005 – FSMS

St. Regis Packaging (Pvt) Ltd • ISO 9001:2008 - QMS

Bio-Mass • Periodic evaluations by the Company staff on their legality and environmental practices

Infilling Project

An initiative to improve the plants per unit area of land cultivated, commenced in the previous year towards consolidating mature tea fields of the small holders’ lands, by infilling the vacant areas. This project complements the replanting programme already established, where the rehabilitation of the tea lands is undertaken in a shorter period which is also preferred by the small holders. A total of 71,450 plants covering 14.29 hectares has been planted as of date.

Financial Assistance to Small Holders

We assist our loyal small holders providing short term loan facilities primarily for land improvement and development activities. The Company has implemented a formal structured process for loans facilities where small holders are assessed and screened based on numerous criteria set by the Company to minimize risk of default. During the year under review the Company allocated Rs. 34 million as loans for small holders.

In�lling Project

2017

40,650

30,800

2016

Total

71,450

Plants

Forestry Project

To improve the forest cover towards protecting the environment and the livelihood of the tea small holder community, a project was initiated by the John Keells Foundation together with the Carbon Consulting Company and tea small holders in the year 2013. A total of 3,000 rain forest and commercial trees covering an extent of 15 acres of unutilised lands belonging to 31 tea small holders attached to Halwitigala, Hingalgoda, Neluwa and Kurupanawa Tea Factories in the Hiniduma and Udugama region of Galle were selected. The project has progressed satisfactorily with no casualties recorded to-date.

Value Distributed to Suppliers

We source 99 percent of the key material through local vendors. During the year under review, the Company incurred Rs. 1,856 million in procuring materials for operations thus generating opportunities and sustaining the livelihood of the local suppliers and community. The amount spent or value distributed to key local suppliers is as follows.

Supplier Environmental Assessment

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Supplier Environmental Assessment

(Continued...)

Our approach to suppliers is selective and built on-long term relationships. Selection of new suppliers are based on a formal screening process ensuring that suppliers are screened in terms of quality, reliability, compliance to rules and regulations, health and safety and environmental parameters.

We stay committed in carrying out random checks on selected suppliers based on a sample to ensure effectiveness and continuous compliance of the Company’s policies.

We at Tea Smallholder Factories PLC conduct awareness on environmental practices through our extension team on environmental preservation methods and small holder development programmes.

All fertilizers are sourced through suppliers who are compliant with environmental standards and are accredited by ISO 14001:2004 Environmental Management Systems Certification. Additionally, these suppliers are also accredited by ISO 9001:2008 QMS Certification.

Packing materials are sourced through Uni-Dil Packaging Ltd and Uni-Dil Paper Sacks (Pvt) Ltd which are accredited by ISO 14001:2004 Environmental Management Systems Certification, ISO 22000:2005 – FSMS and ISO 9001:2008 – QMS and through St. Regis Packaging (Pvt) Ltd which is accredited by FSSC 22000 Standard, PAS223:2011, ISO 22000:2005 – FSMS and HACCP certifications that confirm the level of compliance.

All bio-mass suppliers are evaluated through a structured process ensuring compliance to environmental laws and regulations and they are legally authorised to supply firewood to our factories. During the year, the Company did not identify any non-compliant suppliers.

Assessment for Labour Practices

We stand committed in maintaining human and labour rights across all our operations. Our suppliers too are assessed in terms of labour practices on induction and are subject to random sample checks to ensure compliance to our Company’s commitments. In the year under review, there were no violations of labour practices by the Company and nothing has come to our attention on violation of this aspect in the supply chain. We have not identified any supplier with incidents of child and forced labour and violations of the rights to exercise freedom of association and collective bargaining.

Awareness

Developing Livelihoods

Preservation of Environment

Community Engagement

and the communities in which they live. As we recognize that business success is deeply linked to the progress of society, our community efforts are designed to deliver mutual benefit and promote shared progress to these communities. The Company has categorized its community services into four main clusters, namely, Awareness, CSR Activities, Developing Livelihoods and Preservation of the Natural Environment.

Development of Livelihoods

Most of the services provided to our small holders as explained in the supplier engagement section of this report on pages 48 to 50 are directed at development of the small holders and the communities they live in. The replanting, forestry and infilling projects are the main projects initiated by the Company from a long-term perspective amongst others for the development of the livelihood of the local community.

CSR Activities

We conduct year-round initiatives supporting the health and safety aspects of the local community and undertook several programmes and screening campaigns in the factories. The following programmes were conducted in the year under review.

• Providing of dry rations to Aranayake landslide victims and displaced small holders attached to Broadlands Tea Factory.

• Eye camp conducted for the benefit of the small holders at Neluwa, Halwitigala and Hingalgoda Tea Factories.

• A blood donation campaign was held at Halwitigala Tea Factory.

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Community engagement is a big part of what we do. Our goal is to make a positive difference to society and contribute towards the betterment of the communities in areas where our factories are located. This includes small holders who are our key suppliers

Our Community Focus

CSR Activities


Eye camp at Hingalgoda Factory

WAVE programme

Donating spectacles for vision correction

Preservation of Environment

Under this, we mainly focus on the forest cover, soil management of tea lands, and mitigating land degradation of small holder lands. We have carried out several programmes and visits including demonstrations to address these aspects. In addition, we have conducted a tree planting campaign in selected small holder lands and in our factories to mark the World Environment Day.

Awareness

We organise awareness programmes in the factories educating our community including our workforce on communicable diseases, HIV/AIDS and general aspects of health and safety. In addition, we have also conducted WAVE (Working Against Violence through Education) Awareness Programmes in the factories.

Awareness programme for factory workers



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“Quality is what we deliver”

We at Tea Smallholder Factories PLC, consider quality to be the number one priority in our business and proudly state that our factories produce some of the finest Orthodox Teas in the island. Hingalgoda Tea Factory which also has the capability of manufacturing CTC (Crush, Tear and Curl) teas, has earned the recognition of buyers and is considered a product that could be depended on in terms of consistency and quality.

We understand our customers’ requirements in terms of quality of the end product and have ensured delivery

of same. We have earned the respect of tea brokers and buyers for stringently adhering not only to quality standards but diligently following bye laws and conditions of sale of the Colombo Tea Traders’ Association (CTTA). The CTTA is responsible for conducting the weekly tea auction. Resultantly, many of the factories have attracted not only ‘top prices’ at the weekly auctions but also established ‘all-time record prices’ during the year under review.

Product Responsibility

A comprehensive policy is in place in all our factories to ensure the highest

level of product responsibility. The policy addresses on how health and safety standards are established, communicated, implemented and audited and encompasses aspects such as food safety, quality, first-aid, cleaning, temperature and humidity control and emergency response. Our factories have obtained and comply with OHSAS: 18001:2007, ISO 22000:2005 and also participates in the Ethical Tea Partnership Programme.

We, as a responsible producer of black tea have ensured that the highest standards of food safety and quality has been adhered to at all levels in

Buyers and Tea Brokers

Quality Inspection at the Broker’s Warehouse

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our value chain without restricting ourselves to the manufacture process itself. We have moved our focus to field operations as well. Our highly-experienced extension team focus on maintaining quality by assisting our small holders in following Good Agricultural Practices. We also conform to the conditions outlined by HACCP/ISO 22000 food safety criteria in purchasing, processing, packing and transporting tea. Tea samples are tested for residual levels, heavy metals, micro biological and physical parameters periodically. We also strictly adhere to the ISO 3720 standard for black tea, where no extraneous matter is added in the process of manufacture.

Product Labelling

We adhere to the labelling and packing guidelines specified by the Sri Lanka Tea Board and the Colombo Tea Traders’ Association and all our packaging

carries the information which are essential in communicating the details to the buyer community as follows

• Selling Mark

• Grade

• Invoice Number

• Number of Packages

• Net Weight

• Gross Weight

• Confirmation of Certifications obtained by the sack manufacturer

No incidents of non-compliance on product labelling were reported in the year under review. A comprehensive process is in place within industry norms to ensure customer satisfaction and to deal with complaints and concerns if any.

Customer Engagement and Privacy

We maintain close ‘ties’ with our tea brokers, John Keells PLC, in promoting our product to existing and potential buyers. We encourage our brokers to undertake factory visits and during these visits, we showcase our tea production process, best practices in place and measures adopted to produce our teas at the highest standards. These visits also enable the broker to add value by providing key inputs on market demands and advice on the required changes to the current manufacture process. The Company also visits the tea broker on a weekly basis.

No complaints on breach of customer privacy have been reported in the year under review.

Compliance

We do not engage in the sale of banned, disputed or illegal products and we assure our customers of offering a tea devoid of any adulterants. Our organisation did not record any monetary fines for non-compliance with laws and regulations concerning products.

Packed Tea ready for dispatch

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Natural CapitalTea Smallholder Factories PLC, as an organization whose core product is derived through natural capital, is well aware of the importance of environmental sustainability. Although we generate substantial value additions to most of our capital inputs, we acknowledge that our operations too could adversely influence our natural capital and have considered environmental sustainability as a key strategic objectives of the organization. We place significant emphasis on reducing our environmental impact by efficient and effective use of resources, responsible waste disposal, continuous improvements in our environmental performance, and continuously explore the use of efficient technologies and processes.

We continue to invest in strengthening our environmental monitoring mechanisms to ensure that our green impacts are managed effectively. Our approach towards environmental management is a structured, clearly defined policy framework with governance structures, tools and techniques for monitoring and reporting.

Climate Change

The key impact of climate change on the tea industry is felt through the rise in temperatures, desertification, loss of bio diversity and scarcity of water, which particularly hampers production, thereby the performance of the Company. These effects were quite evident as the nation experienced an erratic weather pattern throughout the year under review resulting in a major decline in tea production in the year

2016 as elaborated in the Business Review Section of this report on pages 23 to 27. Our proactive measures to follow responsible environmental practices together with sustainability initiatives within the operations support us to mitigate the adverse impacts of climate change.

Raw Materials Our primary raw materials could be categorized under two categories.

• Green Leaf

• Packing Material

As a black tea manufacturer, green leaf could be identified as the core material used in our operation. Our approach

towards procurement is characterized by developing mutually beneficial, strategic relationships with our supplier base, thereby providing an effective platform for empowerment while ensuring that we procure highest quality raw materials. The Company at all times attempts to source materials from surrounding communities where our factories operate.

Packing materials are the paper sacks used for bulk tea packing which are recyclable. 97 percent of our produce is sold in the Colombo Tea Auction which are packed using these materials.

The usage of materials by the Company in terms of quantity is set out in the table below.

Materials Unit of measurement 2016/17 2015/16

Green Leaf kilograms 20,567,242 22,029,575

Packing Materials Numbers 110,990 119,086

Source of Energy Unit of measurement

2016/17 2015/16

Diesel used for transportation Litres 94,358 89,660

Diesel used for Generators Litres 32,136 34,567

Electricity – National Grid kWh 3,331,551 3,565,995

Electricity – Self Generation kWh 89,981 96,788

Bio-mass Cubic meters 23,271 25,566

Energy As an energy intensive business, and a manufacturer of Tea, the Company’s primary environmental footprint is a result of the Company’s high energy levels. In order to reduce the business impact on the environment, the Company has implemented a range of mechanisms to improve resource efficiency and address our energy consumption levels.

Our key sources of energy are electricity, bio-mass, diesel and petrol. Energy is a significant component in our cost which accounts for around 30 percent of the cost of production. Diesel is used by the vehicles operated by the Company, the rest is used for production / operating activities within the Company. The direct energy consumption by the Company is tabled below.

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The goal of our energy management policy is to reduce and optimize overall energy usage. In order to achieve it, we have made a conscious effort to manage our infrastructure to seek efficiency improvements on the production floor.

Meanwhile to reduce the dependency on non-renewable energy sources, we have also introduced renewable and alternative energy sources to power certain aspects of the manufacturing process. Over the years we have achieved considerable success in this regard, with over 66 percent of the current energy requirements being met through renewable energy, mainly bio-mass.

The carbon footprint for the year 2016 / 2017 stood 0.61 kg of CO2 per ton of made tea produced.

Our key initiatives under energy management are;

• Operating all tea Driers on renewable energy – bio-mass

• Investment in fast drying UV covered firewood sheds to improve the combustion efficiency of bio-mass

• Installation of Capacitor Banks for Power Factor Correction

• Installation of Variable Speed Drives (VSDs) to optimize the energy consumption on the withering process which demands 40 percent of our total electricity usage

• Blade angle adjustment of withering trough fans to optimize electricity consumption

• Introduction of Screw Compressors which produce energy efficient compressed air for Colour Separators and Pneumatic applications

• Use of transparent roofing sheets encouraging day light

• Energy consumption on lighting is further reduced by replacing traditional fluorescent lights with LED lights

• Continuous training and awareness on energy conservation

• Routine preventive maintenance of machineries

A fast drying firewood shed at Neluwa Factory

Screw Compressor at Hingalgoda Factory



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Energy Intensity Electricity Intensity - Factories

Electricity could be regarded as an essential energy source operating tea machinery. Electricity at our factories are derived through the National Grid and generators which are stationed to ensure a smooth flow of production. Electricity intensity at factories are indicated based in the number of kWh consumed for a kilogram of black tea manufactured.

Electricity Intensity in Factories

2016

2017

kWh/kg

0.80

0.80

The Company during the year under review maintained the energy intensity level at 0.80 kWh / kg although the production volumes decreased by 6 percent Y-o-Y.

Fuel Intensity

Fuel Intensity in Factories

2016

2017

0.028

0.030

Liter/kg

Fuel intensity in our Company is indicated based on the kilograms of made tea produced for a unit of fuel (litres) used in all vehicles.

During the year under review, fuel intensity of the Company had increased by 8 percent as a result of the reduction in green leaf availability as explained elsewhere.

Bio-mass Intensity – Factories

Bio-mass Output

2016

2017

178

184

kg/m3

Bio-mass is used as the primary source of energy for all Driers operated at our factories. Whilst being aware of the environmental impact on emissions of bio-mass, the Company has taken every effort in minimizing the usage through improved efficiency. The intensity of bio-mass could be indicated based on the number of kilograms of black tea made from 1 m3 of firewood consumed.

During the year under review the Company improved the output from 178 kg/m3 to 184 kg/m3 and the cost of bio-mass was reduced to Rs. 8.66 / Kg of made tea from Rs. 8.82/ Kg recorded in the previous year.

Water Water, as an alarmingly depleting natural resource is essential for our existence. Water is not used as a direct input in the tea manufacturing process, but is only used for humidification of the Rolling Room during the manufacturing process and for cleaning purposes. Hence water utilized by our factories are primarily for human consumption.

All factories derive water from the ground through deep wells. We do not consume water from the national supply.

Waste and EffluentsAll water withdrawn are disposed in an environmentally friendly manner. During the year under review, 11,712 m3 of waste water was disposed into soakage pits.

Other hazardous waste such as wood ash is disposed by land fill. All bio-degradable garbage is disposed through compost pits “Jeewa Kotuwa”.

Compost pit ‘‘Jeewa Kotuwa’’

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Metal, glass, plastic, polythene, paper and hazardous e-waste are segregated and sent for recycling to authorised collectors. The functioning of open waste dumps and burning of waste have been prohibited in all our factories. There were no spills recorded during the year.

Environmental Impact of Product and Packaging

The Company produces black tea which are toxin free, bio-degradable and environmentally friendly and does not cause any environmental risks or hazards. All packing materials used by the Company are environmentally friendly and are recyclable.

Compliance with Environmental Laws and Regulations

We comply with the laws and regulations outlined by the Central Environmental Authority and all factories have obtained Environmental Protection Licenses (EPL) from local authorities, which assures compliance with environmental laws and regulations.

No violation of environmental related laws and regulations were reported during the year under review. Hence no monetary or non-monetary fines or sanctions were imposed on the Company for non-compliance.

Intellectual CapitalWe rely on our intellectual capital inclusive of intangible assets such as our corporate reputation, brand image, JKH Group image, our expertise in tea processing and our selling marks. With the increase in competition we recognise the necessity to stay well poised and stand tall to sustain our positioning as a top-tier bought leaf processing entity in the Corporate Sector in Sri Lanka.

We are well aware of the significance amidst the complexities of our operating landscape. We stand firm in our efforts to nurture the intangible assets we possess, which in effect, serve us as our critical value drivers. Our approach is to bolt, reinforce and leverage on the strengths of these assets to create an enabling platform for our value creation process. In this light, we give due precedence, time, effort and investments to strengthen our corporate reputation and brand that underscore our commitment to excellence in operations to produce quality teas.

Key focus areas are;

• Build strong ties with buyers, brokers and customers by leveraging on the Company’s reputation for quality teas and consistency.

• Company’s commitment to carrying out operations with integrity and responsibility, beyond the requirements of bye laws and regulations.

• Abide by JKH values and code of conduct at all levels in the Company

• Prominence to reputational risk

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Risk Management is viewed as an integral part of the organizational process and plays a key role in ensuring the Company’s success through sustainable growth. The Company operates in a dynamic industry and is exposed to various forms of industrial, operational, financial and environmental risks. Therefore, Enterprise Risk Management (ERM) is intertwined with the Company’s strategic planning process and is also considered an essential component of the Company’s Corporate Governance Framework. The Enterprise Risk Management process seeks to create and protect the value of all stakeholders by ensuring that the Company effectively identifies, measures and develops strategies

to mitigate the range of structural, operational, financial and strategic risks that may prevent the organization from meeting its core objectives.

Governance of Risk ManagementThe Board of Directors oversees and retains the ultimate responsibility for the Company’s risk management framework. They are assisted in the discharge of their duties by the Board Audit Committee (BAC) who have oversight responsibility for risk and internal control. The Group Business Process Review (BPR) Division of the parent company, John Keells Holdings PLC, together with the outsourced

Internal Auditors, Messers. BDO Partners, Chartered Accountants assist the BAC in performing its assurance role through regular reviews and recommendations on the robustness of the internal control systems in place. At the business unit level, the Company’s risk management team is headed by the Chief Executive Officer and assisted by the senior management of the Company.

Risk Management FrameworkThe risk management team is guided by the framework established by the Sustainability and Enterprise Risk Management Division of the parent company, John Keells Holdings PLC as depicted below.

John KeellsRisk Universe Headline Risk

External Environment

BusinessStrategies and

Policies

BusinessProcesses

Organizationand People

Analysing andReporting

Technologyand Data

Monitoring and Control Risk

ManagementTeam

Risk and Control Review Team

Sustainability Integration

John Keells Group Review Risk Report

and Action

BU Review and Sector Risk Report

and Action

BU Risk Report and Action

Risk Reporting

Risk MitigationStrategy

Risk Prioritization and Assessment

RiskIdentification

Audit Committee of John Keells Holding PLC

Board Audit Committee of the Company

Group Management Committee (GMC)

Business Unit / the Company

Operational Units Report Content

Risks, Opportunities and Internal Controls

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Risk Management Process1. Risk Identification The Company adopts a structured and comprehensive process to identify and prioritise the most material issues that could have an impact on the Company’s ability to create value to its stakeholders. In determining material issues we consider the priorities of our stakeholders and factors that are critical to our value creation process as well as broader economic and social trends.

Identification of all possible risks is the initial part of the risk management process. Potential risks faced by the Company are identified through

intelligence gathering, quality audits, safety audits, internal audits and means such as suppliers / buyers feedback. The risk management team considers the financial and operational risks faced by the Company together with risks arising from possible impacts on the environment, employees and community due to its operations. The team takes the crucial responsibility for the early identification of such potential risks.

2. Risk Prioritization and Assessment

Identified risks are rated as Ultra High, High, Moderate, Low and Insignificant after an assessment

is undertaken in terms of its Implication, Likelihood of Occurrence, Velocity and Impact to Company and is tabulated in the Company’s Risk Control Self Assessment (RCSA) form, enabling the Company to prioritise the risks and to plan out risk mitigation strategies. The Risk Management Team along with the guidance from the Group Sustainability and Enterprise Risk Management Division will review and assess the identified risks periodically.

The identified risks as stated on pages 62 to 64 are broadly classified into the Risk Universe as given below.

A

55

5

5

44

4

4

33

3

3

22

2

2

11

1

1

10

8

6

4

2

15

12

9

6

3

20

16

12

8

4

25

20

15

10

5

B C

D E G

F

Catastrophic /Extreme Impact

The Colour Matrix implies the following:

Priority Level

15 - 24 10 - 12 8 - 9 3 - 6 1- 2

InsignificantLowModerateHighUltra High

Major /Very High Impact

Moderate /High Impact

Minor Impact

Low /Insignificant Impact

Rare/ Remoteto Occur

Unlikely to Occur

Likelihood of Occurrence

Possibleto Occur

Likelyto Occur

Colour Code

Score

Almost Certain to Occur

Impa

ct t

o th

e C

ompa

ny

Highlights


3. Risk Mitigation StrategyBased on the risks identified, their drivers or root causes and their susceptibility to measurement, the risk management team decides on the appropriate risk response which are categorized into preventive, detective and corrective measures. Each identified risk is assigned to a respective member of the risk team as the risk owner, depending on his / her level and field of expertise.

The risk owners are responsible for the implementation of each risk mitigation strategy assigned to them within the agreed timelines and ensures that all the required resources to implement the strategy are included in the capital expenditure or operational expenditure budget of the Company. The risk owners are also responsible to implement the strategies within the agreed timelines and update the risk committee accordingly.

4. Risk ReportingThe Company maintains a formal mechanism of risk reporting. The Risk Control Self Assessment (RCSA) is reviewed on a quarterly basis by the Risk Committee along with the guidance from the Group Sustainability and Enterprise Risk Management Division. The risk review also forms an item in the agenda of the BAC meetings and the BAC on behalf of the Board reviews the risk management process adopted by the Company.

5. Monitoring and ControlRisk does not remain static and it is essential that Risk Management remains as an on-going process with regular monitoring and reviewing of risks, processes, outcomes and efficiency of the risk treatment measures. Independent internal audits are carried out regularly to ensure that there are sound internal controls and procedures in place to manage and mitigate risks. The ultimate responsibility for the Company’s internal controls and reviewing its effectiveness rests with the Board of Directors.

Risk and OpportunitiesThe Company’s key risk exposures, risk level and mitigating strategies that are in place are summarised in the table below.

Continuous scanning and monitoring helps the Company to identify opportunities and trends in its operating environment. Opportunities specific to the Company are explained and initiatives taken by the Company are further discussed in the Management Discussion and Analysis section of this Report.

The Board confirms that a process for identifying, evaluating and managing significant risks that endanger the achievement of the strategic objectives of Tea Smallholder Factories PLC has been in place throughout the year in accordance with the guidelines set out by the Institute of Chartered Accountants of Sri Lanka and industry best practice. The Board Audit Committee has reviewed the Business Risk Management process adopted by the Company and has noted that the risk management exercises had been conducted for the year under review.

Risk Category and Description Potential Impact

Control Measures and Action Plans to Mitigate Risks

Risk Assessment

2016/17

Risk Assessment

2015/16

Head Line Risk: Business Process

(A) Natural Disaster resulting in destruction to assets of the Company

Could lead to disruptions in operations resulting in financial losses

• Business recovery plans have been adopted to safeguard assets and rapid recovery. These are being reviewed periodically.

• Fire-fighting procedure, trained staff and systems are in place in case of an emergency.

• Insurance coverage for the Company is reviewed periodically and updated appropriately.

• The Company has a special coverage for business interruption.

Low Low


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Risk Assessment

2016/17

Risk Assessment

2015/16

(B) Reduction in green leaf intake to cater to the optimum capacity of the factories.

Impact on profitability

• Extension services such as advisory field visits and demonstrations, seminars and workshops conducted for tea small holders in order to retain and develop the supply base.

• In order to maintain continuous supply, higher prices and incentives are paid for quality green leaf.

• Financial assistance to tea small holders in the form of short term loans.

• Capturing and monitoring the supplier base on a continuous basis.

• Considering the long term sustainability of green leaf supply, the Company has initiated replanting projects under small holder development initiatives to replant selected tea small holder lands.

• Financial assistance to loyal suppliers in the form of advances and providing a credit period for fertilizer purchases. Refer pages 47 to 52 of this report on Supply Chain Management for further details.

Medium Medium

Head Line Risk: External Environment

(C) Unavailability of green leaf in the tea fields - Reduced availability of green leaf due to lower yields and productivity of tea in the small holder tea lands.

Production / long term sustainability

• As the sustainability of the Company’s business directly relates to the sustainability of green leaf supply from the tea small holders, the Company embarked on a pioneering project in 2010 to replant selected tea small holder lands. Since the year 2010, five (5) such programmes have been initiated where approximately 3.2% of the total extent of the factories’ green leaf supply base were developed under this project.

Medium Medium Medium

High

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Risk Assessment

Risk Assessment

2016/17 2015/16

Head Line Risk: External Environment

(C) Unavailability of green (Contd.) • The infilling of tea lands was introduced as a complement to replanting projects to infill vacancies in 2016 / 17 mature tea fields towards consolidation of the tea fields. A total of 40,650 plants have been distributed to small holders which amounts to approximately 7 acres of land. Refer pages 47 to 55 of this report on Supply Chain Management for further details.

(D) Unstable Nature of Market – Macro economic factors which are uncontrollable by the Company having an influence on the demand and pricing of Tea.

Impact on profitability

• Holding minimum stock levels as practically as possible.

• Continuous monitoring and control through monthly progress reports.

Insignificant Insignificant

Head Line Risk: Organization and People

(E) Attraction and Retention of Human Capital - Availability of required talent at varied levels in the operation is diminishing with alternative employment opportunities / avenues being created

Impacting production and efficient usage of the assets of the Company

• Having in place a robust performance management system.

• High level of staff engagement and an open door policy.

• Provide modern residential facilities and continuous monitoring and uplifting of same.

• Training on Health and Safety.

• OHSAS Certification of factories. Refer pages 41 to 46 of this report on Human Capital Management for further details.


(F) Industrial Harmony Industrial disputes leading to lower productivity

• Ensure that all statutory dues are paid on time.

• Maintenance of accurate attendance records and adherence to the statutory laws.

• High level of staff engagement


Head Line Risk: Organization and People

(G) Health and Safety - A work place which is safe to function the day to day operations of the Company

Health and Safety hazards negatively impacting productivity

• Proactively identifying health and safety issues in order for preventive action to be set in place using OHSAS certification guidelines, training on health and safety and fire drills. Refer pages 41 to 46 of this report on Human Capital Management for further details.




Board of Directors

1 2 3Susantha RatnayakeChairman / Non Independent, Non Executive Director(Member of the Board since 2003)

Board Committees• Member, Nominations Committee• Member, Related Party Transactions

Review Committee

Skills and Experience

• Member of the Board of John Keells Holdings PLC for over 24 years

• Served as Chairman of Ceylon Chamber of Commerce, Sri Lanka Tea Board and Employers’ Federation of Ceylon

• Over 38 years of management experience to the Board, all of which is within the John Keells Group.

Other Current Appointments

Listed Companies:

• Chairman and Chief Executive Officer of John Keells Holdings PLC

• Chairman / Director of many listed companies in the John Keells Group

Others:

• Chairman / Director of many unlisted companies in the John Keells Group

Ajit GunewardeneDeputy Chairman / Non Independent, Non Executive Director

(Member of the Board since 2006)

Board Committees

• None



• Served as Chairman of the Colombo Stock Exchange and Nations Trust Bank PLC

• Degree in Economics• Over 34 years of management

experience to the Board


Listed Companies:

• Deputy Chairman of John Keells Holdings PLC

• Chairman of Union Assurance PLC• Director of many other listed

companies in the John Keells Group

Others:

• Member of the Board of SLINTEC, a company established for the development of Nanotechnology in Sri Lanka under the auspices of the Ministry of Science and Technology.

• Member of the Tourism Advisory Committee appointed by the Ministry of Tourism Development.

• He was an Advisory Committee Member of COSTI, the coordinating secretary for science and technology and innovation under the purview of the Minister of Scientific Affairs.

• Chairman of Digital Mobility Solutions Lanka (Pvt.) Ltd

• Director of many unlisted companies in the John Keells Group

Ronnie PeirisNon Independent, Non Executive Director(Member of the Board since 2005)

Board Committees

• None



• Group Finance Director with overall responsibility for the John Keells Group’s Finance and Accounting, Taxation, Corporate Finance, Treasury and Information Technology functions

• Over 40 years of finance and general management experience to the Board

• Previously the Managing Director of Anglo American Corporation (Central Africa) Limited in Zambia

• Served as Chairman of the Sri Lanka Institute of Directors

• A Fellow of the Chartered Institute of Management Accountants, UK, Association of Chartered Certified Accountants, UK, and the Society of Certified Management Accountants, Sri Lanka.

• MBA from the University of Cape Town, South Africa


Listed Companies:

• Director of many listed companies in the John Keells Group

Others:

• Member of the Committee of the Ceylon Chamber of Commerce.

• Director of selected unlisted companies in the John Keells Group.

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Board of Directors

4 5 6Eranjith WijenaikeNon Independent, Non Executive Director(Member of the Board since 2000)

Board Committees

• None


• Serves as the Managing Director of Central Finance Company PLC and has been a member of the Board since 1st April 1983.

• Over 35 years of management experience to the Board

• Bachelor’s Degree in Commerce and a Postgraduate Diploma in Finance and Management


Listed Companies:

• Director of Trans Asia Hotels PLC• Managing Director of Central

Finance Company PLC• Director of Equity One PLC• Director of Equity Two PLC• Director of Central Industries PLC

Ravi RambukwellaNon Independent, Non Executive Director


Board Committees

• None


• Serves as the Director (Marketing and Operations) of Central Finance Company PLC and has been a member of the Board since 20th February 2002.


• Bachelor’s Degree in Economics and Political Science from the University of Peradeniya, a Diploma in Marketing from the Chartered Institute of Marketing - UK and a Diploma in Commerce from the Institute of Commerce – UK


Listed Companies:

• Director of Central Industries PLC

Ananda JayatillekeIndependent, Non Executive Director


Board Committees

• Member, Board Audit Committee


• Specialist in Rubber Technology and Industrial Engineering.

• Licentiate of the Institute of Plastics and Rubber Industry (L.P.R.I. (London)) and a Graduate of the Institute of Work Study and Organization and Methods (F.M.S.(UK)).

• Recipient of the merit certificate awarded by the Plastics and Rubber Institute (PRI) of Sri Lanka for the outstanding contribution made to the Rubber Industry of Sri Lanka.

• Vast experience also includes work in Zambia Consolidated Copper Mines and Pigott Maskew Ltd (Subsidiary of General Tire - South Africa).

• He has been a Director of Richard Pieris & Co. Ltd and also the Managing Director of Richard Pieris Exports Ltd for over 15 years and has served on various Boards within the Richard Pieris Group.

• Served as a Board member of Aviva Global Services Pvt Ltd.


Listed Companies:

• Director of Hayleys Fabric PLC• Director of Alufab PLC

Others:

• Chairman / Managing Director of Latex Green (Private) Limited.


7 8Jayantissa RatwatteIndependent, Non Executive Director


Board Committees

• Member, Board Audit Committee


• A Fellow Member of the National Institute of Plantation Management

• Over 55 years of management experience in the Plantation Sector to the Board.

• Served as Regional Director, Regional Chairman, Director of the Central Board of the Janatha Estates Development Board and Director of John Keells Holdings PLC.

• Served as Chairman of the Plantation Services Employers’ Group of the Employers’ Federation of Ceylon, Director of the Sri Lanka Tea Board, Member of the Tea Council and Director of the Tea Research Board.

• Previously the Head of the Plantation Sector of the John Keells Group.

Ranjeevan SeevaratnamIndependent, Non Executive Director(Member of the Board since 2006)

Board Committees

• Chairman, Board Audit Committee



• Served as a senior partner of KPMG, Chartered Accountants for a period of 30 years where he was mainly involved with audits of banks, financial services and manufacturing companies.

• A Fellow Member of Chartered Accountants of England and Wales and Fellow Member of the Institute of Chartered Accountants of Sri Lanka.

• Graduate of University of London in Chemistry, Botany and Zoology.


Listed Companies:

• Director of Hayleys Advantis Ltd.• Director of Tokyo Cement PLC.• Director of many other listed

companies.

Others:

• Director of Acme Packaging Solutions (Pvt) Ltd

• Director of many unlisted companies.

Manjula Hiranya De SilvaIndependent, Non Executive Director


Board Committees

• None


• Served as Managing Director and Chief Executive Officer of HNB Assurance PLC.

• Served as General Manager, Eagle NDB Fund Management Company Ltd (currently NDB Wealth Management), General Manager – Corporate Lines and Human Resources, Eagle Insurance Co. Ltd (currently AIA Insurance) and Director General, Public Enterprises Reform Commission (PERC).

• BA Hons (First Class) degree in Economics from the University of Colombo and MBA from London Business School, UK.

• A Fellow of the Chartered Institute of Management Accountants (CIMA), UK and has served as Chairman of CIMA Sri Lanka Board in 2016.

• Has pursued executive education at INSEAD Business School, France and Harvard Business School, USA.


Listed Companies:

• An Independent, Non Executive Director of BPPL Holdings PLC.

Others:

• Serves the Government of Sri Lanka as Chairman of National Insurance Trust Fund (NITF).

• Consultant to the Ministry of Public Enterprise Development.

• Committee member of the Ceylon Chamber of Commerce.

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Corporate Governance Report

“Good corporate governance is not only about following applicable rules, it is also about doing what is right”

Tea Smallholder Factories PLC, has honed its governance structures, policies and processes over the years with inputs from its parent company, John Keells Holdings PLC (“JKH”) to build an organisation that is effective and accountable with a high degree of transparency.

Maintaining high standards of corporate governance are key to driving performance and delivering value to our key stakeholders. As the highest decision making body of the Company, the Board sets the

tone at the top and is responsible for reviewing the effectiveness of its corporate governance mechanisms while maintaining an appropriate balance between empowerment and accountability with explicit statements of values and standards of conduct expected from its employees.

The Company operates within an integrated governance framework formulated after taking into consideration the mandatory provisions of the Companies Act No. 07 of 2007, the Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka (“CA Sri Lanka”) and the Securities and

Exchange Commission of Sri Lanka (“SEC”) and the Listing Rules of the Colombo Stock Exchange (“CSE”).

This report is structured in line with the Code of Best Practice on Corporate Governance as it provides a comprehensive view of relevant matters and facilitates reporting in a concise and logical manner. The Board has also adopted the G4 Guidelines published by the Global Reporting Initiative (GRI) to provide guidance in ensuring that due emphasis is given to environmental and social concerns.

The integrated Governance framework formulated is outlined in the diagram below and set out in the report that follows:

Code of Best Practice on Corporate Governance

The Company Shareholders

Beyond Compliance

Investment Criteria

The Board11 Principles

Directors’Remuneration

3 Principles

Accountability and Audit

5 Principles

InstitutionalInvestors

2 Principles

Other Investors

2 Principles

SustainabilityReporting

Relations with Shareholders3 Principles

IT Governance

The Board (11 Principles)

1. An effective Board (A1)2. Roles of Chairman and Chief Executive Officer (A2 & A3)3. Financial Acumen (A4)4. Board Balance (A5)5. Supply of Information (A6)6. Appointments to the Board (A7) and Re-election (A8)7. Appraisal of Board Performance (A9)8. Disclosure of Information in respect of Directors (A10)9. Appraisal of Chief Executive Officer (A11)

Principle A – The BoardPrinciple A1 – An effective Board

The Board of Tea Smallholder Factories PLC comprises five (5) Non Executive, Non Independent Directors including the Chairman and four (4) Non Executive, Independent Directors whose profiles are given on pages 65 to 67. The Board affirms that the four Non Executive, Independent Directors satisfy the criteria for “Independence”

GRI-G4-32-40


Board of Directors

NominationsCommittee

Human Resources &Compensation

Committee

Related PartyTransactions Review

Committee

Group Executive Committee

Board ofDirectors

Board Audit

Committee

ChiefExecutive

Officer

GroupManagementCommittee- Plantation

Services Sector

ManagementCommittee

of the Company

Internal Audit

Employees

as specified by section 7.10.4 and the requirements under section 7.10.2 (b) of the Listing Rules of the CSE and is deemed to have sufficient balance in the Board in line with the requirements of the code.

The Board is of the view that its present composition ensures a healthy balance between executive expediency and independent judgment.

Keells Consultants (Pvt) Limited functions as the Secretaries and Registrars of the Company and

provides secretarial input for Board proceedings in addition to maintaining Board minutes and Board records.

The Company’s internal governance structure is designed in such a way that the executive authority is well delegated through committees with clearly defined authority limits, responsibilities and accountability which are agreed upon in advance to achieve greater operating efficiency and freedom of decision making. The governance structures of the Company is given below with

John Keells Holdings PLC (Parent Company)

Tea Smallholder Factories PLC

reporting lines clearly identified. As permitted by the Listing Rules of the CSE, the Nominations Committee, Human Resources and Compensation Committee and Related Party Transactions Review Committee of the Company’s parent company, John Keells Holdings PLC act for Tea Smallholder Factories PLC as Sub Committees of the Board. M

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Governance

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Board Committee and Composition Mandate Scope

Board Audit Committee (BAC)

The BAC comprises three (3) members and all of them are Non Executive, Independent Directors. The Chairman is a member of a reputed professional accountancy body. Current members are:1. Mr. R. Seevaratnam - Chairman 2. Mr. A. S. Jayatilleke 3. Mr. J. S. Ratwatte

Detailed information regarding the activities of the BAC are provided in the BAC report on pages 86 to 88.

To provide an independent and objective review of the financial reporting process, internal controls, risk management process, and the internal and external audit function in ensuring;

• Adequacy and fairness of disclosure

• Transparency, integrity and quality of financial reporting.

• Confirm and assure:

(i) Independence of external auditor

(ii) Objectivity of internal auditor

• Review with independent auditors the adequacy of internal controls and quality of financial reporting.

• Regular review meetings with the management, internal auditor and external auditors in seeking assurance on various matters.

The Board’s effective governance is supported by its sub-committees and senior management committees as tabled below:

Nominations Committee (of the parent company John Keells Holdings PLC)

The Committee comprises three (3) Independent Directors and one (1) Non Independent Director. The Chairman is a Non Executive, Independent Director. Current members are:1. Mr. M. A. Omar - Chairman2. Ms. M. P. Perera3. Dr. S. S. H. Wijayasuriya 4. Mr. S. C. Ratnayake -

Non Independent Director

Define and establish the nomination process for Non Executive Directors, lead the process and make recommendations to the Board on the appointment of Non Executive Directors.

• Assess the skills required on the Board given the needs of the businesses.

• Periodically assess the extent to which required skills are represented on the Board

• Prepare a clear description of the role and capabilities required for a particular appointment

• Identify and recommend suitable candidates for appointments to the Board.

• Ensure that on appointment to the Board, Directors receive a formal letter of appointment specifying clearly;

(i) The expectation in terms of time commitment

(ii) Involvement outside of the formal Board meetings

(iii) Participation in committees


Board Committee and Composition Mandate Scope

Human Resources and Compensation Committee (of the parent company John Keells Holdings PLC)

The Committee Comprises three (3) Independent, Non Executive Directors including the Chairman. Current members are:1. Mr. D. A. Cabraal - Chairman 2. Mr. M. A. Omar 3. Dr. S. S. H. Wijayasuriya

Determine the quantum of compensation (including stock options) for the Chairman and Executive Directors, conduct performance evaluation of the Chairman, review performance evaluation of the other Executive Directors and establish a Group Remuneration Policy.

• Determine and agree with the Board on a framework for remuneration of the Chairman and Executive Directors.

• Consider targets and benchmark principles for any performance related pay schemes.

• Determining compensation of Non Executive Directors will not be under the scope of this Committee.

Related Party Transaction Review Committee (of the parent company John Keells Holdings PLC)

The Committee comprises three (3) Independent, Non Executive Directors and One (1) Non Independent Director. The Chairperson is an Independent, Non Executive Director. Current members are:1. Ms. M. P. Perera – Chairperson2. Mr. D. A. Cabraal3. Mr. A. N. Fonseka4. Mr. S. C. Ratnayake – Non Independent Director

In addition, the Group Finance Director, Mr. J. R. F. Peiris, the Group Financial Controller, Mr. M. Rajakariar attended meetings by invitation, and the Head of Group Business Process Review served as the Secretary to the Committee.

To ensure on behalf of the Board, that all Related Party Transactions of Tea Smallholder Factories PLC are consistent with the Code of Best Practices on Related Party Transactions issued by the Security and Exchange Commission of Sri Lanka (SEC).

• Develop and recommend for adoption by the Board of Directors of Tea Smallholder Factories PLC, a Related Party Transaction Policy which is consistent with the operating model and the delegated decision rights of the Group.

• Update the Board of Directors on related party transactions of each company in the Group on a quarterly basis.

• Define and establish the threshold values for each of the subject listed companies in setting a benchmark for related party transactions, related party transactions which have to be pre-approved by the Board, related party transactions which require to be reviewed annually and similar issues relating to listed companies.

Group Management Committee(GMC)

The Group Management Committee of the Plantation Services Sector comprises of the President – Plantations Services Sector, Chief Executive Officers of each business units (BU), Sector Financial Controller of the Plantations Services Sector and the Senior Management of each BUs representing each functional area.

To design, implement and monitor the best practices of the industry, sectors and strategic business units where appropriate and material.

• Strategy formulation

• Implementation of strategies for the Plantations Services Sector

• Performance monitoring

• Risk management

• Any other business matters

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Related Party Transaction Review Committee

The objective of the Committee is to exercise oversight on behalf of the Board of John Keells Holdings PLC and its listed subsidiaries including Tea Smallholder Factories PLC, in complying with the Code on Related Party Transactions as issued by the SEC and with the Listing Rules of the CSE. The Committee has also adopted best practices as recommended by the CA Sri Lanka and the CSE.

The Committee reviewed and pre-approved all proposed Non Recurrent Related Party Transactions of the parent company and all its listed subsidiaries. Further, Recurrent Related Party

Transactions of the Company were reviewed annually by the Committee. The activities and views of the Committee have been communicated to the Board of Directors quarterly through verbal briefings and by tabling the minutes of the Committee’s meetings.

The Company carried out transactions in the ordinary course of business with parties who are defined as “Related Parties” in Sri Lanka Financial Reporting Standard 24 - Related Party Disclosure. There were no Non Recurrent Related Party Transactions of the Company during the financial year 2016 / 2017. The aggregate value of Recurrent Related Party Transactions

of the Company for the financial year 2016 / 2017 did not exceed 10 percent of the gross revenue of the same year. The details of Recurrent Related Party Transactions are provided in note 35 of the financial statements on page 142.

The Board of Directors confirm that the Company is in compliance with the provision of the listing rules of the CSE pertaining to Related Party Transactions.

The Committee held four meetings during the financial year. Information on the attendance of these meetings by the members of the Committee is given below.

Members 24/05/2016 27/07/2016 24/10/2016 25/01/2017 Eligible to attend Attended

Mr. D. A. Cabraal 4 4

Mr. N. Fonseka 4 4

Ms. M. P. Perera 4 4

Mr. S. C. Ratnayake - 4 3


Remuneration Policy of the HR and Compensation Committee

The compensation and benefit policy adopted by the Company is formulated based on “Pay for Performance” scheme and based on the pillars of individual performance rating and organisational performance rating for all employees at Executive level and above.

Senior Management Committee of Tea Smallholder Factories PLC

Executive authority is well devolved through a committee structure ensuring that the President of the Plantation Services Sector, Chief Executive

Officer (CEO) of Tea Smallholder Factories PLC and profit centre / functional managers are accountable for the Company and the business units / sub-functions respectively. Clear definitions of authority limits, responsibilities and accountabilities are set and agreed upon in advance to achieve greater operating efficiency, expediency, healthy debate and freedom of decision making.

Board Meetings, Attendance and Agenda

The Board of Tea Smallholder Factories PLC met once every quarter. Any absences are excused in advance

and duly recorded in the minutes. The absent members are briefed on the discussions and actions taken during the meeting.

Directors are provided with Board packs which includes Board Resolutions, performance reports, information on Human Resources and capital expenditure, treasury and compliance statements etc. in advance of the Board meeting (at least one week prior to the Board meeting) to facilitate informed decision making. Dates and attendance of the Board of Directors to the quarterly the Board meetings are tabled in the following page.


Attendance of Board Meetings

Name of Director 22/04/2016 21/07/2016 26/10/2016 23/01/2017 Meetings attended/Eligibity

Mr. S. C. Ratnayake * - 3/4

Mr. A. D. Gunewardene * 4/4

Mr. J. R. F. Peiris * 4/4

Mr. R. S. Fernando * - Resigned with effect from 9th September 2016

- - - - 0/2

Mr. E. H. Wijenaike * 4/4

Mr. R. E. Rambukwella * 4/4

Mr. R. Seevaratnam ** - 3/4

Mr. A. S. Jayatilleke ** 4/4

Mr. J. S. Ratwatte ** - 3/4

Mr. M. H. De Silva ** – Appointed with effect from 6th February 2017

- - - - 0/0

* NED/NID – Non Executive, Non Independent Director** NED/ID – Non Executive, Independent Director

Board Agenda

A typical Board agenda in 2016 / 17 contained;• Confirmation of previous minutes• Matters arising from the previous minutes• Board sub-committee reports and other matters exclusive to the Board• Status updates of major projects • Review of performance in summary and in detail, including high level

commentary on actuals and outlook• Summation of strategic issues discussed at pre-Board meetings• Approval of interim and annual financial statements• Ratification of capital expenditure and approval for disposal of fixed assets• Ratification of the use of the Company Seal • Ratification of Circular Resolutions • New Board Resolutions• Board Evaluation• Ratification of new appointments, renewal of Directors, remuneration and

related approvals• Report on corporate social responsibility• Review of risks, sustainability development, HR practices / updates, etc.• Any other business.

Roles and Responsibilities of the Board

Notwithstanding the functioning of the Board Committees, the Board of Directors are collectively responsible for the decisions and actions taken. The John Keells Group Corporate Governance Framework expects the Board of Directors to:• Provide direction and guidance

to the Company in formulating its high level strategies, with an emphasis on the medium and long term, in the pursuance of its sustainable development goals.

• Review and approve annual plans and long term business plans.

• Track actual progress against plans.

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• Set governance structures and policy frameworks to ensure compliance with laws, regulations and ensuring the highest standards of disclosure, reporting, ethics and integrity

• Oversee systems of internal control, risk management and establishing whistleblowing conduits.

• Ensure that key management personnel and the management team have the required skills, experience and knowledge to implement strategies.

• Review and approval of major acquisitions, disposals and capital expenditure.

• Approve any amendments to constitutional documents.

• Adopt voluntarily, best practices where relevant and applicable.

Act in accordance with Laws and access to Independent Professional Advice

The Board acts in accordance with the laws of the country and all employees are required to conform accordingly as stated in the Code of Conduct of JKH. The Board and the Board Audit Committee receive statements of compliance on recurrent statutory requirements from the management on a quarterly basis in this regard.

In order to preserve the independence of the Board and to strengthen decision making, the Board seeks independent professional advice when deemed necessary. Accordingly, the Board obtains independent professional advice covering areas such as;

• Impacts on business operations from the current and emerging economic and geo-political shifts.

• Legal, tax and accounting aspects, particularly where independent external advice is deemed necessary in ensuring the integrity of the subject decision.

• Market surveys, architectural and engineering advisory services as necessary for business operations.

• Actuarial valuation of retirement benefits and valuation of property including that of investment property.

• Information technology consultancy services pertaining to Enterprise Resource Planning system, distributor management system or other major projects.

• Specific technical know-how and domain knowledge for identified project feasibilities and evaluations.

Additionally, individual Directors are encouraged to seek expert opinion and / or professional advice on matters where they may not have full knowledge or expertise.

Board Induction and Training

Newly appointed Non Executive Directors are apprised of the John Keells Group and Company’s values, culture, group governance framework, policies and processes, Code of Conduct expected by the Company, business model of the Company, strategy and the Directors’ responsibilities in accordance with current legislation.

The Chairman ensures that new Directors are introduced to other

Board members and key management personnel and briefed on matters taken up at prior meetings.Directors are encouraged to update their skills and knowledge on a continuous basis and this is facilitated through the following activities.

1. Access to external and internal auditors

2. Periodic reports on performance

3. Updates on topics that range from proposed / new regulations to industry best practices

4. Opportunities to meet the senior management in a structured setting

5. Access to industry experts and other external professional advisory services

6. Access to the centre legal, tax and finance divisions of the John Keells Group of which the Company is a member and the services of the Company Secretary.

They also have the opportunity of gaining further insight into the Company’s business by undertaking business visits. The Directors devote sufficient time and make every effort to ensure that in proportion with their knowledge and experience, they discharge their responsibilities to the Company.

Delegation of Authority

The Board has delegated certain functions to the Board Audit Committee while retaining the final right to accept the recommendations made by this Committee. The Board Audit Committee is chaired by an Independent Director appointed by the Board.


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Principle A2 and A3 – Roles of Chairman and Chief Executive Officer (CEO)

The roles of the Chairman and Chief Executive Officer are segregated. The Chairman is a Non Executive, Non Independent Director. The main responsibility of the Chairman is to lead and manage the Board and its Committees so that they can function effectively. He also sets the tone for the governance and ethical framework of the Company, facilitates and encourages the expression of differing views, and by keeping in touch with local and global industry developments, ensures that the Board is alert to its obligations to the Company’s shareholders and other stakeholders. He represents the Company externally and is the focal point of contact for shareholders on all aspects of corporate governance.

With the assistance of the Board Secretaries, Keells Consultants (Private) Limited, the Chairman and CEO also ensures that.

1. Board procedures are followed

2. Directors receive timely, accurate and clear information.

3. Updates on matters arising between meetings.

4. The agenda for the Board meeting, reports and papers for discussion are dispatched at least one week in advance so that the Directors are in a position to study the materials and arrive at sound decisions.

5. A proper record of all proceedings of Board Meetings are maintained.

The Human Resources and Compensation Committee of the parent company, JKH appraises the performance of the Chairman on an organizational and individual basis as approved by the Board.

The Board has, subject to pre-defined limits, delegated its executive authority to the CEO of the Company for the implementation of strategies approved by the Board and for developing and recommending to the Board the business plans and budgets in keeping with the Company’s strategy.

Roles of the Chief Executive Officer is as follows; 1. Execute strategies and policies of

the Board

2. Guides and supervises the Senior Management of the Company.

3. Ensures that the operating model of the Company is aligned to the short and long term strategies pursued by the parent company.

4. Ensures that succession at the senior management level is planned.

Principle A4 – Financial Acumen

Collectively the Board has sufficient financial acumen as they are selected through a sufficiently rigorous process. Additionally, the following Directors are members of professional accounting organisations and able to offer guidance on matters of finance, drawing on their specialised knowledge on the subject of finance:

• Mr. J. R. F. Peiris • Mr. R. Seevaratnam • Mr. M. H. De Silva

Principle A5 – Board Balance

The Board comprises five (5) Non Executive, Non Independent Directors including the Chairman and four (4) Non Executive, Independent Directors ensuring that there is sufficient balance on the Board. The Board is of the view that its present composition ensures a healthy balance between executive expediency and independent judgment. This is based on the following:-

• Collectively, the Non Executive Directors possess proven business experience and expertise in their respective fields.

• The present composition of the Board represents an appropriate mix of skills and experience.

• The Independent Directors possess strong financial acumen and by virtue of their membership on external Boards, are able to assess the integrity of the Company’s financial reporting systems and internal controls, continually review, critique and suggest changes in keeping with best practice.

• The Board is also conscious of the need to progressively refresh its composition over time and notes the qualitative contribution of the Independent Directors to the governance of the Company.

The Directors at Tea Smallholder Factories PLC who are profiled on page 65 and 67 of the annual report have a wide range of expertise as well as significant experience in commercial and financial activities enabling them to discharge their governance duties in an effective manner.

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Name of Director Shareholding (i)

Management / Director (ii)

Material Business

Relationship (III)

Employee of the Company

(iv)

Family Member, a Director or

CEO (v)

Continuous Service for nine years

(vi)

Non Executive, Non Independent Director (NED/NID)

Mr. S. C. Ratnayake No Yes No No No N/A

Mr. A. D. Gunewardene No Yes No No No N/A

Mr. J. R. F. Peiris No Yes No No No N/A

Mr. E. H. Wijenaike Yes Yes No No No N/A

Mr. R. E. Rambukwella No Yes No No No N/A

Non Executive, Independent Director (NED/ID)

Mr. R. Seevaratnam No No No No No Yes

Mr. A. S. Jayatilleke No No No No No Yes

Mr. J. S. Ratwatte Yes No No No No Yes

Mr. M. H. De Silva No No No No No No

Definitions

i. Shareholding in the Company carrying not less than 10 percent of voting rights.ii. Director of a listed Company in which they are employed, or having a significant shareholding or have a material business

relationship.iii. Income / non cash benefits derived from the Company is equivalent to 20 percent of the the Director’s annual income.iv. Director is employed by the Company two years immediately preceding appointment.v. Immediate family member who is a Director or CEO. vi. Has served the Board for a continuous period exceeding 9 years.

The Company is conscious of the need to maintain an appropriate mix of skills and experience in the Board through a regular review of its composition in ensuring that the skills representation is in sync with current and future needs.

Conflict of Interest and Independence

Each Director holds continuous responsibility to determine whether he or she has a potential or actual conflict of interest arising from external associations, interests or personal relationships in material matters which are considered by the Board from time to time.

Independence of the Directors have been determined in accordance with the Listing Rules of the CSE and all four independent, Non Executive Directors have submitted signed declarations of their independence.

In accordance with the criteria for “Independence” specified by Section 7.10.4 of the Listing Rules of the CSE and as identified by the Code of Best Practice, the Board affirms that the aforesaid four Non Executive, Independent Directors satisfy the criteria for independence and have satisfied the requirements under clause 7.10.2 (b).

The Board has determined that although Mr. A. S. Jayatilleke, Mr. J. S. Ratwatte and Mr. R. Seevaratnam have been members of the Board for a period exceeding 9 years and do not satisfy the number of years on the Board”criteria, having considered all other factors, the Board is of the view that Mr. A. S. Jayatilleke, Mr. J. S. Ratwatte and Mr. R. Seevaratnam satisfy the other qualifying criteria in terms of independence.


Principle A6 – Supply of Information

In order to ensure robust discussion, informed deliberation and effective decision making, the Directors are provided access to;

• Information as necessary to carry out their duties and responsibilities effectively and efficiently.

• Information updates from the management on topics under review by the Board, new regulations and best practices as relevant to the Company’s business.

• External and internal auditors.

• Expert and other external professional services.

• The services of the company secretaries whose appointment and / or removal is the responsibility of the Board.

• Periodic performance reports.

• Senior management under a structured arrangement.

Principle A7 and A8 – Appointments to the Board and Re-Election

Directors are elected by the Shareholders at the Annual General Meeting based on nominees recommended by the Board following a transparent, structured and formal process within the purview of the Nominations Committee of the parent company. Casual vacancies are filled by the Board following the same rigorous process of selecting nominees. One third of the Directors, except the Chairman, retire by rotation on the basis prescribed in the Articles of Association of the Company. A Director retiring by rotation is eligible for re-election.

The tenure of office for Non Executive Directors is limited by their prescribed company retirement age.

Independent Directors, on the other hand, can be appointed to office for three consecutive terms of three years, which however, is subject to the age limit set by statute at the time of re-appointment following the end of a term. Proposals for the re-appointment of Directors are set out in the Annual Report of the Board of Directors on page 89 as well as in the Notice of Meeting on page 164 of this Report.

Principle A9 – Appraisal of Board Performance

The Chairman evaluates the performance of the Board annually while the Independent, Non Executive Chairman of the Board Audit Committee evaluates the effectiveness of the Board Audit Committee. There is a formalised process of self-appraisal which enables each member to self-appraise on an anonymous basis, the performance of the Board, using a detailed checklist / questionnaire covering areas such as;

1. Role clarity and effective discharge of responsibilities.

2. People mix and structure.3. Systems and procedures.4. Quality of participation.5. Board image.

The score and open comments are collated and the results are analysed to give the Board an indication of its effectiveness as well as areas that require addressing and / or

strengthening. The Human Resources and Compensation Committee of the parent company appraises the performance of the Chairman on an organizational and individual basis as approved by the Board.

Principle A10 – Disclosure of Information in respect of Directors

Information specified in the Code with regards to Directors are disclosed within this Annual Report as follows.

1. Name, qualifications, expertise, material business interests and brief profiles on pages 65 to 67.

2. Membership of sub-committees and attendance at Board Meetings and Sub-Committee Meetings on pages 73.

3. Related party transactions on pages 142.

Principle A11– Appraisal of Chief Executive Officer

The annual appraisal of the CEO is carried out at parent company level and is based on pre-agreed criteria.

Principle B – Directors’ Remuneration

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Directors’ Remuneration (3 Principles)

1. Remuneration Procedures2. The Level and composition of

Remuneration3. Disclosure of Remuneration

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Remuneration for Non Executive, Non Independent Directors

No Director Fees are paid by the Company to Non Independent, Non Executive Directors (NED/NID) representing John Keells Holdings PLC and Central Finance Company PLC.

Compensation for Non Executive, Independent Directors (NED/IDs) is determined by reference to fees paid to other NED/IDs of comparable companies. NED/IDs’ receive a fee for devoting time and expertise for the benefit of the Company. Nevertheless, NED/ID’s fees are not time bound or defined by a maximum / minimum number of hours committed to the Company per annum and hence is not subject to additional / lower fees for additional / lower time devoted. NED/IDs do not receive any performance / incentive payments.

Mr. M. H. De Silva was appointed as a Non Executive, Independent Director of Tea Smallholder Factories PLC from 6th February 2017 at the standard Non Executive Fees approved by the Board for Non Executive Directors as recommended by the Human Resources and Compensation Committee of John Keells Holdings PLC, which fees are commensurate with the market complexities of the Company.

The aggregate remuneration paid to Directors is disclosed on page 143 of this report

Principle C – Shareholder Relations

Shareholder Relations (3 Principles)

1. Constructive use of AGM and General Meetings

2. Communication with shareholders

3. Major and material transactions

The Board of Directors, in conjunction with the Board Audit Committee, ensures the accuracy and timeliness of published information and has presented an honest and balanced assessment of results in the quarterly and annual financial statements. All other material and price sensitive information about the Company is promptly communicated to the CSE, where the shares of the Company are listed and such information is also released to shareholders, press and employees. The Company makes use of the Annual General Meetings constructively towards enhancing relationship with the shareholders and the following procedures are followed;

1. In accordance with the provisions of the Companies Act No. 7 of 2007, Rules of the SEC, Notice of the Annual General Meeting (AGM) and relevant documents are forwarded to shareholders within the specified period.

2. The Directors and the members of the senior management team are available to clarify any points raised by shareholders.

3. The Chairman ensures that relevant senior managers are available at the AGM to answer specific queries.

4. Separate resolutions are proposed for each item on the Agenda.

Shareholders are advised of any instance where the contemplated value of a transaction would be in excess of half of the net assets of the Company (Major transactions). There were no major transactions as defined under Section 185 of the Companies Act No. 07 of 2007, during the year under review.

Principle D – Accountability and Audit

Accountability and Audit (5 Principles)

1. Financial Reporting2. Internal Control3. Audit Committee4. Code of Business Conduct and

Ethics5. Corporate Governance

Disclosures

Principle D1 – Financial Reporting

The Board recognises its responsibility to present a balanced and understandable assessment of the Company’s financial position, performance and prospects in accordance with the requirements of the Companies Act No. 07 of 2007 and the CSE Continuing Listing Requirements. The financial statements included in this Annual Report are prepared and presented in accordance with the Sri Lanka Accounting Standards. The Annual Report also conforms to the G4 standard on Sustainability Reporting published by the Global Reporting Initiative and the Integrated Reporting Framework published by the International Integrated Reporting Council.


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The Directors are satisfied that the Company has sufficient resources to continue in operation for the foreseeable future. In the unlikely event that the net assets of the Company fall below a half of shareholders’ funds (Serious Loss of Capital), shareholders would be notified and the requisite resolutions would be passed on the proposed way forward as per requirements of the Companies Act No. 07 of 2007. The following specialised information requirements are also included in this Annual Report:

1. The Annual Report of the Board of Directors on the Affairs of the Company given on pages 89 to cover all areas of this section.

2. The “Statement of Directors’ Responsibility” is given on page 95.

3. The Directors’ Statement on Internal Controls is given on page 87.

4. The “Independent Auditors’’ Report on page 99 for the Auditors’ responsibility.

5. The Management Discussion and Analysis on pages 21 to 59.

6. Related Party Transactions on page 142.

Principle D2 – Internal Control

The Board, through the involvement of the Group Business Process Review Division of JKH, has taken steps to obtain assurance that systems designed to safeguard the Company’s assets, maintain proper accounting records and provide management information, are in place and are functioning according to expectations.

The Company’s systems are designed to provide the Directors with reasonable assurance that assets are safeguarded, transactions are authorized and properly recorded and that material errors and irregularities are either prevented or detected in a timely manner. Key elements of such procedures are as follows:

• Formal policies and procedures are defined which include the documentation of key systems and rules relating to delegation of financial authority. This restricts the unauthorized use of the Company’s assets and ensures the monitoring of controls.

• The annual budgets are approved by the Board upon a detailed management review. Budgets are prepared in a manner that facilitates the management to monitor key business and financial activities. Results are regularly reviewed against budget and revised forecasts for the year are prepared on a half yearly basis.

• The Enterprise Resource Planning system; SAP has ensured that information is reliable and up-to-date.

• Capital expenditure is subject to formal authorization procedures.

• Experienced and suitably qualified staff takes responsibility for important business functions and annual appraisal procedures have been established to maintain standards of performance.

To further strengthen internal control and obtain independent assurance, the Company has enlisted the services

of Messers. BDO Partners, Chartered Accountants, a reputed firm of Chartered Accountants to monitor and report on the adequacy of the financial and operational systems of the Company. Their scope includes:

1. Assessment of the adequacy of accounting and operational control systems in terms of economy, efficiency and effectiveness.

2. Examination of compliance with statutory requirements, management policies and procedures.

3. Review and monitor operational and financial controls in order to ascertain adherence to such controls.

The internal audit reports are first discussed by the externally appointed internal auditor with the management of the Company. The Head of the Risk and Control Division of JKH attends these meetings as the moderator, after which these reports are forwarded to the Board Audit Committee. Internal audit reports are structured in a manner that facilitates the resolution of the concerns highlighted and follow up action is monitored by the Board on an ongoing basis.

Risk Review

The Board has adopted a Company-wide risk management programme to identify, evaluate and manage significant risks while stress-testing for various risk scenarios. This programme ensures that a multitude of risks, arising as a result of the Company’s operations, are effectively managed in creating and preserving shareholder

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and other stakeholder wealth. The detailed Risk Management report on page 60 of the Annual Report describes the process of risk management as adopted by the Company and the key risks impacting the achievement of the Company’s strategic business objectives.

Internal Compliance

A quarterly self-certification programme requires the Sector Head of the Plantation Services Sector and CEO of the Company to confirm compliance with financial standards and regulations. The President and CEO of the Company are required to confirm operational compliance with statutory and other regulations and key control procedures, and also to identify any significant deviations from expected norms.

The Annual Report of the Board of Director’s on page 89 contains declarations on compliance with laws and regulations and material interests in contracts involving the Company and confirms that they refrain from voting on matters in which they were materially interested; equitable treatment of shareholders and confirms that the business is a going concern, review of the internal controls covering financial, operational and compliance controls and risk management and that they have obtained reasonable assurance of their effectiveness and compliance thereof. It also sets out the responsibilities of the Board for the preparation and presentation of financial statements.

Principle D3 – Board Audit Committee

The Board has established a Board Audit Committee comprising three (3) Non Executive Independent Directors as stated in Principle A1 and information regarding its activities are provided in the Board Audit Committee Report on pages 86 to 88.

Messrs. Ernst & Young, are the Company external auditors and during the year under review they have not provided non-audit services to the Company. The principal auditor of JKH Group has not engaged in any services which are in the restricted category as defined by the CSE for external auditors. The audit fees paid by the Company to its auditors are separately classified in the Notes to the Financial Statements on page 106.

Principle D4 – Code of Business Conduct and Ethics

All employees, including the Board of Directors, are bound to abide by a formal Code of Conduct which is outlined on the following page.


Prior to Appointment

During Board

Meeting

Once Appointed

Nominees are requested to disclose their various interests that could potentially conflict with the interest of the Company

Directors who have disclosed an interest in a matter under discussion:• excuse themselves from deliberations on the subject matter• abstain from voting on the subject matter (Such abstentions

from Board decisions are duly recorded)

All Directors are expected to inform the Board and obtain Board clearance prior to :• accepting a new position• engaging in any transaction that could create a potential

conflict of interest.

The Company believes that the strong set of core values which underlie the Code, is the main source of its competitive advantage which is rewarded by the trust placed by its stakeholders.

The Chairman of the Board affirms that there has not been any material violation of any of the provisions of the Code of Conduct. In instances where violations did take place, they were investigated and handled through well established procedures.

Each Director has a continuing responsibility to determine whether he has a potential or actual conflict of interest arising from external associations, interests or personal relationships which may influence judgement in material matters, which are considered by the Board from time to time. In order to mitigate any potential or actual conflict of interest or independence of Directors throughout the term of their membership on the Board, the Company has adopted the processes as illustrated below.


Code of Conduct

• Allegiance to the Company and the Group

• Compliance with rules and regulations applicable in the operating territory.

• Exercise of professionalism and integrity in all business and personal transactions which could affect the image of the Group

Details of companies in which Board members hold Board or Board Committee Memberships are available with the Company for inspection by shareholders on request.

Whistleblower PolicyEmployees can report to the Chairman through a communication link named “Chairman Direct”, on any concerns about unethical behaviour and any violation of Group Values. Employees reporting such incidents are guaranteed complete confidentiality and such complaints are investigated and addressed via a select committee under the direction of the Chairman.

OmbudspersonIn a situation where an individual employee or a group of employees complain of an alleged violation of the published Code of Conduct, and feels that the alleged violation has not been addressed satisfactorily by internally available mechanisms, provision has been made to refer such complaints to an Ombudsperson. The findings and recommendations of the Ombudsperson arising subsequent to an independent inquiry is confidentially communicated to the

Chairman or to the Senior Independent Director of the parent company, JKH upon which the involvement of the Ombudsperson ceases.

On matters referred to him by the Ombudsperson, the Chairman or the Senior Independent Director of the parent company, as the case may be, will place before the Board;

• decision and recommendations of the Ombudsperson.

• the action taken based on the recommendations.

• the areas of disagreement and the reasons adduced in instances where the Chairman or the Senior Independent Director disagrees with any or all of the findings and / or recommendations. In such cases, the Board shall consider the areas of disagreement and determine the way forward.

Steps are taken to ensure that complainants are not victimised in connection with the complaint. There were no cases that were brought to the attention of the Ombudsperson during the year under review.

These open door policies facilitate constant dialogue, communication, transparency and ultimately employee confidence, which would help retain existing talent whilst attracting new.

Employee ParticipationThe Human Resource unit is designed in a manner that enables high accessibility by any employee to every level of management. Structured ‘skip level’ meetings are held where employees are given the opportunity to discuss matters of concern with

superiors who are at a level higher than their own immediate supervisor in an open but confidential environment. Through the participation of 360 Degree surveys and Voice of Employee (VOE) surveys which are conducted annually, employees are able to voice their opinion about the Company and their respective superiors. The employees also have the opportunity to take part in the Great Place To Work (GPTW) survey conducted by John Keells Holdings PLC giving them the opportunity to voice their opinion on the overall work environment.

Securities Trading PolicyThe JKH’s Securities Trading Policy prohibits all employees and agents engaged by Tea Smallholder Factories PLC, who are aware of unpublished price sensitive information, from trading in the Tea Smallholder Factories PLC shares or the shares of other companies in which the Company presently has business interest. The Group adopts a zero tolerance policy against any employee who is found to be in violation of this policy.

Principle D5 – Corporate Governance Disclosures

The Board of Directors has taken all reasonable steps to ensure that all financial statements are prepared in accordance with the Sri Lanka Accounting Standards (SLFRS / LKAS) issued by the CA Sri Lanka and the requirements of the CSE and other applicable authorities.

This Report has been prepared as per the rules and regulations stipulated

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by the Corporate Governance Listing Rules published by the CSE and also by the Companies Act No. 07 of 2007.

The Company has also adhered to the Code of Best Practice on Corporate Governance Reporting guidelines jointly set out by the CA Sri Lanka and the SEC of Sri Lanka in preparation of this Corporate Governance Report, and where necessary deviations have been explained as provided within the rules and regulations. The Company’s governance framework is confirmed to be in full compliance with;

• Companies Act No. 7 of 2007 – Mandatory Compliance

• The Listing Rules of the CSE - Mandatory Compliance

• The Code of Best Practice on Governance issued jointly by the SEC of Sri Lanka and the CA Sri Lanka – Voluntary Compliance

• Legal requirements of the Sri Lanka Tea Board and Tea Commissioner’s Division and Bye Laws and Conditions of Sale governing the Sale of tea under the aegis of the Colombo Tea Traders’ Association.

Principle E and F – ShareholdersShareholders are provided sufficient financial information and other relevant information of the Company to enable them to take decisions regarding their investments. Annual Reports are circulated to all registered shareholders within prescribed timelines. All shareholders are encouraged to participate at the Annual General Meeting and vote on matters set before the shareholders which are detailed on page 164.

Company Secretary

The Company Secretary is responsible for inducting new Directors, assisting the Chairman and the Board of Directors in determining the annual Board Plan, guiding the Board and the individual Directors in the proper discharge of their responsibilities and acting as a central source of guidance on matters of ethics and governance. In addition, the Company Secretary is responsible for making necessary disclosures on related party transactions required by law and regulations and acts as a channel of communication with shareholders to ensure healthy shareholder relations. The shareholders can contact Keells Consultants (Private) Limited, the Company Secretaries on 011-2306245, for any Company related information requirements.

Principle G – SustainabilityTo ensure a sustainable business model, the Company identifies that it is a prerequisite to have an effective

risk management model and a duly up-to-date business continuity plan. This report is an Integrated Report which includes sustainability information as provided on page 47.

Other Stakeholders: Corporate Social Responsibility and Sustainability

The Company recognises that emphasis should not only be on maximising long term shareholder value, but it should also look after the rights and appropriate claims of many non-shareholder groups such as employees, consumers, clients, suppliers, lenders, environmentalists, host communities and Government. A detailed description of the Company’s CSR activities can be found in the management Discussion and Analysis section of this Annual Report, laid down on pages 21 to 59.

Strategy formulation and Investment AppraisalOver the years, the Company has refined the process of investment

Our Strategy formulation Process

Formulatingbusiness strategy,

objectives and riskmanagement

Board approval

Reforecasting the targets for the second half

of the year

Business performance evaluation of

the �rst 6 months

against targets

Performance evaluation of the second half/

full year

Continuousperformancemonitoring


appraisal which ensures the involvement of the relevant persons when investment decisions are made. In this manner, several views, opinions and advice are obtained prior to the investment decision. Experience has proven that a holistic and well debated

view of the commercial viability and potential of proposed projects including operational, financial, funding, risk and tax implications has most of the time culminated in a good result. All investment decisions are routed through a committee structure which

safeguards against one individual having unfettered decision making powers in such decisions.

IT Value and Alignment

Deliver business value

IT Governance

Performance Management

Deliver business value

Accountability

Risk Management

Sustainability of Business Value

Sustainability of Business Value

IT Governance

The John Keells Group has progressively improved service quality and mitigated IT risks by implementing prudent internal controls based on the Information Security Management guidelines outlined in ISO 27001 within the COSO framework which covers both risk and business continuity management. With the growing dependence on IT caused by the rapid evolution and use of mobile technologies, the Group has also further strengthened its IT governance framework by adopting the Control Objectives for Information and Related Technology guidelines (COBIT) issued by the IT Governance Institute.

Regulatory Compliance Sign Off

A regulatory compliance check list is signed off on a quarterly basis by the Head of Departments ensuring compliance with the applicable laws and regulations. Changes in the regulation are monitored both by the Legal Division of John Keells Holdings PLC as well as at a Company level and are updated on a regular basis. The compliance reports are tabled and discussed at the Board Audit Committee meetings.

Conclusion

The Company’s robust and sound governance helps it to create and maintain trust with employees,

investors, governments, business partners, guests and other stakeholders. Within this framework, the Company’s goal is to run its business sustainably, engaging with society in a way that leads to the creation of shared value over the long term.

A detailed report on the extent of our best practices with appropriate reference is given on the following page.

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Rule No.

Subject Applicable Requirement Compliance Status

Applicable Section in the Annual Report

7.10 Compliance

a./b./c. Compliance with Corporate Governance Rules

The Company is in compliance with the Corporate Governance Rules and any deviations are explained, where applicable

Complied Corporate Governance

7.10.1 Non Executive Directorsa./b./c. Non Executive Directors

(NED)At least 2 or 1/3 of the total number of Directors should be NEDs


7.10.2 Independent Directorsa. Independent Directors (ID) 2 or 1/3 of NEDs, whichever is higher, shall

be independentComplied Corporate Governance

b. Independent Directors Each NED should submit a declaration of independence or non independence

Complied Available with the Secretaries for review

7.10.3 Disclosures relating to Directorsa./b. Disclosure relating to

DirectorsThe Board shall annually determine the independence or otherwise of the NEDs


c. Disclosure relating to Directors

A brief resume of each Director should be included in the Annual Report including the Director’s areas of expertise

Complied Board of Directors (profile) section in the Annual Report on pages 65 and 67.

d. Disclosure relating to Directors

Provide a brief resume of new Directors appointed to the Board along with details


7.10.4 Criteria for defining independence (a-h) Determination of

IndependenceRequirements for meeting criteria to be an Independent Director


7.10.5 Remuneration Committee7.10.5 Remuneration Committee

(RC)The RC of the listed parent company may function as the RC


a. Composition of Remuneration Committee

RC shall comprise of NEDs, a majority of whom will be independent


b. Functions of Remuneration Committee

The RC shall recommend the remuneration of the Chief Executive Officer (CEO) and Executive Directors


c. Disclosure in the Annual Report relating to the Remuneration Committee

• Names of Directors comprising the RC• Statement of Remuneration Policy• Aggregated remuneration paid to NED/

NIDs and NED/IDs

Complied Corporate Governance and Notes to the Financials.

Compliance with CSE Listing Requirements

Statement of Compliance under Rule 7.10 of the Rules of the Colombo Stock Exchange


Rule No.

Subject Applicable requirement Compliance Status

Applicable Section in the Annual Report

7.10.6 Audit Committee (AC)

a. Composition of Audit Committee

• Shall comprise of NEDs a majority of whom will be independent

• A NED shall be appointed as the Chairman of the Committee

• The Chief Executive Officer and Financial Controller should attend AC meetings

• The Chairman of the AC or one member should be a member of a professional accounting body

Complied Corporate Governance and the Board Committee Reports

b. Audit Committee Functions Overseeing of the –• Preparation, presentation and adequacy

of disclosures in the financial statements in accordance with Sri Lanka Accounting Standards (SLFRS/LKAS)

• Compliance with financial reporting requirements, information requirements of the Companies Act No. 07 of 2007 and other relevant financial reporting related regulations and requirements

• Ensuring that internal controls and risk management are adequate to meet the requirements of the SLFRS/LKAS

• Assessment of the independence and performance of the external auditors

• Make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors, and approve the remuneration and terms of engagement of the external auditor


C Disclosure in Annual Report relating to Audit Committee

• Names of Directors comprising the AC• The AC shall make a determination of the

independence of the Auditors and disclose the basis for such determination

• The AR shall contain a Report of the AC setting out the manner of compliance with their functions


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Report of the Board Audit Committee

IntroductionThis report focuses on the activities of the Board Audit Committee (BAC) of Tea Smallholder Factories PLC (the Company) for the year under review. The Committee assists the Board in the areas of financial reporting, internal audit, internal controls and external audit. The Audit Committee Charter defines the Terms of Reference of the Committee and the BAC conducts committee proceedings in accordance with this and operates pursuant to the Audit Committee Charter.

Responsibilities of the BACThe BAC in its role, assists the Board in fulfilling their responsibilities with regard to;

• Ensuring the integrity of the financial statements of the Company and that good financial reporting systems are in place and is managed in order to give accurate, appropriate and timely information to the management, regulatory authorities and shareholders in accordance with the financial reporting standards of The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) Companies Act No. 07 of 2007, the Sri Lanka Accounting and Auditing Standards and the continuing Listing Rules of the Colombo Stock Exchange (CSE).

• Ensuring effectiveness of the internal control system and the Company’s risk management function.

• Assessing the independence and monitoring the performance of external auditors and outsourced internal auditors.

• Ensure compliance with applicable laws, regulations and policies of the John Keells Group and the Company.

• Assess the Company’s ability to continue as a going concern in the foreseen future.

Composition of the BACThe BAC of the Company is formally constituted as a sub committee of the Main Board, to which it is accountable and comprises of three Independent, Non Executive Directors for the financial year 2016 / 2017 whose detailed profiles are given on page 65 to 67 of this report. The Sector Financial Controller for the Plantation Services Sector of John Keells Group serves as the Secretary to the BAC.

The composition of the BAC for the reporting year is as follows,

• Mr. R. Seevaratnam - Chairman

• Mr. A. S. Jayatilleke - Director

• Mr. J. S. Ratwatte - Director

Meetings of the BAC

The BAC held four meetings during the financial year 2016 / 2017. The attendance of the Committee members at the meetings is illustrated at the end of this report.

The Chief Executive Officer, Head Of Operations, General Manager Finance of the Company and the Head of Group Business Process Review (Group BPR) of John Keells Holdings PLC (JKH) attend the meetings of the BAC by invitation. Other officials are invited to attend on a need basis. The external auditors and the Outsourced internal auditors also attend meetings on invitation when required.

The activities and views of the Committee have been communicated to the Board of Directors by tabling the minutes of the Committee’s meetings at Board Meetings and verbally at Board Meetings when necessary.

The Chairman and members of the Committee were in regular contact with the management of the Company through numerous meetings and communications to oversee the auditing and control aspect in the Company.

Financial Reporting

The BAC has reviewed and discussed the Company’s quarterly and annual financial statements prior to publication with the management and the external auditors, including the extent of compliance with the Sri Lanka Accounting Standards and the adequacy of disclosures required by other applicable laws, rules, and guidelines. The Committee has also regularly discussed the operations of the Company and its future prospects with the management and is satisfied that all relevant matters have been taken into account in the preparation of the financial statements.


Risk Assessment and Internal ControlsThe BAC has reviewed the processes for the identification, evaluation and management of all significant risks faced by the Company. The most significant operational risks and the remedial measures taken to mitigate them have been reviewed with the management and the John Keells Group Sustainability and Enterprise Risk Management Division of JKH.

Formal confirmations and assurances have been received from the senior management quarterly regarding the efficacy and status of the internal control systems and risk management systems, and compliance with applicable laws and regulations.

Internal Audit and Control AssessmentThe internal audit is outsourced to Messrs. BDO Partners, a leading firm of Chartered Accountants. The Committee monitors the effectiveness of the internal audit function and is responsible for recommending to the Board their appointment or removal and for ensuring they have adequate access to information required to conduct their audits.

The internal audit plans and scope of work were formulated in consultation with the internal audit function, which at John Keells is termed Group Business Process Review Division (Group BPR) and the outsourced internal auditors and approved by the Committee.

The main focus of the internal audit was to provide independent assurance on the overall system of internal controls, risk management and governance, by evaluating the adequacy and effectiveness of internal controls, and compliance with laws and regulations and established policies and procedures of the Company.

During the year, reports were received by the Committee from the outsourced internal auditors, and Group Business Process Review Division, which were reviewed and discussed with the management. Audit findings presented in the reports were prioritised based on the level of risk. The Committee also reviews and monitors management’s responsiveness to the significant audit findings and recommendations of the internal auditor.

The BAC met the internal auditors without the presence of the management during the year.

External AuditMessrs. Ernst & Young, a leading firm of Chartered Accountants serves as the external auditors of the Company.

The BAC reviewed the external auditors’ letter of engagement, the external audit plan and scope, audit findings as well as the management letters and any issues raised by the external auditors were followed up. The external auditors kept the Committee advised on an ongoing basis regarding any unresolved matters of significance.

Before the conclusion of the audit, the Committee met with the external auditors to discuss all audit issues and agree on their treatment. The Committee held independent meetings with the external auditors, prior to the finalization of the financial statements. The external auditors’ management letter for the year 2015 / 2016, together with management’s responses was discussed with the management and the auditors.

The BAC is satisfied that the independence of the external auditors has not been impaired by any event or service that gives rise to a conflict of interest. Due consideration has been given to the level of audit and non-audit fees received by the external auditors from the John Keells Group and confirmation has been received from the external auditors of their compliance with the independence criteria given in the Code of Ethics of the CA Sri Lanka.

The performance of the external auditors has been evaluated and discussed with the senior management of the Company, and the Committee has recommended to the Board that Messrs. Ernst & Young be re-appointed as the external auditors of the Company for the financial year ending 31st March 2018, subject to approval by the shareholders at the Annual General Meeting.

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Information Technology Risk AssessmentThe Company seeks the services of Information Technology (IT) to provide value added services to its customers as well as to make the internal processes more efficient and effective. The Committee draws conformity from the Head of IT Plantation Services Sector as well as internal auditors, Messrs. BDO Partners when disseminating this role.

Whistle Blowing Assessment

The Company has an established mechanism for employees to report to the Chairman of John Keells Holdings through a communication link named “Chairman Direct” about any unethical behaviour or any violations to Group values. Employees reporting such incidents are guaranteed complete confidentiality. The Committee reviews this process on a periodic basis.

Compliance with Code of Best Practice The BAC scope and functions are in compliance with the requirements of the Code of Best Practice on Audit Committee and has conducted its affairs as per the requirements of the Code of Best Practice on Corporate Governance Rules as per section 7.10 of the listing Rules of the CSE.

Evaluation of the BACThe BAC with the assistance of the Group Business Process Review Division of JKH conducts a self-evaluation exercise once a year with input by each member of the BAC. An assessment is also done by other participants such as Sector Financial Controller of the Plantation Services Sector of the John Keells Group, Chief Executive Officer of the Company, internal auditors, and external auditors. The assessment is tabled at the BAC meeting and communicated to the Board of the Company.

ConclusionBased on the reports submitted by the external auditors and the outsourced internal auditors of the Company, the assurances and certifications provided by the senior management, and the discussions with the management and the auditors both at formal meetings and informally, the Committee is of the view that the control environment within the Company is satisfactory and provides reasonable assurance that the financial position of the Company is adequately monitored and its assets are safeguarded.

Name of Director Board Audit Committee Meeting Attendance

17th May 2016

21st July 2016

20th October 2016

23rd January 2017

Eligibility to Attend

Attendance

Mr. R. Seevaratnam 4 4

Mr. A. S. Jayatilleke 4 4

Mr. J. S. Ratwatte - 4 3

R. SeevaratnamChairman of the Board Audit Committee31st May 2017

Members :Mr. A. S. JayatillekeMr. J. S. Ratwatte

Report of the Board Audit Committee


Annual Report of the Directors

The Directors have pleasure in presenting the 23rd Annual Report of your Company which covers the Audited Financial Statements, Chairman’s Review, Management Discussion and Analysis, Corporate Governance, Risk Management, Independent Auditors’ Report and all the other relevant information for the year ended 31st March 2017.

The details set out herein provide the pertinent information required by the Companies Act No. 07 of 2007, the Listing Rules of the Colombo Stock Exchange and are guided by recommended best accounting practices.

1. Principal Activities

The principal activity of the Company is processing green leaf purchased from tea small holders and the sale of processed black tea. There has been no change in the activities of the Company in the year under review.

2. Vision, Mission and Goals

The Company’s vision, mission and goals are given on page 05 in the Annual Report. The Directors and employees of the Company conduct their activities with the best level of ethical standards and integrity in order to achieve the vision “To be the best managed bought leaf processing company in Sri Lanka and to contribute to the socio-economic growth of the Country”.

3. Review of Business Performance

A review of operational and financial performance of the Company for the year ended 31st March 2017 is described in greater detail in the Chairman’s Review on page 16 and the Management Discussion and Analysis on pages 21 to 59. These reports together with the audited financial statements of the Company reflect the state of affairs of the Company.

4. Financial Statements and Auditors’ Report

The financial statements of the Company for the year ended 31st March 2017 have been prepared in accordance with Sri Lanka Accounting Standards (SLFRSs / LKASs) which are set out on pages 100 to 144 of the Annual Report. The Independent Auditors’ Report on the financial statements is given on page 99 of the Annual Report.

5. Accounting Policies

All significant accounting policies adopted in the preparation of the financial statements of the Company are given in pages 106 to 109. There were no changes to the accounting policies the adopted by the Company during the year under review.

6. Financial Results and Appropriations

6.1. Revenue

Revenue generated by the Company for the year amounted to Rs. 2,312 million. (2016 - Rs. 1,913 million) which is a growth of 21 percent compared to the previous year. An analysis of revenue based on geographical segments is disclosed in note 6.2 of the financial statements on page 110.

6.2 Profit and Appropriations

The profit after tax of the Company for the year 2016 / 2017 was Rs. 85 million (2015 / 2016 – Loss of Rs. 8.8 million). The segmental profits are disclosed in note 6.2 of the financial statements on page 110.

The Company’s total comprehensive income net of tax for the financial year 2016 / 2017 was Rs. 127 million (2015 / 2016 - Rs. 8 million).

6.3 Taxation

The Company is liable to income tax at 28 percent (2016 - 28 percent) in terms of the Inland Revenue Act No. 10 of 2006 and amendments thereto. A detailed statement of the income tax rates applicable to the Company and a reconciliation of the accounting profits with the taxable profits are given in note 17 of the financial statements on page 125.

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6.4 Dividends and Reserves

As required by Section 56(2) of the Companies Act No. 7 of 2007, the Board of Directors has confirmed that the Company satisfies the solvency test in accordance with Section 57 of the Companies Act No. 7 of 2007, and has obtained a certificate from the auditors, prior to declaring all dividends. The first and final dividend for the financial year ended 31st March 2017 will be paid on 14th June 2017 to those shareholders on the register as on 2nd June 2017.

Information on dividends and position of reserves are given below;

For the year ended 31st March 2017

Rs.‘000s

2016

Rs.‘000s

Profit before tax 110,239 (20,506)

Provision for taxation including deferred tax (25,219) 11,744

Net profit after tax 85,020 (8,762)

Other adjustments (2,271) (154)

Balance brought forward from the previous year 146,217 170,132

The amount available for appropriation 228,966 161,217

First and final dividend declared for 2015/16 of Rs. 0.50 per share (2014/15 – Rs. 0.50 per share) (15,000) (15,000)

Balance to be carried forward next year 213,966 146,217

*In accordance with LKAS 10, Events After The Reporting Period, the first and final dividend for the financial year 2016 / 2017 has not been recognized as a liability in the financial statements.

7. Donations

The Company has not made any donations during the year under review.

8. Corporate Sustainability

The Company is conscious of the impact, direct and indirect, on the environment due to its business activities. Every endeavour is made to minimize the adverse

effects on the environment to ensure sustainable continuity of our natural resources. The activities undertaken by the Company in recognition of its responsibility as a corporate citizen are disclosed in detail on pages 47 to 59 of the Annual Report.

9. Property, Plant and Equipment

The carrying value of property, plant and equipment of the Company as at 31st March 2017 was Rs. 777 (as at 31st March 2016 – Rs. 772 million). The total expenditure on the acquisition of property, plant and equipment

during the year in respect of new assets amounted to Rs. 13 million. The movement of property, plant and equipment during the year is shown in note 18.2 of the financial statements on page 129.

Investment property amounting to Rs. 176 million has been shown separately from property, plant and equipment as per LKAS 40 – Investment Properties. Lease rentals paid in advance amounting to Rs. 2.66 million (2016 - Rs. 2.74 million) have been shown separately from property, plant and equipment as per LKAS 17 – Leases.

10. Market Value of Properties Land and buildings which includes

freehold lands, leasehold land, and buildings on freehold and leasehold lands for eight factories were revalued by Mr. K. T. D. Tissera, Chartered Valuation Surveyor as of 31st March 2017 and results of such valuation were incorporated in the financial statements as at that date.

Property classified as investment property was also revalued on 31st March 2017 by Messrs. P. B. Kalugalagedara & Associates, Chartered valuation surveyors and results of such valuation were incorporated in the financial statements as at that date.

Details of valuation of property, plant and equipment and investment property are provided in notes 18.3, 18.4, and 20.3 of the financial statements on pages 130, 131 and 134 respectively.



11. Investments

Value of investment made by the Company (short term) as at 31st March 2017 amounted to Rs. 142.35 million (as at 31st March 2016 - Rs. 20.10 million).

12. Stated Capital and Reserves

The stated capital of the Company as at 31st March 2017 was Rs. 150 million (as at 31st March 2016 - Rs. 150 million) with 30 million shares in issue.

The total Reserves of the Company as at 31st March 2017 amounted to Rs. 872 million (as at 31st March 2016 - Rs. 761 million). The movement in these reserves is shown in the statement of changes in equity on page 103.

General reserve Rs. 255 million

Revaluation reserve

Rs. 403 million

Retained profits Rs. 214 million

Total Rs. 872 million

13. Shareholding and Stock Market Information

As at 31st March 2017 there were 1,170 (as at 31st March 2016 – 1,169) registered shareholders. Information on top twenty shareholders, the distribution schedule, along with the public holding is given on pages 146 and 147 of the report.

An ordinary share of the Company was quoted on the Colombo Stock Exchange at Rs. 24/- as at 31st March 2017 (31st March

2016 - Rs. 19.50). Information relating to earnings, dividend, net assets and market value per share is given in the “Five Year Summary” on page 151 and in the “Shareholder and Investor Information Section” on pages 146 to 150.

Details of the twenty largest shareholders of the Company and the percentages held by each of them are disclosed in the share information section (page 147) of the Annual Report.

14. Capital Commitments and Contingent Liabilities

Capital commitments made on capital expenditure and contingent liabilities as at 31st March 2017 are given in note 39 and 38 respectively in the notes to the financial statements on pages 143 and 144.

15. Events Occurring After the Reporting Date

The details are given in Note 41 in the notes to the financial statements on page 144.

16. Information on the Board of Directors.

16.1. Directorate

The Board of Directors of the Company as at 31st March 2017 and their brief profiles are given in the Board of Directors section of the Annual Report on pages 65 to 67 of the Annual Report.

16.2 New Appointments and Resignation of Directors

All Directors of the Company held office during the entire year, with the exception of Mr. R. S. Fernando who resigned with effect from 9th September 2016 and Mr. M. H. De Silva who was appointed with effect from 6th February 2017.

16.3 Board Sub-Committees

Information regarding the Board Audit Committee, Human Resources and Compensation Committee and Nominations Committee, Related Party Transactions Review Committee is given under Corporate Governance on pages 70 to 73.

16.4 Retirement of Directors and their re-election

In accordance with Article 83 of the Articles of Association of the Company, Mr. A. S. Jayatilleke retire by rotation and being eligible, offer himself for re-election at the forthcoming Annual General Meeting.

Mr. M. H. De Silva retires in terms of Article 90 of the Articles of Association of the Company and offers himself for re-election at the forthcoming Annual General Meeting.

The Company has recommended the re-election of Mr. J. S. Ratwatte who is over 70 years of age, and retire in terms of Section 210 of the Companies Act No. 7 of 2007.

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The resolution proposes that the age limit stipulated in Section 210 of the Companies Act No. 7 of 2007 shall not apply to him and that he be re-elected as a Director of the Company.

Mr. R. Seevratnam who is over the age of 70 years and who has served the Board for more than nine years has notified the Company that he will not be presenting himself for re-election at the forthcoming Annual General Meeting of the Company.


16.5 Directors’ Shareholding and their Interests

The relevant interests of the Directors and the Chief Executive Officer in the shares of the Company are as follows.

As at 31st March 2017 - No. ofShares held

2016 - No. ofShares held

Mr. S. C. Ratnayake Nil Nil

Mr. A. D. Gunewardene Nil Nil

Mr. J. R. F. Peiris Nil Nil

Mr. E. H. Wijenaike 10,000 10,000

Mr. R. E. Rambukwella Nil Nil

Mr. A. S. Jayatilleke Nil Nil

Mr. J. S. Ratwatte 2,000 2,000

Mr. R. Seevaratnam Nil Nil

Mr. M. H. De Silva Nil Nil

Mr. V. A. A. Perera (CEO) Nil Nil

16.6 Interest Register and Interest in Contracts

The Company has maintained an Interest Register as contemplated by the Companies Act No. 7 of 2007 and entries have been made therein from 3rd May 2007 being the date on which the Companies Act No. 7 of 2007 came into operation.

In compliance with the requirements of the Companies Act No. 7 of 2007, this Annual Report also contains particulars of entries made in the Interest Register.

(a) Interests in Contracts – The Directors have all made a general disclosure to the Board of Directors as permitted by Section 192 (2) of the Companies Act No. 07 of 2007.

(b) There have been no other disclosures of share dealings as at 31st March 2017.

(c) The following may be noted; Mr. M. H. De Silva was

appointed as a Non Executive Director of Tea Smallholder Factories PLC from 6th February 2017 at the standard Non Executive Fees approved by the

Board for Non Executive Directors, which fees are commensurate with the market complexities of the Company.

16.7 Directors’ Remuneration

The Directors’ remuneration and fees in respect of the Company for the financial year ended 31st March 2017 are disclosed in Note 14.1 on page 123 of the financial statements.

17. Related Party Transactions

There were no related party transactions required to be disclosed under the Listing Rules of the Colombo Stock Exchange other than as disclosed under Note 35 in the notes to the financial statements on pages 142 and 143.

18. Employment

The number of persons employed by the Company as at 31st March 2017 was 594 (as at 31st March 2016 - 642).

There were no material issues pertaining to employees and industrial relations in the year under review.

19. Corporate Governance

The policies adopted by the Company in relation to Best Practices and Good Corporate Governance are given on pages 68 to 85.


The Directors declare that: a) The Company has not

engaged in any activities, which contravene laws and regulations; and

b) The Directors have declared all material interest in contracts involving the Company and refrained from voting on matters in which they were materially interested; and

c) The Company has made all endeavours to ensure the equitable treatment of shareholders; and

d) The business is a going concern with supporting assumptions or qualifications as necessary; and

e) The Directors have conducted a review of internal controls covering financial, operational and compliance controls and risk management and have obtained a reasonable assurance of their effectiveness and successful adherence here with.

20. Internal Controls

The Directors ensures that the Company has an effective internal control system which ensures that the assets of the Company are safeguarded and appropriate systems are in place to minimise and detect fraud, errors and other irregularities. The system ensures that the Company adopts procedures which result in financial and

operational effectiveness and efficiency. The statement of Directors’ Responsibilities on page 95 and the Audit Committee Report set out on pages 86 to 88 of the Annual Report to provide further information in respect of the above.

21. Risk Management

The Directors have established and adhere to a comprehensive risk management framework to ensure the achievements of their corporate objectives. The categories of risks faced by the Company are identified, the significance they pose are evaluated and mitigating strategies are adopted. The Board of Directors reviews the risk management process through the Board Audit Committee. The details of the risk and risk management process is set out on pages 60 to 64 of the Annual Report.

22. Statutory Payments

The Directors confirm that to the best of their knowledge that all taxes, duties and levies payable by the Company and all contributions, levies and taxes payable on behalf of and in respect of the employees of the Company and all other known statutory dues as were due and payable by the Company as at the reporting date have been paid or where relevant provided for in the financial statements. The tax position of the Company is disclosed on pages 125 to 127.

23. Going Concern

The Board of Directors are satisfied that the Company has adequate resources to continue its operations in the foreseeable future. Accordingly the financial statements are prepared based on the “going concern’’ concept.

24. Environmental Protection

The Company is conscious of the impact, direct and indirect, on the environment due to its business activities. Every endeavour is made to minimize the adverse effects on the environment to ensure sustainable continuity of our resources.

25. Annual Report

The Board of Directors approved the financial statements on 31st May 2017. The appropriate number of copies of this report will be submitted to the CSE and to the Sri Lanka Accounting and Auditing Standards Board on 31st May 2017.

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A. D. Gunewardene J. R. F. Peiris Director Director

Keells Consultants (Private) Limited Company Secretaries 31st May 2017

26. Auditors

In accordance with the Companies Act No. 7 of 2007 a resolution proposing the re-appointment of Messrs. Ernst & Young, Chartered Accountants, as Auditors of the Company will be submitted at the Annual General Meeting. The Auditors, Messrs. Ernst & Young were paid Rs. 1.58 million as audit fee for the financial year by the Company.

As far as the Directors are aware the auditors neither have any other relationship with the Company that would have an impact on their independence.

27. Annual General Meeting

The Annual General Meeting will be held at the John Keells Auditorium, 186, Vauxhall Street, Colombo 02, on 23rd June 2017 at 10.30 a.m. The notice of the Annual General Meeting appears on page 164. This Annual Report is signed on behalf of the Board of Directors by



Statement of Directors’ ResponsibilityThe responsibility of the Directors in relation to the financial statements is set out in the following statement. The responsibility of the auditors in relation to the financial statements prepared in accordance with the provision of the Companies Act No. 7 of 2007 is set out in the report of the Auditors on page 99.

The Companies Act No. 07 of 2007 requires the Directors of the Company to be responsible for the preparation and presentation of the financial statements and other statutory reports for each financial year and place before a general meeting financial statements which comprise of;

• a statement of statement of profit or loss and other comprehensive income of the Company which present a true and fair view of the profit or loss of the Company for the financial year; and

• a statement of financial position, which presents a true and fair view of the state of affairs of the Company as at the end of the financial year ; and

• a statement of changes in equity; and

• a statement of cash flows for the year then ended 31st March 2017 together with notes to the financial statements.

The Directors have ensured that, in preparing these financial statements;

• the appropriate accounting policies have been selected and applied in a consistent manner and material departures, if any, have been disclosed and explained; and.

• all applicable accounting standards as relevant, have been applied; and

• reasonable and prudent judgments and estimates have been made so that the form and substance of transactions are properly reflected; and

• provide information in accordance with the Companies Act No. 07 of 2007, the Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and the Listing Rules of the CSE.

The Directors having considered the Company’s business plans, and a review of its current and future operations, are of the view that the Company has adequate resources to continue in operation. The Directors have adopted the going concern basis in preparing the financial statements.

The Directors have taken appropriate steps to ensure that the Company maintains adequate and accurate records which reflect the true financial position of the Company.

The Directors have taken appropriate and reasonable steps to safeguard the assets of the Company.

The Directors have instituted appropriate systems of internal control in order to minimise and detect fraud, errors and other irregularities. The Directors in maintaining a sound system of internal control and in protecting the assets of the Company, have further adopted risk management strategies to identify and evaluate the risks which the Company could be exposed and its impact to the Company.

The Directors have provided the Auditors with every opportunity to carry out any reviews and tests that they consider appropriate and necessary for the performance of their responsibilities. The responsibility of the independent auditors in relation to the financial statements is set out in the independent auditors Report on page 99.

Further, as required by Section 56 (2) of the Companies Act No. 07 of 2007, the Board of Directors have confirmed that the Company based on the information available, satisfies the solvency test immediately after the distribution in accordance with Section 57 of the Companies Act No. 07 of 2007 and have obtained a certificate from the auditors, prior to recommending a first and final dividend for this year to be paid on 14th June 2017.

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As per the provisions of the Companies Act, the Board of the Company shall cause the Annual General Meeting report to be sent to every shareholder of the Company not less than fifteen working days before the date fixed for holding of the Annual General Meeting, provided in the first instance the Company is required to send to every shareholder the financial statements in the summarized form as may be prescribed, together with the Annual Report.

The Directors are of the view that they have discharged their responsibilities as set out in this statement.

Compliance ReportThe Directors confirm that to the best of their knowledge, all taxes, duties and levies payable by the Company, all contributions levies and taxes payable on behalf of and in respect of the employees of the Company, and all other known statutory dues as were due and payable by the Company as at the reporting date have been paid or, where relevant provided for except as detailed in Note 38 to the financial statements, relating to contingent liabilities.

By Order of the Board

Keells Consultants (Private) LimitedSecretaries

31st May 2017

Statement of Directors’ Responsibility

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Financial StatementsIndependent Auditors’ Report 99Statement of Profit or Loss 100Statement of Comprehensive Income 101 Statement of Financial Position 102Statement of Changes in Equity 103Statement of Cash Flows 104Notes to the Financial Statements 106



Independent Auditors’ Report

Report on the Financial Statements

We have audited the accompanying Financial Statements of Tea Smallholder Factories PLC (“the Company”) which comprise the Statement of Financial Position as at March 31, 2017 and the Statement of Profit or Loss, Statement of Comprehensive Income, Statement of Changes in Equity and Statement of Cash Flows for the year then ended, and a summary of significant Accounting Policies and other explanatory information.

Board’s Responsibility for the Financial Statements

The Board of Directors (“Board”) is responsible for the preparation of these financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards and for such internal control as Board determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards

require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by Board, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements give a true and fair view of the financial position of the Company as at March 31, 2017, and of its financial performance and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

Report on Other Legal and Regulatory Requirements

As required by section 163 (2) of the Companies Act No. 07 of 2007, we state the following:

a) The basis of opinion, scope and limitations of the audit are as stated above.

b) In our opinion:

• we have obtained all the information and explanations that were required for the audit and, as far as appears from our examination, proper accounting records have been kept by the Company, and

• the financial statements of the Company comply with the requirements of section 151 of the Companies Act No. 7 of 2007.

31 May 2017Colombo

TO THE SHAREHOLDERS OF TEA SMALLHOLDER FACTORIES PLC


Statement of Profit or Loss

For the Year Ended 31 March Note 2017 2016

Rs.'000s Rs.'000s

Revenue 10.2 2,312,330 1,912,841

Cost of Sales (2,169,426) (1,915,418)

Gross Profit / (Loss) 142,904 (2,577)

Other Operating Income 11.2 33,070 24,436

Administrative Expenses (60,820) (54,040)

Management Fees 12 (29,274) (16,205)

Results From Operating Activities 85,879 (48,386)

Finance Cost 13.2 (3,303) (2,384)

Finance Income 13.2 4,400 3,264

Net Finance Income / (Cost) 1,097 880

Change in fair value of Investment Property 20.2 23,263 27,000

Profit / (Loss) Before Tax 14 110,239 (20,506)

Tax (Expense) / Reversal 17.2 (25,219) 11,744

Profit / (Loss) for the Year 85,020 (8,762)

Earnings / (Loss) Per Share - Basic 15 2.83 (0.29)

Dividend Per share 16 0.50 0.50

Figures in brackets indicate deductions.

The Accounting Policies and Notes as set out in pages 106 to 144 form an integral part of these financial statements.


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Statement of Comprehensive Income


Rs.'000s Rs.'000s

Profit / (Loss) for the Year 85,020 (8,762)

Other Comprehensive Income

Other Comprehensive Income not to be reclassified to profit or loss in subsequent periods

Revaluation of Land and Buildings 18.2 53,690 21,937

Tax Effect 17.2.1 (9,844) (5,294)

43,845 16,643

Re-measurement Gain / (Loss) on Defined Benefit Plans 32.2 (3,154) (214)

Tax Effect 17.2.1 883 60

(2,271) (154)

Net Other Comprehensive Income / (Loss) not to be reclassified to profit or loss in subsequent period

41,575 16,489

Total Other Comprehensive Income for the year, net of Tax 41,575 16,489

Total Comprehensive Income for the year, net of Tax 126,595 7,728



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Statement of Financial Position

As at 31 March Note 2017 2016

Rs.'000s Rs.'000s

ASSETSNon-Current AssetsProperty, Plant and Equipment 18.2 777,492 771,505Lease Rentals Paid in Advance 19.1.2 2,655 2,741Investment Property 20.2 176,263 153,000Intangible Assets 21.2 7,303 7,303Other Non-Current Financial Assets 22.1 942 1,299Other Non-Current Assets 23.1 122 195

964,777 936,043

Current AssetsInventories 24.2 216,443 207,349Trade and Other Receivables 25 76,200 56,552Other Current Assets 26 4,182 4,750Income Tax Recoverable 17.3 - 10,182Short Term Investments 27 142,355 20,104Cash in Hand and at Bank 28 1,117 367

440,297 299,304

Total Assets 1,405,074 1,235,347

EQUITY AND LIABILITIESStated Capital 29 150,000 150,000Revaluation Reserve 30 403,443 359,597Revenue Reserves 31 468,966 401,217Total Equity 1,022,409 910,814

Non-Current LiabilitiesDeferred Tax Liabilities 17.4 172,412 157,160Employee Defined Benefit Obligation 32.2 42,255 37,531Deferred Grants and Subsidies 33 773 960

215,440 195,651

Current LiabilitiesTrade and Other Payables 34 150,977 122,181Amounts due to Related Parties 35.1 3,079 2,563Income Tax Payable 17.3 8,747 -Other Current Liabilities 36 4,422 3,911Bank Overdraft 37 - 227

167,225 128,882

Total Equity and Liabilities 1,405,074 1,235,347

Net Assets Per Share (Rs.) 34.08 30.36

I certify that the financial statements have been prepared in compliance with the requirements of the Companies Act No. 7 of 2007.

P. A. P. Perera Sector Financial Controller

The Board of Directors is responsible for the preparation and presentation of these financial statements.

A. D. Gunewardene J. R. F. Peiris Director DirectorThe Accounting Policies and Notes as set out in pages 106 to 144 form an integral part of these financial statements.

31 May 2017 Colombo


For the Year Ended 31 March Stated Revaluation General Accumulated Total

Capital Reserve Reserve Profit EquityRs.'000s Rs.'000s Rs.'000s Rs.'000s Rs.'000s

As at 1 April 2015 150,000 342,954 255,000 170,132 918,086

Profit / (loss) for the year - - - (8,762) (8,762)

Other comprehensive income - 16,643 - (154) 16,489

Total comprehensive income - 16,643 - (8,915) 7,728

First and final dividend paid - 2014 / 2015 - - - (15,000) (15,000)

As at 31 March 2016 150,000 359,597 255,000 146,217 910,814

Profit for the year - - - 85,020 85,020

Other comprehensive income - 43,845 - (2,271) 41,575

Total comprehensive income - 43,845 - 82,749 126,595

First and final dividend paid - 2015 / 2016 - - - (15,000) (15,000)

As at 31 March 2017 150,000 403,443 255,000 213,966 1,022,409



Statement of Changes in Equity

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Cash Flow Statement


Rs.'000s Rs.'000s

CASH FLOWS FROM OPERATING ACTIVITIESProfit / (Loss) Before Tax 110,239 (20,506)

ADJUSTMENTS FORFinance Income 13.2 (4,400) (3,264)Depreciation and Amortisation 14 60,511 56,549Gratuity Charge and Related Cost 32.2 8,466 7,777Amortization of Grants 33 (187) (187)Finance Cost 13.2 3,303 2,384Profit on disposal of Property, Plant and Equipment 11.2 (493) (293)Change in Fair Value of Investment Property 20.2 (23,263) (27,000)Operating Profit Before Working Capital Changes 154,176 15,460

(Increase) / Decrease in Inventories (9,094) 35,362(Increase) / Decrease in Trade and Other Receivables (19,291) 40,806(Increase) / Decrease in Other Current Assets 568 (2,421)(Increase) / Decrease in Other Non-Current Assets 73 77Increase / (Decrease) in Trade and Other Payables 29,312 10,739Increase / (Decrease) in Other Current Liabilities 512 (580)Cash Generated from Operations 156,257 99,443

Finance Income Received 4,400 3,264Finance Cost Paid (3,303) (2,384)Gratuity Paid 32.2 (6,896) (6,534)Tax Paid 17.3 - (55)Net Cash from Operating Activities 150,458 93,733

CASH FLOWS FROM INVESTING ACTIVITIESProceeds from Sale of Property, Plant and Equipment 495 316Purchase of Property, Plant and Equipment (12,725) (53,835)Net Cash from / (used) in Investing Activities (12,230) (53,519)

CASH FLOWS FROM FINANCING ACTIVITIESProceeds from / (Repayment of) Short Term Borrowings - (10,000)Dividend Paid (15,000) (15,000)Payment of Finance Lease Liabilities - (3,143)Net Cash from / (used) in Financing Activities (15,000) (28,143)

Net Increase / (Decrease) in Cash and Cash Equivalents 123,228 12,071

Cash and Cash Equivalents at the Beginning Note A 20,244 8,173Cash and Cash Equivalents at the End Note B 143,472 20,244

NOTESA. Cash and Cash Equivalents at the Beginning Cash and Bank Balances 367 670 Short Term Investments 20,104 7,503 Bank Overdraft (227) -

20,244 8,173

B. Cash and Cash Equivalents at the End Cash and Bank Balances 1,117 367 Short Term Investments 142,355 20,104 Bank Overdraft - (227)

143,472 20,244



Index to Notes

CORPORATE INFORMATION1 Corporate Information

BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

2 Basis of preparation3 Summary of significant accounting policies4 Significant accounting judgements, estimates and assumptions5 Standards issued but not yet effective

BUSINESS, OPERATIONS AND MANAGEMENT6 Operating segment information7 Financial risk management objectives and policies8 Fair value measurements and disclosures9 Financial instruments and related policies

NOTES TO INCOME STATEMENT, STATEMENT OF COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION

10 Revenue

11 Other operating income12 Management fees 13 Net finance income 14 Profit (loss) before tax 15 Earnings per share 16 Dividend per share17 Taxes 18 Property, plant and equipment 19 Leases 20 Investment property 21 Intangible assets22 Other non-current financial assets23 Other non-current assets24 Inventories 25 Trade and other receivable 26 Other current assets 27 Short term investments 28 Cash in hand and at Bank29 Stated capital and other components of equity30 Revaluation reserve 31 Revenue reserves 32 Employee benefit liabilities 33 Other deferred liabilities 34 Trade and other payables 35 Related party transactions 36 Other current liabilities37 Bank overdraft

OTHER DISCLOSURES

38 Contingent liabilities 39 Capital and other commitments40 Assets pledged41 Events after the reporting period

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Notes to the Financial Statements

CORPORATE INFORMATION

1 Corporate Information

Reporting Entity

Tea Smallholder Factories PLC is a public limited liability company incorporated and domiciled in Sri Lanka, under the Companies Act No. 17 of 1982 (The Company was re-registered under the Companies Act No. 07 of 2007) in terms of the provisions of the Conversion of Public Corporations or Government Owned Business Undertakings into Public Companies Act No. 23 of 1987. The registered office and principal place of business of the Company is located at No. 4, Leyden Bastian Road, Colombo 1. Factories are situated in the districts of Matara, Galle, Ratnapura and Nuwara Eliya.

Ordinary shares of the Company are listed on the Colombo Stock Exchange.

Approval of Financial Statements

The financial statements for the year ended 31 March 2017 were authorised for issue by the Directors on 31 May 2017.

Principal Activities and Nature of Operations

The principal activity of the Company is processing green and sale of processed black tea.

There were no significant changes in the nature of the principal activities of the Company during the financial year under review.

Holding Company

John Keells Holdings PLC, the Company’s Parent Company, manages a portfolio of holdings consisting of a range of diverse business operations, which together constitute the John Keells Group, and provides function based services to its subsidiaries and associates.

BASIS OF PREPARATION AND OTHER SIGNIFICANT ACCOUNTING POLICIES

2 Basis of Preparation

The financial statements have been prepared on an accrual basis and under the historical cost convention except for investment properties, land and buildings, and plant and machinery that have been measured at fair value.

Statement of Compliance

The financial statements which comprise the statement of profit or loss, statement of comprehensive income, statement of financial position, statement of changes in equity and the statement of cash flow, together with the accounting policies and notes (the “financial statements”) have been prepared in accordance with Sri Lanka Accounting Standards (SLFRS / LKAS) as issued by the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) and the requirement of the Companies Act No. 7 of 2007.

Presentation and Functional Currency

The financial statements are presented in Sri Lankan Rupees, the Company's functional and presentation currency, which is the primary economic environment in which the Company operates.

Comparative Information

The presentation and classification of the financial statements of the current year are comparable with those of the previous year.

3 Summary of Significant Accounting Policies

Summary of significant accounting policies have been disclosed along with the relevant individual notes in the subsequent pages.

Those accounting policies presented with each note, have been applied consistently by the Company.

Other Significant Accounting Policies Not Covered with Individual Notes

Following accounting policies which have been applied consistently and are considered to be significant but not covered in any other sections of the financial statements.


Going Concern

The financial statements of the Company have been prepared on the assumption that the Company is a going concern. The Directors are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future, to justify adopting the going concern basis in preparing these financial statements.

Current versus Non-Current Classification

The Company presents assets and liabilities in the statement of financial position based on current and non-current classification. An asset is classified as a current assets when it is expected to be realised or intended to be sold or consumed in the normal operating cycle,

* held primarily for the purpose of trading

*expected to be realised within twelve months after the reporting period, or

* cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at at least twelve months after the reporting period.

All other assets are classified as non-current assets;

A liability is classified as a current liability when:

* it is expected to be settled in the normal operating cycle

* it is held primarily for the purpose of trading

* it is due to be settled within twelve months after the reporting period, or

* there is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

The Company classifies all other liabilities as non-current liabilities.

Deferred tax assets and liabilities are classified as non-current assets and liabilities accordingly.

4 Significant Accounting

Judgements, Estimates and Assumptions

The preparation of the financial statements of the Company require the management to make judgments, estimates and assumptions, which may affect the amounts of income, expenditure, assets, liabilities and the accompanying disclosures and disclosure of contingent liabilities, at the end of the reporting period. In the process of applying the Company’s accounting policies, the key assumptions made relating to the future and the sources of estimation at the reporting date together with the related judgments that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the financial year are discussed in the individual notes

of the related financial statement line items.

The line items which have most significant effect on accounting, judgements, estimate and assumptions are as follows;

a) Valuation of property, plant and equipment and investment property

b) Impairment of non-financial assets

c) Taxesd) Fair value of financial

instruments e) Employee benefit liability

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5 Impending Accountings Standards / Standards Issued But Not Yet Effective

The following SLFRSs have been issued by the Institute of Chartered Accountants of Sri Lanka that have an effective date in the future and have not been applied in preparing these financial statements. Those SLFRS’s will have an effect on the accounting policies currently adopted by the Company and may have an impact on the future financial statements. The Company intends to adopt these standards, if applicable, when they become effective.

SLFRS 9 Financial Instruments: Classification and Measurement SLFRS 9 replaces the existing guidance in LKAS 39 Financial Instruments: Recognition and Measurement. SLFRS 9 includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from LKAS 39.

SLFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The Company has performed a high level impact assessment of all three aspects of SLFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Company in the future. Overall, the Company expects no significant impact on its financial position and equity.

SLFRS 15 Revenue From Contracts With Customers

SLFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including LKAS 18 Revenue, LKAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes.

SLFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The Company completed diagnostic phase of SLFRS 15 adaptation in financial year 2016 / 2017 with the assistance of external consultants. The Company’s current study has not revealed a significant change to the revenue recognition patterns.

However, the gaps identified will be addressed during financial year 2017 / 2018 and any impact to the current systems and processors will be modified where necessary

SLFRS 16 - Leases

SLFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under LKAS 17. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for the users of financial statements to assess the effect that leases have on the financial position. SLFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with early adoption permitted. The Company plans to assess the potential effect of SLFRS 16 on its financial statements in the financial year 2017 / 2018.


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BUSINESS, OPERATIONS AND MANAGEMENT

6 Operating Segment Information

6.1 Accounting Policy The segments are determined based on the Company’s geographical spread of operations. The geographical analysis of turnover and profits are based on location of customers and assets respectively.

Segment information has been prepared in conformity with the accounting policies adopted for preparing and presenting the financial statements of the Company.

No operating segments have been aggregated to form the above reportable operating segments. An individual segment manager is determined for each operating segment and the results are regularly reviewed by the Chief Executive Officer. The Chief Executive Officer monitors the operating results of its segments separately for the purpose of making decisions about resource allocation and performance assessment.

Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the operating segments information, is measured differently from operating profit or loss in the financial statements.

Transfer prices between operating segments are on an arm’s-length basis in a manner similar to transactions with third parties.

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Galle Matara2017 2016 2017

For the Year Ended 31 March Rs.’000s Rs.’000s Rs.’000s6.2.1 Segment Revenue

Sale of Produce 1,223,364 968,106 112,805

Segment ResultsSegment Revenue 1,223,364 968,106 112,805Revenue Expenditure (1,094,257) (921,545) (122,017)Depreciation / Amortisation (29,583) (27,153) (3,136)Gratuity Charge and Related Costs (3,496) (2,577) (642)Segment Gross Profit / (Loss) 96,027 16,831 (12,990)

Other Operating IncomeChange in fair value of Investment PropertyFinance IncomeUnallocated ExpensesManagement FeesProfit / (Loss) Before Tax

6.2.2 Segment Assets as at 31 March

Allocated AssetsNon - Current Assets

Cost 492,464 472,890 76,650Depreciation / Amortisation (88,846) (66,770) (14,339)

Current Assets 172,702 155,457 12,925576,320 561,577 75,237

Unallocated AssetsNon - Current Assets

CostDepreciation / Amortisation

Current AssetsTotal Assets

6.2.3 Segment Liabilities as at 31 March

Allocated LiabilitiesNon Current Liabilities 11,832 12,052 4,714Current Liabilities 68,804 51,088 7,647

80,636 63,140 12,361

Unallocated LiabilitiesNon Current LiabilitiesCurrent Liabilities

Total Liabilities

6.2.4 Segment Capital ExpenditureAllocated Capital Expenditure 5,422 27,554 -Unallocated Capital Expenditure

6.2 Reporting Segment Information - Geographical Segment


Ratnapaura N.Eliya Total2016 2017 2016 2017 2016 2017 2016

Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s

131,628 569,764 489,883 406,396 323,224 2,312,330 1,912,8412,312,330 1,912,841

131,628 569,764 489,883 406,396 323,224 2,312,330 1,912,841(135,658) (538,478) (496,805) (350,519) (300,861) (2,105,272) (1,854,868)

(3,485) (15,094) (13,568) (10,320) (10,239) (58,133) (54,445)(758) (1,468) (1,824) (415) (945) (6,021) (6,104)

(8,272) 14,724 (22,314) 45,142 11,179 142,904 (2,577)

33,070 24,43623,263 27,0004,400 3,264

(64,123) (56,424)(29,274) (16,205)110,239 (20,506)

61,592 267,663 240,041 128,049 135,191 964,827 909,714(12,082) (54,171) (42,283) (30,262) (21,816) (187,618) (142,952)14,451 71,541 57,621 42,669 37,736 299,838 265,26663,961 285,033 255,379 140,457 151,111 1,077,046 1,032,028

209,185 188,850(21,617) (19,570)140,458 34,039

1,405,074 1,235,347

4,198 9,411 7,948 4,455 3,847 30,412 28,0452,694 27,114 19,965 20,375 16,818 123,941 90,5646,892 36,526 27,913 24,830 20,665 154,353 118,609

185,028 167,60643,285 38,317

228,312 205,923382,665 324,533

2,889 5,028 21,151 2,201 2,589 12,651 54,183573 379

13,224 54,562


Galle Matara2017 2016 2017

For the Year Ended 31 March Rs.’000s Rs.’000s Rs.’000s6.2.1 Segment Revenue

Sale of Produce 1,223,364 968,106 112,805

Segment ResultsSegment Revenue 1,223,364 968,106 112,805Revenue Expenditure (1,094,257) (921,545) (122,017)Depreciation / Amortisation (29,583) (27,153) (3,136)Gratuity Charge and Related Costs (3,496) (2,577) (642)Segment Gross Profit / (Loss) 96,027 16,831 (12,990)

Other Operating IncomeChange in fair value of Investment PropertyFinance IncomeUnallocated ExpensesManagement FeesProfit / (Loss) Before Tax

6.2.2 Segment Assets as at 31 March

Allocated AssetsNon - Current Assets

Cost 492,464 472,890 76,650Depreciation / Amortisation (88,846) (66,770) (14,339)

Current Assets 172,702 155,457 12,925576,320 561,577 75,237

Unallocated AssetsNon - Current Assets

CostDepreciation / Amortisation

Current AssetsTotal Assets

6.2.3 Segment Liabilities as at 31 March

Allocated LiabilitiesNon Current Liabilities 11,832 12,052 4,714Current Liabilities 68,804 51,088 7,647

80,636 63,140 12,361

Unallocated LiabilitiesNon Current LiabilitiesCurrent Liabilities

Total Liabilities

6.2.4 Segment Capital ExpenditureAllocated Capital Expenditure 5,422 27,554 -Unallocated Capital Expenditure

Ratnapaura N.Eliya Total2016 2017 2016 2017 2016 2017 2016

Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s Rs.’000s

131,628 569,764 489,883 406,396 323,224 2,312,330 1,912,8412,312,330 1,912,841

131,628 569,764 489,883 406,396 323,224 2,312,330 1,912,841(135,658) (538,478) (496,805) (350,519) (300,861) (2,105,272) (1,854,868)

(3,485) (15,094) (13,568) (10,320) (10,239) (58,133) (54,445)(758) (1,468) (1,824) (415) (945) (6,021) (6,104)

(8,272) 14,724 (22,314) 45,142 11,179 142,904 (2,577)

33,070 24,43623,263 27,0004,400 3,264

(64,123) (56,424)(29,274) (16,205)110,239 (20,506)

61,592 267,663 240,041 128,049 135,191 964,827 909,714(12,082) (54,171) (42,283) (30,262) (21,816) (187,618) (142,952)14,451 71,541 57,621 42,669 37,736 299,838 265,26663,961 285,033 255,379 140,457 151,111 1,077,046 1,032,028

209,185 188,850(21,617) (19,570)140,458 34,039

1,405,074 1,235,347

4,198 9,411 7,948 4,455 3,847 30,412 28,0452,694 27,114 19,965 20,375 16,818 123,941 90,5646,892 36,526 27,913 24,830 20,665 154,353 118,609

185,028 167,60643,285 38,317

228,312 205,923382,665 324,533

2,889 5,028 21,151 2,201 2,589 12,651 54,183573 379

13,224 54,562

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7 Financial Risk Management Objectives and Policies

The Company has loans and other receivables, trade and other receivables, and cash and short term deposits that arise directly from its operations and the Company’s principal financial liabilities comprise of loans and borrowings, bank overdraft, and trade and other payables. The main purpose of these financial liabilities is to finance the Company’s operations. The Company is exposed to market risk, credit risk and liquidity risk.

7.1 Credit Risk

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions.

The Company trades only with recognised, creditworthy third parties. It is the Company’s policy that all clients who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis and as a result the Company’s exposure to bad debts is not significant.

With regard to the credit risk arising from the other financial assets of the Company, such as cash and cash equivalents, short term investments and loans to Executives, the Company’s exposure to credit risk arises from default of the counterparty. The Company manages its operations to avoid any excessive concentration of counterparty risk and the Company takes all reasonable steps to ensure the counterparties fulfill their obligations.

7.1.1 Credit Risk Exposure

The maximum risk positions of financial assets which are generally subject to credit risk are equal to their carrying amounts. The following table shows the maximum risk positions.

As at 31 March 2017 Notes Other non current

financial assets

Cash in hand and

at bank

Trade and other

receivables

Investments Total % of Allocation

Rs.'000s Rs.'000s Rs.'000s Rs.'000s Rs.'000s

Loans to Executives 7.1.2 942 - - - 942 -Trade and other receivables 7.1.3 - - 76,200 - 76,200 35%Short term investments 7.1.4 - - - 142,355 142,355 64%Cash in hand and at bank 7.1.4 - 1,117 - - 1,117 1%Total credit risk exposure 942 1,117 76,200 142,355 220,614 100%


7.1.1 Credit Risk Exposure

As at 31 March 2016 Other non current

financial assets

Cash in hand and

at bank

Trade and other

receivables

Investments Total % of Allocation

Rs.'000s Rs.'000s Rs.'000s Rs.'000s Rs.'000s

Loans to Executives 7.1.2 1,299 - - - 1,299 2%Trade and other receivables 7.1.3 - - 56,552 - 56,552 71%Short term investments 7.1.4 - - - 20,104 20,104 26%Cash in hand and at bank 7.1.4 - 367 - - 367 1%Total credit risk exposure 1,299 367 56,552 20,104 78,322 100%


7.1.2 Loans to Executives

Loans to Executive portfolio is made up of vehicle loans which are given to staff at Assistant Manager level and above. The Company has obtained the necessary promissory notes as collateral for the loans granted.

7.1.3 Trade and Other Receivables Trade and other receivables as at 31 March 2017 of Rs. 76.2 million (as at 31 March 2016 - Rs. 56.55 million) is neither past due nor impaired.

The Company has obtained customer deposits and promissory notes from major customers by reviewing their past performance and credit worthiness, as collateral.

The requirement for an impairment is analysed at each reporting date on an individual basis for major clients. Additionally, a large number of minor receivables are grouped into homogeneous groups and assessed for impairment collectively. The calculation is based on actual historical data.

7.1.4 Cash and Cash Equivalent and Short Term Investments

In order to mitigate concentration, settlement and operational risks related to cash and cash equivalents, the Company limits the maximum cash amount that can be deposited with a single counterparty. In addition, the Company maintains an authorised list of acceptable cash counterparties based on current ratings and economic outlook, taking into account analysis of fundamentals and market indicators. The Company held cash and cash equivalents of Rs. 143.47 million as at 31 March 2017 (2016 - Rs.20.24 million).

7.2 Liquidity Risk

The Company’s policy is to hold cash and undrawn committed facilities at a level sufficient to ensure that the Company has available funds to meet its medium term capital and funding obligations and to meet any unforeseen obligations and opportunities. The Company holds cash and undrawn committed facilities to enable the Company to manage its liquidity risk.

The Company monitors its risk to a shortage of funds using a daily cash management process. This process considers the maturity of both the Company’s financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.

The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of funding including short and long term bank loans, overdrafts and finance leases over a broad spread of maturities.

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7.2.1 Net (Debt) / Cash

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Short term investments 142,355 20,104

Cash in hand and at bank 1,117 367

Total liquid assets 143,472 20,471

Bank overdraft - (227)Total liabilities - 227

Net (debt) / cash 143,472 20,244

The Company has obtained banking facilities to the value of Rs. 250 million, which comprise of a short term loan facility of Rs. 100 million and an overdraft facility of Rs. 50 million from Hatton National Bank PLC, and an overdraft facility of Rs.100 million from Deutsche Bank. Of the total limit, there was no outstanding as at 31 March 2017. Hence, the total facility amount of Rs. 250 million is available for utilisation to finance any net debt.

7.2.2 Liquidity Risk Management

The mixed approach combines elements of the cash flow matching approach and the liquid assets approach. The Company attempts to match cash outflows in each time bucket against a combination of contractual cash inflows plus other inflows that can be generated through the sale of assets, repurchase agreement or other secured borrowing.

Maturity Analysis

The table below summarises the maturity profile of the Company’s financial liabilities at 31 March 2017 based on contractual undiscounted payments.

Within 1 year

Between 1-2 years

Between 2-3 years

Between 3-4 years

Between 4-5 years

More than 5 years

Rs. Rs. Rs. Rs. Rs. Rs.

Amounts due to related parties 3,079 - - - - -Other current financial liabilities 150,977 - - - - -

154,056 - - - - -



7.3 Market Risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate as a result of changes in market prices.

Market prices comprise four types of risk:

* Interest rate risk

* Currency risk

* Commodity price risk

* Equity price risk

The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return.

Sensitivity Analysis

The sensitivity analysis will only be applicable to the interest rate risk. Currency risk will not be applicable as the functional currency and the reporting currency are same which is the Sri Lankan Rupee. Equity price risk will not be applicable as the Company does not deal with equity instruments.

The sensitivity analysis relates to the position as at 31 March 2017 and 2016 of the Company.

The analyses excludes the impact of movements in market variables on: the carrying values of other post-retirement obligations; provisions: and the non-financial assets and liabilities.

The sensitivity of the relevant income statement item is the effect of the assumed changes in respective market risks. This is based on the financial assets and financial liabilities held as at 31 March 2017 and 2016.

7.4 Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations with floating interest rates. However, there were no long term debt obligations with floating interest rates as at 31 March 2017 and as at 31 March 2016.

8. Fair Value Measurements and Disclosures

The Company measures financial instruments and non-financial assets such as investment properties, at fair value at each reporting date. Fair value related disclosures for financial instruments and non-financial assets that are measured at fair value or where fair values are disclosed, are summarised in the following table:

Disclosures for valuation methods, significant estimates and assumptions Note 18.3, 18.4 & 20.3

Quantitative disclosures of fair value measurement hierarchy Note 8.2

Property, plant and equipment under revaluation model Note 18.3 & 18.4

Investment properties Note 20.3

Financial instruments (including those carried at amortised cost) Note 9

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8.1 Accounting Policy

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

* In the principal market for the asset or liability, or

* In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Company.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

* Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

* Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

* Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

The Company determines the policies and procedures for both recurring fair value measurement, such as investment properties and for non-recurring measurement.

External valuers are involved for valuation of significant assets, such as investment properties and land and buildings. Involvement of external valuer is decided upon annually by the Company after discussion with and approval by the Company’s Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained. The Company decides, after discussions with the Company’s external valuer, which valuation techniques and inputs to use for individual asset and liability.

At each reporting date, the Company analyses the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Company’s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.



The Company, in conjunction with the Company’s external valuer, also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

8.2 Fair Value Hierarchy

8.2.1 Financial Assets and Liabilities

The financial assets and liabilities held by the Company as at 31 March 2017 as given under Note 9.2 are carried at amortised cost where the fair value does not significantly vary from the value based on the amortised cost methodology for the Company.

8.2.2 Non Financial Assets

Level 1 Level 2 Level 3

As at 31 March Date of Valuation 2017 2016 2017 2016 2017 2016

Rs.'000s Rs.'000s Rs.'000s Rs.'000s Rs.'000s Rs.'000s

Assets measured at fair value

Land and buildings 31st March 2017 515,000 472,500Plant and machinery 31st March 2015 236,157 271,132

Investment property 31st March 2017 176,263 153,000

927,420 896,632

9. Financial Instruments and Related Policies


Initial Recognition and Subsequent Measurement

(i) Financial Assets

Initial Recognition and Measurement

Financial assets within the scope of LKAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition.

All financial assets are recognised initially at fair value plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e., the date that the Company commits to purchase or sell the asset.

The Company’s financial assets include cash and short-term deposits, short term investments, trade and other receivables, and loans and other receivables.

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(i) Financial Assets (Contd.)

Subsequent Measurement

The subsequent measurement of financial assets depends on their classification.

Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of profit or loss. The losses arising from impairment are recognised in the statement of profit or loss in finance costs.

Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:

* The rights to receive cash flows from the asset have expired * The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay

the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of it, the asset is recognised to the extent of the Company’s continuing involvement in it.

Impairment of Financial Assets

The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial Assets carried at Amortised Cost

For financial assets carried at amortised cost, the Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.


If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of profit or loss. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in the statement of profit or loss. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the statement of profit or loss.

(ii) Financial Liabilities

Initial Recognition and Measurement

Financial liabilities within the scope of LKAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, carried at amortised cost. This includes directly attributable transaction costs.

The Company’s financial liabilities include trade and other payables, bank overdrafts, and loans and borrowings.

Subsequent Measurement The measurement of financial liabilities depends on their classification.

Loans and Borrowings

After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method (EIR). Gains and losses are recognised in the statement of profit or loss when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance costs in the statement of profit or loss.

Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of profit or loss.

(iii) Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

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(iv) Fair Value of Financial Instruments

The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.

For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; a discounted cash flow analysis or other valuation models.

9.2 Financial Assets and Liabilities by Categories

Financial assets and liabilities in the tables below are split into categories in accordance with LKAS 39.

Financial Assets

As at 31 March Note 2017 2016

Rs.'000s Rs.'000s

Loans and receivables in non-current assets

Other non-current financial assets 22.1 942 1,299

Loans and receivables in current assets

Trade and other receivables 25 76,200 56,552

Short term investments 27 142,355 20,104

Cash in hand and at bank 28 1,117 367

Total Financial Assets 220,614 78,322

Financial Liabilities

Financial liabilities in current liabilities

Trade and other payables 34 150,977 122,181

Amounts due to related parties 35.1 3,079 2,563

Bank overdraft - 227

Total Financial Liabilities 154,056 124,971

The fair value of loans and receivable, and financial liabilities does not significantly vary from the value based on the amortised cost methodology for the Company.

9.3 Accounting Judgements, Estimates and Assumptions in Determining Fair Value of Financial Instruments Where the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible.

Where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include

considerations of inputs such as liquidity risk, credit risk and volatility.


NOTES TO STATEMENT OF PROFIT OR LOSS, STATEMENT OF COMPREHENSIVE INCOME AND STATEMENT OF FINANCIAL POSITION

10 Revenue


Revenue Recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company, and the revenue and associated costs incurred or to be incurred can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, net of trade discounts.

The following specific criteria are used for recognition of revenue.

Sale of Goods

Revenue from the sale of goods is recognised when the significant risk and rewards of ownership of the goods have passed to the buyer with the Company retaining neither a continuing managerial involvement to the degree usually associated with ownership, nor an effective control over the goods sold.

10.2 Total Revenue

For the Year Ended 31 March 2017 2016

Rs.'000s Rs.'000s

Gross revenue 2,349,641 1,946,116

Less - brokerage and handling charges (37,311) (33,275)

Net Revenue 2,312,330 1,912,841

11 Other Operating Income


Gains and Losses

Net gains and losses of a revenue nature arising from the disposal of property, plant and equipment and other non-current assets are accounted for in the statement of profit or loss, after deducting from the proceeds on disposal, the carrying amount of such assets and the related selling expenses.

Gains and losses arising from activities incidental to the main revenue generating activities and those arising from a group of similar transactions, which are not material are aggregated, reported and presented on a net basis.

Other Income Other income is recognised on an accrual basis

Rental Income Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the

lease terms.

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11.2 Total Other Income


Rs.'000s Rs.'000s

Sale of residual tea 16,145 11,316

Rent income 8,422 8,381

Amortisation of deferred grants 187 187

Profit on sale of property, plant and equipment 493 293

Net margin on sale of fertilizer 6,660 3,795

Sundry income 1,162 464

33,070 24,436

12 Management Fee


Rs.'000s Rs.'000s

Management fee to John Keells Teas (Private) Limited 29,274 16,205

29,274 16,205

13 Net Finance Income / Cost


Finance Income

Finance income comprises interest income earned from financial instruments such as short term deposits, short term investments and loans and receivables. Interest income is recorded as it accrues using the effective interest rate (EIR) which is the rate that exactly discounts the estimated future cash inflows through the expected life of the financial instrument or shorter period, where appropriate, to the net carrying amount of the financial asset.

Finance Costs

Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions that are recognised in the statement of profit or loss.

Interest expense is recorded as it accrues using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial liability.

Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to make available for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that the Company incurs in connection with the borrowing of funds.



13.2 Net Finance Income/ (Cost)


Rs.'000s Rs.'000s

Finance Income

Interest income on loans to green leaf suppliers 3,178 2,499

Interest income on staff vehicle loans 149 211

Interest income on short term investments 1,073 553

Total finance income 4,400 3,264

Finance Cost

Interest cost on short term borrowings 3,303 2,384

Total finance cost 3,303 2,384

Net Finance Income 1,097 880

14 Profit / (Loss) Before Tax


Expenditure Recognition

Expenses are recognised in the statement of profit or loss on the basis of a direct association between the cost incurred and the earning of specific items of income. All expenditure incurred in the running of the business and in maintaining the property, plant and equipment in a state of efficiency has been charged to the statement of profit or loss.

For the purpose of presentation of the statement of profit or loss, the “function of expenses” method has been adopted, on the basis that it presents fairly the elements of the Company.

Profit / (loss) before tax is stated after charging all expenses including the following;


Rs.'000s Rs.'000s

Remuneration to Non Executive Directors 3,777 3,600

Auditors’ remuneration;

Audit services 1,575 1,500

Non-audit services - -

Costs of defined employee benefits;

Defined benefit plan cost 8,466 7,777

Defined contribution plan cost - Providend Fund and ETF 22,607 21,857

Staff costs 113,077 102,294

Depreciation of property, plant and equipment 60,425 56,463

Amortisation of lease rentals paid in advance 86 86

Legal fees 26 609

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15 Basic Earnings / (Loss) per Share

The calculation of the basic earnings per share is based on after tax profit for the year divided by the weighted average number of ordinary shares outstanding during the period.

The following reflects the income and share data used in the basic earnings per share computation.


Net profit / (loss) applicable to ordinary shareholders - Rs. ‘000s 85,020 (8,762)

Weighted average number of ordinary shares in issue - No. of shares 30,000 30,000

Basic earnings per share - Rs. 2.83 (0.29)

16 Dividend per Share


Declared and paid during the year

First and final dividends* 15,000 15,000

15,000 15,000

*Previous year’s first and final dividend paid in the current year.

17 Taxes

17.1 Accounting policy

Current Tax

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.

Current income tax relating to items recognised directly in equity is recognised in equity and for items recognised in other comprehensive income shall be recognised in other comprehensive income and not in the statement of profit or loss. The management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred Tax

Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences.

Deferred tax assets are recognised for all deductible temporary differences, and unused tax credits and tax losses carried forward, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the unused tax credits and tax losses carried forward can be utilised.



17.1 Accounting policy (Contd.)

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the year when the asset is realised or liability is settled, based on the tax rates and tax laws that have been enacted or substantively enacted as at the reporting date.

Deferred tax relating to items recognised outside profit or loss is recognised outside profit or loss. Deferred tax items are recognised in correlation to the underlying transaction either in other comprehensive income or directly in equity.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and when the deferred taxes relate to the same taxable entity and the same taxation authority.

17.2 Tax Expense


Rs.'000s Rs.'000s

Current Income taxCurrent tax charge 17.6 18,929 578Under / (Over) provision of current tax in respect of previous years - 9

Deferred Income TaxRelating to origination and reversal of temporary differences 17.2.1 6,290 (12,331)Total tax expense / (reversal) 25,219 (11,744)

17.2.1 Deferred Tax Expense


Rs.'000s Rs.'000s

Income StatementDeferred tax expense arising from;Accelerated depreciation for tax purposes (3,515) 5,412Revaluation of investment property to fair value - 856Employee benefit liabilities (440) (348)Other deferred liabilities 52 52Losses available for offset against future taxable income 10,193 (18,304)Deferred tax charge 6,290 (12,331)

Other Comprehensive IncomeDeferred tax expense arising from;Revaluation of building to fair value 9,844 5,294Re-measurement gain on defined benefit plans (883) (60)Deferred tax charge 8,961 5,234

Deferred tax has been computed at the rate of 28%.

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17.3 Income Tax Payable / (Recoverable)

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At the beginning of the year (10,182) (10,714)Charge for the year 18,929 578Payments and set off against refunds - (55)Under / (over) provision of current tax in respect of previous years - 9At the end of the year 8,747 (10,182)

17.4 Deferred Tax Liability

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At the beginning of the year 157,160 164,257Charge / (release) for the year 6,290 (12,331)Tax effect on revaluations 9,844 5,294Tax effect on re-measurement gain on defined benefit plans (883) (60)At the end of the year 172,412 157,160

The closing deferred tax liability relates to the following;Revaluation of investment property to fair value 9,800 9,800Accelerated depreciation for tax purposes 187,346 181,016Employee benefit liability (11,831) (10,509)Other liabilities (216) (269)Deferred tax assets recognised on account of carry forward tax losses (12,686) (22,879)

172,412 157,160

17.5 Accounting Judgements, Estimates and Assumptions in Determining Tax Provisions Uncertainties exist with respect to the interpretation of tax regulations and the amount and timing of future taxable income. Given the wide range of business relationships and the long term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. Accordingly, based on such reasonable estimates the Company establishes the provisions to be made during the financial year.

17.6 Reconciliation between Tax Expense and the product of Accounting Profit


Rs.'000s Rs.'000s

Profit / (loss) before tax 110,239 (20,506)Profits not charged to income tax (23,263) (27,000)Adjusted accounting profit chargeable to income taxes 86,976 (47,506)Aggregate disallowable expenses 70,410 65,106Aggregate allowable expenses (53,381) (80,904)Utilisation of tax losses (36,402) (1,112)Current year tax losses not utilised - 66,482Taxable income 67,603 2,066

Income tax charged at standard rate of 28% 18,929 578Current tax charge 18,929 578



17.7 Reconciliation between Tax Expense and the product of Accounting Profit

For the Year Ended 31 March 2017 2016Rs.'000s Rs.'000s

Adjusted accounting profit / (loss) chargeable to income taxes 86,976 (47,506)

Tax effect on chargeable profits 24,353 (13,302)Tax effect on non deductible expenses 866 1,581Tax effect on deductions claimed - (24)Total tax expense 25,219 (11,744)

17.8 Tax Losses carried Forward

As at 31 March 2017 2016Rs.'000s Rs.'000s

Tax losses brought forward 81,710 16,340

Tax losses arising during the year - 66,482Utilisation of tax losses (36,402) (1,112)Tax losses carried forward 45,308 81,710

18 Property, Plant and Equipment


Basis of Recognition

Property, plant and equipment are recognized if it is probable that future economic benefits associated with the asset will flow to the Company and the cost of the asset can be reliably measured.

Basis of Measurement

Items of property, plant and equipment are measured at cost (or fair value in the case of land and building, and plant and machinery) less accumulated depreciation and accumulated impairment losses, if any. The cost of property, plant and equipment includes expenditures that are directly attributable to the acquisition of the asset and any other cost directly attributable to bring the asset to a working condition for its intended use.

Land and buildings, and plant and machinery are measured at fair value less accumulated depreciation on buildings, plant and machinery and impairment charged subsequent to the date of the revaluation.

The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

Where land and buildings and plant and machinery are subsequently revalued, the entire class of such assets is revalued at fair value on the date of revaluation.

Any revaluation surplus is recognised in other comprehensive income and accumulated in equity in the asset revaluation reserve, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of profit or loss, in which case the increase is recognised in the statement of profit or loss. A revaluation deficit is recognised in the statement of profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve.

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18.1 Accounting Policy (Contd.)

Accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. The Company has adopted a policy of revaluing land and building by external valuer and plant and machinery by an internal valuer at least every 5 years, except for properties held for rental, which are revalued by external valuer at least every 3 years.

Derecognition

An item of property, plant and equipment are derecognised upon replacement, disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset is included in the statement of profit or loss in the year the asset is derecognised.

Depreciation

Depreciation is calculated by using a straight-line method on the cost or valuation of all property, plant and equipment, other than freehold land, in order to write off such amounts over the estimated useful economic life of such assets.

The estimated useful life of assets is as follows:

Assets Years

Buildings 40

Plant and machinery 10

Furniture and fittings 10

Motor vehicles 5

Equipment 10

Computer Equipment 3

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each financial year end.

Impairment of Property, Plant and Equipment

The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.



18.2

C

arry

ing

Val

ue o

f Pro

pert

y, P

lant

and

Equ

ipm

ent

Free

hold

Land

at

Valu

atio

n

Leas

ehol

d

Land

at

Valu

atio

n

Build

ings

on

Free

hold

Land

at

Valu

atio

n

Plan

t and

Mac

hine

ry

at

Valu

atio

n

Furn

iture

,

Fitti

ngs

and

Equi

pmen

t

Mot

or

Vehi

cles

Com

pute

r

Equi

pmen

t

Capi

tal

Wor

k in

Prog

ress

Tota

l

2017

Tota

l

2016

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Rs.'0

00s

Cost

or V

alua

tion

Bala

nce

as a

t 1 A

pril

2016

43,5

001,

000

428,

000

307,6

1928

,995

102,

146

9,53

149

992

1,29

185

8,72

3Ad

ditio

ns

- -

2,20

74,

054

944

319

2,08

013

,224

22,8

2810

8,62

4Re

valu

atio

ns

18,5

0031

35,1

59-

--

--

53,6

9021

,937

Dis

posa

ls-

--

-(2

6)(1

,050

)(3

30)

-(1

,406

)(4

69)

Tran

sfer

red

due

to re

valu

atio

n-

(31)

(13,

366)

--

--

-(1

3,39

7)(1

2,73

6)Tr

ansf

ers

in /

(out

)-

--

--

--

(10,

103)

(10,

103)

(54,

789)

Bala

nce

as a

t 31

Mar

ch 2

017

62,0

001,

000

452,

000

311,

673

29,9

1310

1,41

511

,280

3,62

097

2,90

292

1,29

1

Acc

umul

ated

Dep

reci

atio

n an

d Im

pairm

ent

Bala

nce

as a

t 1 A

pril

2016

-

-

-

36,4

8620

,059

85,5

707,

671

-

149,

786

106,

505

Char

ge fo

r the

yea

r -

31

13,3

6639

,029

1,72

84,

935

1,33

6 -

60

,425

56,4

63

On

disp

osal

s -

-

-

-

(2

4)(1

,050

)(3

30)

-

(1,4

04)

(446

)

Tran

sfer

red

due

to re

valu

atio

n -

(3

1)(1

3,36

6) -

-

-

-

-

(1

3,39

7)(1

2,73

6)

Bala

nce

as a

t 31

Mar

ch 2

017

-

-

-

75,5

1621

,762

89,4

558,

676

-

195,

410

149,

786

Carr

ying

Val

ue

As

at 3

1 M

arch

201

762

,000

1,00

045

2,00

023

6,15

78,

151

11,9

602,

604

3,62

077

7,492

771,

505

As

at 3

1 M

arch

201

643

,500

1,00

042

8,00

027

1,13

28,

937

16,5

761,

860

499

771,

505

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18.3 Accounting Judgements, Estimates and Assumptions related to Revaluation of Land and Buildings

The Company measures land and building at revalued amounts with changes in fair value being recognised in other comprehensive income and in the statement of changes in equity. The Company engaged independent valuation specialist to determine fair value of land and buildings as at 31 March 2017.

The freehold land, leasehold land, building on freehold land and pre cast concrete structure for eight factories were revalued by Mr. K.T.D. Tissera, Chartered Valuation Surveyor as of 31 March 2017 and the results of such valuation have been incorporated in these financial statements as at that date. Such assets were valued on the basis of Land and Building method, Contractors Test method. Fair value is determined by reference to market-based evidence. The surplus arising from the revaluation has been transferred to the revaluation reserve.

The fair value of land and buildings as at 31 March 2017 is Rs. 515 million (as at 31 March 2016 - Rs. 472.5 million)

Information on fair value measurement on land and building as at 31 March 2017 using significant unobservable inputs (level 3) is given below.

Type of Asset Fair Value as at 31 March 2017 -

Rs.'000s

Method of Valuation

Significant Unobservable

Inputs

Estimates for Unobservable

Inputs (Weighted

Average)

Sensitivity of Fair Value to Unobservable Inputs

Land 63,000Market Approach

Estimated price per perch

Rs.6,001/- per perch

Positively correlated sensitivity

Buildings 452,000Market Approach

Estimated price per square foot

Rs.1,041/- per square foot


515,000



18.4 Accounting Judgements, Estimates and Assumptions related to Revaluation of Plant and Machinery

The Company uses the revaluation model of measurement of plant and machinery. Plant and machinery of the eight factories were revalued internally by the Engineer as at 31 March 2015 and results of such valuation had been incorporated in the financial statements as at that date. Such assets were valued based on Cost Approach (Current Replacement Cost) due to the fact of unavailability of market information for the plant & machinery being valued and the source of information for comparison from the market. The surplus from the revaluation has been transferred to the revaluation reserve as at that date.

The fair value of plant and machinery as at 31 March 2017 is Rs. 236.16 million (as at 31 March 2016 - Rs. 271.13 million)

Information on fair value measurement on plant and machinery as at 31 March 2017 using significant unobservable inputs (level 3) is given below.

Type of Asset Fair Value as at 31 March 2017 - Rs.'000s

Method of Valuation


Inputs


Inputs (Weighted

Average)


Plant and machinery 236,157

Current Replacement Cost

Estimated replacement cost adjusted for wear and tear

Based on number of years of usage

Negatively correlated sensitivity

18.5 Carrying Value of total Property, Plant and Equipment

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At cost 26,335 23,682

At valuation 751,157 743,632

On hire purchase contract (Refer Note 19.3) - 4,191

777,492 771,505

18.6 The carrying amount of revalued land and buildings, and plant and machinery if they were carried at cost less depreciation, would be as follows;

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Cost 743,344 739,290

Accumulated depreciation and impairment (418,815) (365,545)

Carrying value 324,529 373,745

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18.7 The cost of fully depreciated assets, but still in use of the Company amounts to Rs 72.54 million as of 31 March 2017 (As at 31 March 2016 - Rs. 64.74 million).

19 Leases

Accounting Policy

The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.

For arrangements entered into prior to 1 April 2011, the date of inception is deemed to be 1 April 2011 in accordance with the SLFRS 1.

Finance leases which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the statement of profit or loss.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.

19.1 Leasehold Property / Lease Rentals Paid in Advance

19.1.1 Accounting Policy

Leasehold property comprising of land use rights obtained on a long term basis, is stated at the recorded carrying values as at the effective date of LKAS 17 - Leases in line with the Ruling of the Urgent Issues Task Force (UITF) of the Institute of Chartered Accountants of Sri Lanka. Such carrying amounts are amortised over the remaining lease term or useful life of the lease property whichever is shorter. However, the UITF ruling issued prior to 1 January 2012 has been superseded by the Sri Lanka Accounting Framework with effect from 1 January 2012.

Prepaid lease rentals paid to acquire land use rights are amortised over the lease term in accordance with the pattern of benefits provided. The capitalisation of the prepaid lease rentals of such nature under property, plant and equipment was abolished with the application of the Accounting Framework with effect from 1 January 2012.

Prepaid lease rentals paid to acquire land use rights have been classified as lease rental paid in advance and are amortised over the lease term in accordance with the pattern of benefits provided.



19.1.2 Lease Rental Paid in Advance

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Balance at the beginning of the year 2,741 2,826Amortisation for the year (86) (86)Balance at the end of the year 2,655 2,741

The remaining period of lease for the leasehold property is 30 years.

19.2 Depreciation and Amortisation


Rs.'000s Rs.'000s

On assets at cost 7,999 4,416On assets at valuation 52,426 49,222On hire purchase assets - 2,911Total 60,426 56,549

19.3 Finance leases / Hire Purchase Contracts

The motor vehicles purchased under Hire Purchase contract is fully depreciated as at 31 March 2017 (as at 31 March 2016 - Rs. 4.1 million .There were no additions under Hire Purchase or Lease contract during the year under review.

19.4 Assets Pledged for Securities

No assets have been pledged for facilities obtained by the Company as at 31 March 2017.

20 Investment Property20.1 Accounting Policy

Investment properties are measured initially at cost, including transaction costs. The carrying value of an investment property includes the cost of replacing part of an existing investment property, at the time that cost is incurred if the recognition criteria are met, and excludes the costs of day-to-day servicing of the investment property. Subsequent to initial recognition, the investment properties are stated at fair values, which reflect market conditions at the reporting date.

Gains or losses arising from changes in fair value are included in the statement of profit or loss in the year in which they arise. Fair values are evaluated at frequent intervals by an accredited external, independent valuer.

Investment properties are derecognised when disposed, or permanently withdrawn from use because no future economic benefits are expected. Any gains or losses on retirement or disposal are recognised in the statement of profit or loss in the year of retirement or disposal.

Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied property or inventory (WIP), the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner occupied property becomes an investment property or inventory (WIP), the Company accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use.

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20.2 Carrying Value of Investment Property

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At the beginning of the year 153,000 126,000

Change in fair value during the year 23,263 27,000

At the end of the year 176,263 153,000

20.3 Accounting Judgements, Estimates and Assumptions related to Valuation of Investment Property

Fair value of the investment property is ascertained by an independent valuation carried out by Messrs P. B. Kalugalagedara & Associates - Chartered Valuation Surveyors as at 31 March 2017. Investment property was appraised in accordance with LKAS 40 and 8th edition of International Valuation Standards published by the International Valuation Standards Committee (IVSC), by the independent valuer.

In determining the fair value, the current condition of the properties, future usability and associated redevelopment requirements have been considered. Additionally the valuer has made reference to market evidence of transaction prices for similar properties, with appropriate adjustments for size and location. The appraised fair values are approximated within appropriate range of values.

Information on fair value measurement on investment property (Peliyagoda warehouse situated at No. 77, New Nuge Road, Peliyagoda) as at 31 March 2017 using significant unobservable inputs (level 3) is given below.

Type of Asset Fair Value as at 31 March 2017

- Rs.'000s

Method of Valuation


Inputs


Inputs (Weighted

Average)


Land 141,263Market Approach

Estimated price per perch

Rs. 900,000/- per perch


Buildings 35,000Market Approach

Estimated price per square foot

Rs.1,100/- per square foot


176,263

20.4 Rental Income earned and direct operating expenses incurred on Investment Property


Rs.'000s Rs.'000s

Rental income 8,422 8,381

8,422 8,381

* The Company has not incurred any direct operating expenses in the current year as well as in the previous year in connection with the investment property.



21 Intangible Assets

21.1 Accounting Policy Basis of Recognition

Intangible asset is an identifiable non-monetary asset without physical substance held for use is the production or supply of goods or services, for rental or for administrative purposes. An intangible asset is recognised if it is probable that future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be measured reliably in accordance with LKAS 38 on Intangible Assets.

Basis of Measurement Intangible assets acquired separately are measured on initial recognition at cost.

Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses.

Internally generated intangible assets, excluding capitalised development costs, are not capitalised, and expenditure is charged against statement of profit or loss in the year in which the expenditure is incurred.

Useful Economic lives, Amortization and Impairment

The useful lives of intangible assets are assessed as either finite or indefinite lives. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end and such changes are treated as accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss.

Intangible assets with indefinite useful lives are not amortised but tested for impairment annually, or more frequently when an indication of impairment exists either individually or at the cash generating unit level. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

21.2 Carrying Value of Goodwill

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Cost / Carrying ValueAt the beginning of the year 16,228 16,228Impairment At the end of the year 16,228 16,228Accumulated Amortisation At the beginning of the year (8,926) (8,926)Impairment - - At the end of the year (8,926) (8,926)Carrying Value 7,303 7,303

The Company carried out a test on impairment of Goodwill at 31 March 2017 and there was no impairment loss requiring adjustments during the year. The recoverable amount of the Cash Generating Unit (CGU) has been determined based on the fair value less cost to sell or the Value in Use (VIU) calculation.

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21.3 Significant Accounting judgements, estimates and Assumptions on Impairment of Intangible Assets

Key assumptions used in the VIU calculations

Gross Margins

The basis used to determine the value assigned to the budgeted gross margins is the gross margins achieved in the year preceding the budgeted year adjusted for projected market conditions.

Discount Rates

The discount rate used is 15% which is the risk free rate, adjusted by the addition of an appropriate risk premium.

Inflation

The basis used to determine the value assigned to the budgeted cost inflation, is the inflation rate, based on projected economic conditions.

Volume Growth

Volume growth has been budgeted on a reasonable and realistic basis by taking into account the growth rates of one to four years immediately subsequent to the budgeted year based on industry growth rates. Cash flows beyond the five year period are extrapolated using 0% growth rate.

22 Other Non - Current Financial Assets

22.1 Loans to Executives

As at 31 March 2017 2016

Rs.'000s Rs.'000s


Loans granted - -

Recoveries (646) (615)


Receivable within one year 315 604

Receivable between one and five years 942 1,2991,257 1,903

23 Other Non-Current Assets

23.1 Prepaid Staff Cost

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At the beginning of the year 195 271

Additions - -

Amortisation (73) (77)

At the end of the year 122 195



24 Inventories


Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price less estimated costs of completion and the estimated costs necessary to make the sale.

The costs incurred in bringing inventories to its present location and condition, are accounted for as follows: Raw materials - Weighted average basis on actual cost

Produce Inventories and work-in-progress - At the cost of direct materials, direct labour and an appropriate proportion of fixed production overheads based on normal operating capacity but excluding borrowing costs Other inventories - At actual cost

24.2 Carrying Value of Inventories

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Fertilizer stock 9,285 12,248

Consumables and spares 12,642 14,193

Produce stocks 194,516 180,908

216,443 207,349

25. Trade and Other Receivables

As at 31 March Notes 2017 2016

Rs.'000s Rs.'000s

Trade and other receivables 78,006 57,391

Provision for impairment 25.1 (2,121) (1,443)

75,885 55,948

Current portion of loans to Executives 315 60476,200 56,552

25.1 Provision for Impairment

As at 31 March 2017 2016

Rs.'000s Rs.'000s


Provision for the year 678 215

Recoveries / write offs - -


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26. Other Current Assets

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Non financial assets 1,689 2,257

ESC recoverable 2,492 2,492

4,182 4,750

27. Short Term Investments

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Savings - Bank of Ceylon and People’s bank 5,675 4

Fixed deposit - Bank of Ceylon 1,000 -

Repurchase agreements - People’s bank - 20,100

Overnight call deposit - Deutsche bank 135,680 -

142,355 20,104

28. Cash in Hand and at Bank

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Cash at bank 1,080 327

Cash in hand 30 33

Stamp balance 7 7

1,117 367

29. Stated Capital

As at 31 March 2017 2016

Number of Value of Number of Value of

Shares Shares Shares Shares

In '000s Rs.'000s In '000s Rs.'000s

Issued and fully paid Ordinary Shares 30,000 150,000 30,000 150,000

30,000 150,000 30,000 150,000



30. Revaluation Reserve

As at 31 March 2017 2016

Rs.'000s Rs.'000s


Transfers during the year - -

Net revaluation gain / (loss) 43,845 16,643


The above revaluation reserve consists of net surplus resulting from the revaluation of property, plant and equipment as described in Note 18.3 to these financial statements. This unrealised amount cannot be distributed to shareholders.

31. Revenue ReservesAs at 31 March 2017 2016

Rs.'000s Rs.'000s

General reserve 255,000 255,000

Accumulated profits 213,966 146,217

468,966 401,217

32. Employee Benefit Liabilities


Defined Contribution Plan - Employees’ Providend and Employees’ Trust Fund Employees are eligible for Employees’ Provident Fund contributions and Employees’ Trust Fund contributions in line with respective statutes and regulations. The companies contribute the defined percentages of gross emoluments of employees to an approved Employees’ Provident Fund and to the Employees’ Trust Fund respectively, which are externally funded.

Employee Defined Benefit Obligation – Retirement Gratuity

The liability recognised in the statement of financial position is the present value of the defined benefit obligation at the reporting date using the projected unit credit method. Any actuarial gains or losses arising from experience adjustment and changes in actuarial assumptions are recognised immediately in the other comprehensive income.

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32.2 Carrying Value of Employee Defined Benefit Obligation – Retirement Gratuity

As at 31 March 2017 2016

Rs.'000s Rs.'000s


Current service cost 4,525 4,169

Interest cost on benefit obligation 3,941 3,608

Payments (6,896) (6,534)

(Gain) / loss arising from changes in assumptions or due to

(over) / under provision in the previous year 3,154 214


The employee benefit liability as at 31 March 2017 of the Company is based on the actuarial valuations carried out by Messrs. Actuarial & Management Consultants (Pvt) Ltd., actuaries. If the Company had provided for gratuity on the basis of fourteen days wages and half month salary for each completed year of service for workers and staff respectively, the liability would have been Rs. 43.05 million. Hence, there is a contingent liability of Rs. 0.8 million which would crystallize only if the Company ceases to be a going concern.

The expenditure in relation to retirement gratuity for the years ended 31 March are recognised in the statement of profit or loss in the following line items;

2017 2016

Rs.'000s Rs.'000s

Cost of sales 6,261 6,104

Administrative expenses 2,205 1,672

8,466 7,776

The actuarial gain on defined benefit obligation has been recognised in the statement of comprehensive income in terms of the provision in LKAS 19.

32.3 Significant Accounting Judgement, Estimates and Assumptions - Employee Defined Benefit Obligation

The employee benefit liability of the Company is based on the actuarial valuation carried out by an Independent actuarial specialist. The actuarial valuations involve making assumptions about discount rates and future salary increases. The complexity of the valuation, the underlying assumptions and its long term nature, the defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.

The principal assumptions used in determining the cost of employee benefits were:

2017 2016

Discount rate (per annum) 9.50% 10.50%

Future salary increases - Staff (per annum) 10.00% 9.00%

- Workers (Once in every two years) 20.00% 20.00%



32.4 Sensitivity of Assumptions used

A qualitative sensitivity analysis for significant assumptions as at 31 March 2017 is shown below.

Discount Rate Future Salary Increment Rate

Sensitivity level Increase Decrease Increase Decrease

1% 1% 1% 1%

Impact on defined benefit obligation - Rs.'000s (1,467) 1,596 1,137 (1,071)

32.5 Maturity Profile of the Defined Benefit Obligation as at 31 March 2017

Future Working Life TimeDefined Benefit Obligation - Rs.’000s

Staff Workers Total

Within the next 12 months 5,967 7,615 13,582

Between 1 - 2 years 3,337 5,268 8,606

Between 2 - 5 years 4,735 5,449 10,185

Between 5 - 10 years 3,766 3,719 7,485

Beyond 10 years 1,307 1,091 2,397

Total 19,112 23,143 42,255

The average duration of the defined benefit plan obligation as at 31 March 2017 is 4.28 years for Staff and 3.62 years for Workers.

33. Other Deferred Liabilities

Government Grants The following represents grants received from the Sri Lanka Tea Board under modernization of tea factories such as

automation of manufacturing process and requirements under CQC certification.

As at 31 March 2017 2016

Rs.'000s Rs.'000s

At the beginning of the year 960 1,147

Amortisation (187) (187)

At the end of the year 773 960

34. Trade and Other Payables

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Trade payables 117,873 84,465

Sundry creditors and accrued expenses 31,190 35,964

Unclaimed dividend 1,914 1,751

150,977 122,181

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35. Related Party Transactions The Company carried out transactions in the ordinary course of business with parties who are defined as Related

Parties in Sri Lanka Financial Reporting Standard 24 - Related Party Disclosures, the details of which are reported below. The consideration for the goods and services provided has been paid or accrued at market prices prevailing at the time.

There are no related party transactions or investments in related parties exceeding the lower of 10% of equity or 5% of the total assets of the Company for the year ended 31 March 2017.

35.1 Amounts Due to Related Parties

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Parent CompanyJohn Keells Holdings PLC 211 150

Companies Under Common ControlMackinnon's Keells Limited 303 254Keells Consultants (Private) Limited 97 37Infomate (Private) Limited 6 - John Keells Office Automation (Private) limited 15 -Whittal Bousted (Private) Limited 71 62John Keells Teas (Private) Limited 2,376 2,060

3,079 2,563

35.2 Transactions with Related Parties


Rs.'000s Rs.'000s

Parent Company Receiving of services (1,643) (1,461)

Companies Under Common Control of the Parent CompanyPurchases of goods (57) (226)Sale of goods 130 130Receiving of services (45,138) (35,555)Rent paid (2,252) (1,821)

Companies which have Significant InfluenceReceiving of services - (3,143)Purchases of goods (1,309) (1,387)Interest paid - (288)



35.3 Transactions with Key Management Personnel of the Company

The Company has paid Rs. 3.78 million (2015 / 2016 - Rs. 3.6 million) to their Directors as fees during the year. Other than that there are no transactions, arrangements and agreements with close family members of Key Management Personnel or with companies controlled / jointly controlled / significantly influenced by Key Management Personnel and their close family members.

35.4 Terms and Conditions of Transactions with Related Parties Transaction with related parties are carried out in the ordinary course of business. Outstanding current account balances at year end are unsecured, interest free and settlement occurs in cash.

35.5 Management Fee

The management fee to managing agents, John Keells Teas (Private) Limited was paid at the contractual price.

36. Other Current Liabilities

As at 31 March 2017 2016

Rs.'000s Rs.'000s

Other payables 4,422 3,911

4,422 3,911

37. Bank Overdraft

As at 31 March 2017 2016

Rs.'000s Rs.'000s

People's Bank - 227

- 227

38. Contingent Liabilities

Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of profit or loss net of any reimbursement.

If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

All contingent liabilities are disclosed unless the outflow of resources is remote. There is no contingent liability of the Company as at the reporting date other than those disclosed under Note 32.2 of the financial statements.

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39. Capital Commitment The value of contractual commitments for acquisition of property, plant and equipment as at 31 March 2017

is Rs.22.03 million (as at 31 March 2016 - Rs. 0.3 million).

40. Assets Pledged as Security

No assets have been pledged for facilities obtained by the Company as at 31 March 2017.

41 Events After the Reporting Period

The Board of Directors of the Company has declared a first and final dividend of Rs. 1.70 per share for the financial year ended 31 March 2017. As required by Section 56(2) of the Companies Act No. 7 of 2007, the Board of Directors has confirmed that the Company satisfies the Solvency Test in accordance with Section 57 of the Companies Act No. 7 of 2007 and has obtained a certificate from the auditors, prior to declaring a first and final dividend which is to be paid on 14th June 2017.

In accordance with the LKAS 10, Events After the Reporting Period, the first and final dividend has not been recognised as a liability in the financial statements as at 31 March 2017.



Statement of Economic Value Added

Year Ended 31 March 2017 2016 2015 2014 2013

Rs'000s % Rs'000s % Rs'000s % Rs'000s % Rs'000s %DIRECT ECONOMIC VALUE GENERATED

Turnover 2,312,330 1,912,841 2,517,818 2,675,751 2,425,787

Finance Income 4,400 3,264 5,136 4,716 4,243

Other Income 33,070 24,436 57,889 37,174 34,316

Valuation gain on Investment Property

23,263 27,000 7,869 7,860 8,272

2,373,063 1,967,541 2,588,712 2,725,500 2,472,618

ECONOMIC VALUE DISTRIBUTED

Operating Cost 1,850,224 88% 1,534,893 87% 2,096,500 89% 2,224,826 89% 2,039,817 89%

Employees Wages and Benefits 211,131 10% 211,919 12% 220,838 9% 206,731 8% 193,621 8%

Payments to Government as Taxes 18,929 1% 578 0% 918 0% 22,846 1% 23,131 1%

Payments to Providers of Funds 18,303 1% 17,384 1% 40,132 2% 44,833 2% 43,606 2%

2,098,587 1,764,775 2,358,388 2,499,236 2,300,175

ECONOMIC VALUE RETAINED

Depreciation 60,511 56,549 60,192 62,685 63,197

Profit Retained 213,965 146,217 170,132 163,579 109,246

274,476 202,765 230,324 226,264 172,443

Above data has been derived from the audited financial statements that were prepared based on Sri Lanka Accounting Standards (SLFRS / LKAS).

The total economic value generated for 2016 / 2017 of Rs. 2.37 billion which was an increase of 21 percent compared to Rs. 1.97 billion in 2015 / 2016.

The total value distributed in 2016 / 2017 was Rs. 2.10 billion of which 88 percent was spent on operating cost.

The Company retained 12 percent of the value generated in 2016 / 2017 for development and investment.

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Information to Shareholders and Investors 1. STOCK EXCHANGE LISTING

The issued ordinary shares of Tea Smallholder Factories PLC was listed with the Colombo Stock Exchange on 01st August 1996. The audited accounts of the Company for the year ended 31st March 2017 have been submitted to the Colombo Stock Exchange.

2. DISTRIBUTION OF ORDINARY SHAREHOLDERS

No. of Shares held 31st March 2017 31st March 2016

Shareholders Holdings Shareholders Holdings

Number % Number % Number % Number %

Less than or equal to 1000 859 73.42 200,034 0.67 844 72.20 201,460 0.67

1,001 10,000 280 23.93 863,871 2.88 294 25.15 885,327 2.95

10,001 100000 25 2.14 682,183 2.27 25 2.14 659,301 2.20

100,001 1,000,000 2 0.17 861,420 2.87 2 0.17 861,420 2.87

Over 1,000,000 4 0.34 27,392,492 91.31 4 0.34 27,392,492 91.31

Total 1,170 100.00 30,000,000 100.00 1,169 100.00 30,000,000 100.00

3. ANALYSIS OF SHAREHOLDERS

No. of Shares held 31st March 2017 31st March 2016

Shareholders Holdings Shareholders Holdings

Number % Number % Number % Number %

Individuals 1,110 94.87 2,040,428 6.80 1,114 95.30 2,050,694 6.84

Institutions 60 5.13 27,959,572 93.20 55 4.70 27,949,306 93.16

Total 1,170 100.00 30,000,000 100.00 1,169 100.00 30,000,000 100.00

Residents 1,161 99.23 29,976,213 99.92 1,159 99.14 29,974,213 99.91

Non Residents 9 0.77 23,787 0.08 10 0.86 25,787 0.09

Total 1,170 100.00 30,000,000 100.00 1,169 100.00 30,000,000 100.00

Public Shareholding 1,165 99.57 9,913,508 33.05 1,164 99.57 9,913,508 33.05

Non - Public Shareholding 5 0.43 20,086,492 66.95 5 0.43 20,086,492 66.95

Total 1,170 100.00 30,000,000 100.00 1,169 100.00 30,000,000 100.00


4. TWENTY LARGEST SHAREHOLDERS OF THE COMPANY

31st March 2017 31st March 2016

Name

No. of

Shares Held

% Holdings No. of

Shares Held

% Holdings

1 John Keells Holdings PLC 11,286,000 37.62 11,286,000 37.62

2 Akbar Brothers Limited 7,318,000 24.39 7,318,000 24.39

3 Central Finance Company PLC 6,854,814 22.85 6,854,814 22.85

4 CF Growth Fund Limited 1,933,678 6.45 1,933,678 6.45

5 Mr. K. D. S. R. Upasena 469,120 1.56 469,120 1.56

6 Anverally and Sons (Private) Limited 392,300 1.31 392,300 1.31

7 Mr. D. J. De Silva Wijeyeratne 98,400 0.33 98,400 0.33

8 Mr. N. D. Kurukulasuriya 62,400 0.21 62,400 0.21

9 Dr. D. S. A. Samaraweera 53,000 0.18 53,000 0.18

10 Mrs. R. Z. Wickramanayake 44,963 0.15 44,963 0.15

11 Dr. N. I. Wickramanayake 43,691 0.15 43,691 0.15

12 Mr. M. D. S. Goonatilleke 38,527 0.13 - -

13 People's Leasing & Finance / L. P. Hapangama 27,449 0.09 27,449 0.09

14 Mr. C. N. Lawrence 24,000 0.08 24,000 0.08

15 Mr. T. G. Rodrigo and Mr. R. S. Punchihewa 21,650 0.07 21,650 0.07

16 Mr. T. G. Rodrigo and Mr. M. P. A. Salgado 21,650 0.07 21,650 0.07

17 Asha Financial Services Limited / Mr. C. N. Pakianathan

20,545 0.07 20,545 0.07

18 Mrs. Jacintha Aloysius 20,000 0.07 20,000 0.07

19 Mr. N. J. H. M. Cooray 20,000 0.07 20,000 0.07

20 Mrs. S. K. Leelananda 20,000 0.07 20,000 0.07

Total 28,770,187 95.92 28,731,660 95.79

Note - The percentage of public shareholding is stated on page 146 under “Analysis of Shareholders”.

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5 RELEVANT INTEREST IN SHARES AND SHARE DEALINGS

The relevant interest of the Directors and Chief Executive Officer in the shares of the Company as at 31st March 2017 are as follows.

As at 31st March 2017 2016

No. of Shares No. of Shares

Mr. S. C. Ratnayake Nil Nil

Mr. A. D. Gunewardene Nil Nil

Mr. J. R. F. Peiris Nil Nil

Mr. E. H. Wijenaike 10,000 10,000

Mr. R. E. Rambukwella Nil Nil

Mr. A. S. Jayatilleke Nil Nil

Mr. J. S. Ratwatte 2,000 2,000

Mr. R. Seevaratnam Nil Nil

Mr. M. H. De Silva - Appointed with effect from 6th February 2017 Nil Nil

Mr. V. A. A. Perera (CEO) Nil Nil

6. MARKET VALUEFor the year ended 31st March 2017 2016 2015 2014

Rs. Rs. Rs. Rs.

Highest Price 36.10 43.40 55.00 54.40

Lowest Price 20.00 18.00 34.00 30.10

As at Year End 24.00 19.50 39.50 35.00

Market capitalisation (Rs. Million) 720 585 1,185 1,050

7. DIVIDENDS PER SHARE First and final dividend of Rs. 1.70 per share for the year ended 31 March 2017 will be paid on 14th June 2017.

8. TRADING STATISTICS For the year ended 31st March 2017 2016

No. of Trades 492 559

No. of Shares Traded 140,804 156,661

Value of Traded Shares - Rs. 3,518,378 5,300,921

Information to Shareholders and Investors


9. RATIOS AND STATISTICS

For the year ended 31st March 2017 2016 2015 2014 2013

No. of shares in issue (In '000s) 30,000 30,000 30,000 30,000 30,000

Earnings per Share (EPS) - (Rs.) 2.83 (0.29) 1.20 2.72 2.80

EPS growth (%) 1,076 (124) (56) (3) 7,100

Price earning ratio (No. of times) 8.47 (66.77) 32.92 12.89 16.04

Dividend payout ratio (%) 17.6 (171.2) 83.3 36.8 35.7

Pre-tax return on capital employed (Pre-tax ROCE) (%) 7.7 (1.3) 2.8 9.4 8.9

Return on equity (ROE) (%) 5.8 (0.6) 2.7 6.4 7.5

Net assets per share (Rs.) 34.08 30.36 30.60 28.68 26.86

Market price per share (Rs.) 24.00 19.50 39.50 35.00 45.00

Market capitalisation (Rs.'000s) 720,000 585,000 1,185,000 1,050,000 1,350,000

Dividend per Share (Rs.) 0.50 0.50 1.00 1.00 1.00

Dividend Yield (%) 2.08 2.56 2.53 2.86 2.22

Dividend per Share and Dividend Yield

2013

2014

2015

2016

2017

0.0

0.5

1.0

1.5

2.0

2.5

3.0

DPS (Rs.) Dividend Yield (%)

Earnings Per Share Rs.

2013

2014

2015

2016

2017

2.8

2.72 1.

2

-0.2

9

2.83

Shareholders' FundsRs.Million

2013

2014

2015

2016

2017

1,02

2

911

918

860

806

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0.6

0.9

1.2

1.5

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Market Price To Book Value 2016/17 Vs 2015/16

Tim

es

2016/2017 2015/2016

Share Prices - 2016 / 2017Rs.

05

101520253035

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb MarCompany Share Price - Rs.

0

5,000

10,000

15,000

20,000

25,000

Sector Index - Rs.

Market Behaviour During the Year 2016 / 2017

Gross Sales Average for 1 kg of Made Tea - Rs. per kilogram

Month Company Average

Low Grown Elevational

Average

Premium Achieved by the Company

Rs. %

Apr 443.51 437.20 6.31 1.44

May 476.89 468.37 8.52 1.82

Jun 479.24 461.30 17.94 3.89

Jul 480.06 477.14 2.92 0.61

Aug 516.86 499.22 17.64 3.53

Sep 541.88 538.25 3.63 0.67

Oct 580.95 572.64 8.31 1.45

Nov 617.57 603.91 13.66 2.26

Dec. 600.45 593.36 7.09 1.19

Jan. 606.91 601.38 5.53 0.92

Feb. 606.49 604.22 2.27 0.38

Mar 652.96 648.90 4.06 0.63

Cumulative 549.60 542.29 7.31 1.35

Company Share Price

Sector Index All Share Price Index

Rs. Rs. Rs.

30.60 21,679.97 6,442.53

27.20 22,812.42 6,550.51

25.20 22,317.98 6,283.27

25.70 21,893.14 6,393.87

25.60 22,147.25 6,541.80

23.10 21,179.52 6,451.61

23.00 20,994.66 6,438.50

22.50 21,851.26 6,252.12

24.00 21,979.91 6,337.82

22.50 21,050.74 6,201.65

23.30 21,319.63 6,134.28

24.00 21,955.92 6,061.94

Share Information

The price to book value of the Company as at the financial year end was 0.7 times [2015/16: 0.64 times].The ratio increased, due to the increase in the market value of share to Rs.24/- compared to Rs.19.50 in 2015/16.

Average Prices at the Colombo tea auctions hit record highs in 2016 in all elevations, the average price of low grown tea reached to a record of Rs. 648.90 in March 2017.

The Share price of the Company as at 31 March 2017 stood at Rs. 24/- which was an increase of 23 percent compared to the price as at 31 March 2016. The Sector Index (Beverage Food and Tobacco) showed an improvement during the year 2016 / 2017 whilst the All Share Price Index declined.

Information to Shareholders and Investors


Year Ended 31st March 2017 2016 2015 2014 2013

Rs.000's Rs.000's Rs.000's Rs.000's Rs.000's

Total Revenue 2,312,330 1,912,841 2,517,818 2,675,751 2,425,787

Cost of Sale (2,169,426) (1,915,418) (2,475,907) (2,517,669) (2,294,013)

Gross Operating Profit 142,904 (2,577) 41,911 158,082 131,774

Expenses

Administrative Expenses (60,820) (54,040) (51,822) (46,836) (45,700)

Management Fees (29,275) (16,205) (21,440) (33,919) (28,512)

Net Finance (Cost) / Income 1,097 880 (4,997) (10,117) (9,363)

Operating Profit / (Loss) 53,906 (71,942) (36,348) 67,209 48,198

Other Income 33,070 24,436 57,889 37,174 34,316

Change in fair value of Investment Property 23,263 27,000 7,869 7,860 8,272

Profit / (Loss) before Taxation 110,239 (20,506) 29,410 112,242 90,786

Taxation (25,219) 11,744 6,589 (30,766) (6,640)

Profit / (Loss) after Taxation 85,020 (8,762) 35,999 81,476 84,146

Other Comprehensive Income (2,271) (154) 554 2,855 1,543

Prior Year Retained Profits 146,217 170,132 163,579 109,246 53,557

Total Available for Appropriation 228,966 161,217 200,132 193,577 139,246

Dividends Paid (15,000) (15,000) (30,000) (30,000) (30,000)

Retained Profit at the end of the year 213,966 146,217 170,132 163,577 109,246

Five Year Financial Summary and Key Indicators

Pro�t before taxRs.Million

2013

2014

2015

2016

2017

90.7

9

112.

24

29.4

1

-20.

51

110.

24

RevenueRs.Million

2013

2014

2015

2016

2017

2,31

2

1,91

3

2,51

8

2,67

6

2,42

6

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As at 31st March 2017 2016 2015 2014 2013

Rs.000's Rs.000's Rs.000's Rs.000's Rs.000's

CAPITAL AND RESERVES

Stated Capital 150,000 150,000 150,000 150,000 150,000

Revaluation Reserve 403,443 359,597 342,954 291,700 291,700

General Reserve 255,000 255,000 255,000 255,000 255,000

Retained Profits 213,966 146,217 170,132 163,579 109,246

Shareholders' Funds 1,022,409 910,814 918,086 860,279 805,946

ASSETS LESS LIABILITIES

Current Assets 440,297 299,304 360,696 417,928 373,964

Current Liabilities (167,225) (128,882) (131,639) (219,305) (204,668)

Net Current Assets 273,072 170,422 229,058 198,623 169,296

Non-Current Assets 964,777 936,043 890,507 854,001 827,273

Non-Current Liabilities other than Deferred Grants and Subsidies

(214,667) (194,691) (200,332) (191,011) (189,102)

Deferred Grants and Subsidies (773) (960) (1,147) (1,334) (1,521)

1,022,409 910,814 918,086 860,279 805,946

RATIOS AND STATISTICS

Earnings per Share (EPS) - Rs 2.83 (0.29) 1.20 2.72 2.80

Interest cover (No. of times) 34.4 (7.6) 3.9 8.6 7.7

Debt/Equity (No. of times) - - 0.01 0.08 0.02

Annual Turnover growth (%) 20.88 (24.03) (5.90) 10.30 39.01

Current Ratio (times) 2.63 2.32 2.74 1.91 1.83

Gross Turnover per employee (Rs.000's) 3,906 2,989 3,507 3,271 2,683

Five Year Financial Summary and Key Indicators


For

the

Fina

ncia

l Yea

rs E

nded

201

7 an

d 20

16

Stat

emen

t of

Pro

fit o

r Lo

ss

2016

/201

720

15 /

2016

For

the

Qu

arte

rs a

nd

Yea

r E

nd

edQ

1Q

2Q

3Q

4Q

1Q

2Q

3 Q

4

30 J

un '1

630

Sep

'16

31 D

ec '1

631

Mar

'17

Tota

l30

Jun

'15

30 S

ep'1

531

Dec

'15

31 M

ar '1

6To

tal

Rs.

000

'sR

s. 0

00's

Rs.

000

'sR

s. 0

00's

Rs.

000

'sR

s. 0

00's

Rs.

000

'sR

s. 0

00's

Rs.

000

'sR

s. 0

00's

Turn

over

48

5,11

4 5

76,9

73

586

,960

6

63,2

83

2,3

12,3

30

516,

195

470

,624

4

46,5

24

479

,498

1

,912

,841

Cos

t of s

ales

(4

62,9

36)

(551

,964

) (5

35,8

69)

(618

,656

) (2

,169

,426

)(5

05,7

04)

(475

,740

) (4

37,1

10)

(496

,864

) (1

,915

,418

)

Gro

ss p

rofit

2

2,17

8 2

5,00

9 5

1,09

1 4

4,62

7 1

42,9

04

10,

491

(5,1

16)

9,4

14

(17,3

66)

(2,5

77)

Oth

er o

pera

ting

inco

me

8,74

5 7,

005

8,0

39

9,2

80

33,

070

7,270

4

,995

5

,948

6

,223

2

4,43

6

Adm

inis

trat

ive

expe

nses

(1

4,69

9) (1

6,15

2) (1

4,57

8) (1

5,39

0) (6

0,82

0)(1

3,34

1) (1

3,63

5) (1

2,52

8) (1

4,53

6) (5

4,04

0)

Man

agem

ent F

ees

(5,2

15)

(5,6

66)

(9,1

75)

(9,2

19)

(29,

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Quarterly Financial Information

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Statement of Financial Position

2016 / 2017 2015 / 2016

As at 30 Jun '16 30 Sep'16 31 Dec '16 31 Mar '17 30 Jun '15 30 Sep'15 31 Dec '15 31 Mar '16

Rs. 000's Rs. 000's Rs. 000's Rs. 000's Rs. 000's Rs. 000's Rs. 000's Rs. 000's

Net Assets

Non-current assets 924,160 912,015 899,678 964,777 877,458 866,662 861,649 936,043

Net current assets 176,589 196,773 238,501 273,072 225,235 217,330 221,523 170,422

1,100,749 1,108,788 1,138,179 1,237,849 1,102,693 1,083,992 1,083,172 1,106,465 Less : Non current liabilities 197,626 198,907 202,409 215,440 199,933 194,000 193,702 195,651 Net Assets 903,123 909,881 935,770 1,022,409 902,760 889,992 889,470 910,814

Shareholders' Funds 903,123 909,881 935,770 1,022,409 902,760 889,992 889,470 910,814 Stated capital and revenue reserves 903,123 909,881 935,770 1,022,409 902,760 889,992 889,470 910,814

Net assets per share - Rs. 30.10 30.33 31.19 34.08 30.09 29.67 29.65 30.36

Quarterly Financial Information


GRI G4 Content Index

G4 General Disclosures Location Page Reference

G4 -1 Strategy and analysis Our Value Creation Model 30

G4 -2 Provide a description of key impacts, risks, and opportunities

Risks, Opportunities andInternal ControlsBusiness Review

62

27

Organizational Profile

G4 – 3 Name of the organization Corporate Information Inner back cover

G4 - 4 Primary brands, products and services

G4 – 5 Location of the organization’s head quarters About Us 21

G4 – 6 Number of countries where the organization operates

G4 - 7 Nature of ownership and legal form

G4 – 8 Markets Business Review 25

G4 - 9 Scale of the organization About Us 21

G4 – 10 UNGC workforce disclosures Human Capital 41

G4 – 11 OECD / UNGC disclosures regarding collective bargaining - -

G4 - 12 Supply chain Social and Relationship Capital

47

G4 -13 Significant organizational changes None -

G4 – 14 Application of the precautionary principle Natural Capital 56

G4 – 15 Externally developed economic, environmental and social charters or principles

Our Integrated Report 06

G4 - 16 Memberships of associations - -

Identified Material Aspects and Boundaries

G4 – 17 Scope and boundary of the report Our Integrated Report 06

G4 – 18 Defining report content

G4 – 19 - 21 Materiality assessment Stakeholder Engagement and Material Aspects

33

G4 – 22 Restatements regarding previous reports There are no restatements -

G4 – 23 Significant changes relating to previous reporting periods.

None -

G4 – 24- 27 Stakeholder engagement Stakeholder Engagement and Material Aspects

32

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Report Profile

G4 – 28 Reporting period Our Integrated Report 06

G4 – 29 Date of most recent previous report Financial year ended 31st March 2016

-

G4 – 30 Reporting cycle Our Integrated ReportFinancial Statements

06

G4 – 31 Contact point for questions regarding the report or its contents

Our Integrated Report 07

G4 – 32 GRI CONTENT INDEX (“In Accordance” Options – Core / Comprehensive)

GRI Index 155 to 161

G4 - 33 External assurance for the report Our Integrated Report 06

Governance

G4 – 34 - 40 Governance structure and composition 68

G4 - 41 The role of the highest governance body in setting purpose , values and strategy Corporate Governance

73

G4 – 42 - 44 Evaluating performance and competency of the highest governance body.

77

G4 – 45 - 47 The role of the highest governance body in managing risk


60

G4 – 48 The role of the highest governance body in ensuring sustainability reporting

Corporate Governance

82

73

77

78

G4 – 49 - 50 The role of the highest governance body in evaluating economic, environmental and social performance

G4 – 51 - 55 Remuneration and incentives relating to the highest governance body

G4 - 56 - 58 Ethics and Integrity

G4 Specific Standard Disclosures

G4 - DMA Disclosures and management approach Our Value Creation Model Stakeholder Engagement and Material Aspects

3032




Economic Indicators

Aspect Economic Performance

G4 – EC1 Direct economic value generated and distributed Financial and Manufactured CapitalStatement of Value Added

40

145

G4 – EC2 Financial implications and other risks and opportunities for the organization’s activities due to climate change

Natural Capital 56

G4 – EC3 Coverage of the organization’s defined benefit plan obligations

Human Capital 44

G4 – EC4 Financial assistance received from Government None -

Aspect Economic Performance

G4 – EC6 Proportion of senior management hired from the local community at significant locations of operation

Human Capital 42

Aspect Procurement Practices

G4 – EC9 Proportion of spending on local suppliers at significant locations of operation


51

Environmental Indicators

Aspect Materials

G4 – EN1 Materials used by weight or volume

Natural Capital 56G4 – EN2 Percentage of materials used that are recycled input materials

Aspect Energy

G4 – EN3 Energy consumption within the organization

Natural Capital

56

G4 – EN4 Energy consumption outside of the organization 56

G4 – EN5 Energy intensity 58

G4 – EN6 Reduction of energy consumption 58

Aspect Water

G4 –EN8 Total water withdrawal by source

Natural Capital 58G4 – EN9 Water sources significantly affected by withdrawal of water

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Aspect Effluents and Waste

G4 – EN22 Total water discharge by quality and destination

Natural Capital58

G4 – EN23 Total weight of waste by type and disposal method

G4 – EN24 Total number and volume of significant spills

G4 – EN25 Weight of transported, imported, exported, or treated waste deemed hazardous under the terms of the Basel convention2 annex i, ii, iii, and viii, and percentage of transported waste shipped internationally

G4 – EN26 Identity, size, protected status, and biodiversity value of water bodies and related habitats significantly affected by the organization’s discharges of water and runoff

Aspect Products and Services

G4 – EN27 Extent of impact mitigation of environmental impacts of products and services Natural Capital 59

G4 – EN28 Percentage of products sold and their packaging materials that are reclaimed by category

Aspect Compliance

G4 – EN29 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance with environmental laws and regulations

Natural Capital 59

Aspect Supplier Environment Assessment

G4 – EN32 Percentage of new suppliers that were screened using environmental criteria Social and Relationship

Capital51

G4 – EN33 Significant actual and potential negative environmental impacts in the supply chain and actions taken

Aspect Environmental Grievance Mechanisms

G4 - EN34 Number of grievances about environmental impacts filed, addressed, and resolved through formal grievance mechanisms

No Environmental Grievances -

Labour Practices and Decent Work

Aspect Employment

G4 – LA1 Total number and rates of new employee hires and employee turnover by age group, gender and region Human Capital

42

G4 – LA2 Benefits provided to full-time employees that are not provided to temporary or part-time employees, by significant locations of operation

44




Labour Practices and Decent Work

Aspect Occupational Health and Safety (OECD)

G4 – LA6 Type of injury and rates of injury, occupational diseases, lost days, and absenteeism, and total number of work-related fatalities, by region and by gender

Human Capital 46

Aspect Occupational Health and Safety (OECD)

G4 – LA9 Average hours of training per year per employee by gender, and by employee category

Human Capital

45

G4 – LA10 Programs for skills management and lifelong learning that support the continued employability of employees and assist them in managing career endings

45

G4 – LA11 Percentage of employees receiving regular performance and career development reviews, by gender and by employee category

44

Aspect Diversity and Equal Opportunity

G4 – LA12 Composition of governance bodies and breakdown of employees per employee category according to gender, age group, minority group membership, and other indicators of diversity

Human Capital 41

Aspect Supplier Assessment and Labour Practices

G4 – LA14 Percentage of new suppliers that were screened using labour practices criteria Social and Relationship

Capital 52G4 – LA15 Significant actual and potential negative impacts for labour practices in the supply chain and actions taken

Aspect Labour Practices and Grievance Mechanisms (OECD)

G4 – LA16 Number of grievances about labour practices filed, addressed, and resolved through formal grievance mechanisms

Human Capital 45

Human Rights

Aspect Investment

G4 – HR2 Total hours of employee training on human rights policies or procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained

Human Capital 43

Aspect Non – Discrimination (OECD / UNGC)

G4 - HR3 Total number of incidents of discrimination and corrective actions taken

No incidents reported -

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Human Rights

Aspect Freedom of Association and Collective Bargaining (OECD / UNGC)

G4 – HR4 Operations and suppliers identified in which the right to exercise freedom of association and collective bargaining may be violated or at significant risk, and measures taken to support these rights


52

Aspect Child Labour (OECD / UNGC)

G4 – HR5 Operations and suppliers identified as having significant risk for incidents of child labour, and measures taken to contribute to the effective abolition of child labour

Human Capital 43

Aspect Forced or Compulsory Labour (OECD / UNGC)

G4 – HR6 Operations and suppliers identified as having significant risk for incidents of forced or compulsory labour, and measures to contribute to the elimination of all forms of forced or compulsory labour

Human Capital 43

Aspect Indigenous rights

G4 – HR8 Total number of incidents of violations involving rights of indigenous peoples and actions taken

No incidents reported -

Aspect Human rights grievance mechanisms

G4 – HR12 Number of grievances about human rights impacts filed, addressed, and resolved through formal grievance mechanisms

No grievances filed -

Local Communities

Aspect Local communities (OECD / UNGC)

G4 – SO1 Percentage of operations with implemented local community engagement, impact assessments, and development programs Social and Relationship

Capital52

G4 – SO2 Operations with significant actual and potential negative impacts on local communities

Aspect Ant-corruption (OECD / UNGC)

G4 – SO5 Confirmed incidents of corruption and actions taken No incidents reported -

Aspect Compliance (OECD)

G4 – SO8 Monetary value of significant fines and total number of non-monetary sanctions for non-compliance with laws and regulations

No fines imposed on the Company for non-compliance with laws and regulations

-




Local Communities

Aspect Grievance mechanisms for impacts on society (OECD)

G4 – S011 Number of grievances about impacts on society filed, addressed, and resolved through formal grievance mechanisms

No grievances filed -

Product Responsibility

Aspect Customer health and safety (OECD)

G4 – PR1 Percentage of significant product and service categories for which health and safety impacts are assessed for improvement

Social and Relationship Capital 54G4 – PR2 Total number of incidents of non-compliance with regulations and voluntary codes concerning the health and safety impacts of products and services during their life cycle, by type of outcomes

Aspect Product and Service Labelling

G4 - PR3 Type of product and service information required by the organization’s procedures for product and service information and labelling, and percentage of significant product and service categories subject to such information requirements Social and Relationship Capital 55

G4 – PR4 Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labelling, by type of outcomes

Aspect Marketing Communications

GR – PR6 Sale of banned or disputed products Social and Relationship Capital

55

Aspect Customer privacy

G4 – PR8 Total number of substantiated complaints regarding breaches of customer privacy and losses of customer data


55

Aspect Compliance

G4 – PR9 Monetary value of significant fines for non-compliance with laws and regulations concerning the provision and use of products and services


55

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Accounting Policies

Specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements.

Total Debt

Long term loans plus short term loans plus overdrafts.

Capital Employed

Shareholders’ Funds plus debt.

Capital Reserves

Profits of a company that for various reasons are not regarded as distributable to shareholders as dividend. This includes gains on revaluation of capital assets.

Cash and Cash Equivalent

Short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Current Ratio

Current Assets divided by Current Liabilities.

Deferred Tax

Sum set aside for tax in the accounts of an entity that will become liable in a period other than that under review.

Dividend Cover

Profit attributable to shareholders divided by gross dividend. Measures the number of times dividend is covered by distributable profit.

Glossary of Financial Terminology

Dividend per Share (DPS)

Dividends paid during the year divided by the weighted number of ordinary shares in issue during the period.

Earnings per Share

Earnings per Share is the net profit after tax attributable to each ordinary share. This is calculated using the formula - net profit after tax divided by the total number of ordinary shares in issue during the period.

Total Equity

Shareholders’ Funds

Debt to Equity

Debt to capital employed.

Interest Cover

Profit before Interest and tax over finance cost.

Market Capitalization

Number of shares in issue at the end of the period multiplied by the market price per share at the end of period.

Net Assets

Total assets minus current liabilities minus long term liabilities.

Net Assets per Share

Net assets as at a particular year end divided by the number of shares in issue as at the current financial year end.

Number of Trades

The total number of transactions of a company’s shares on the Stock Exchange on a particular day.

Price Earnings Ratio (PER)

Market price per share over earnings per share.

Profit After Tax

The profit that a company has earned in a given period of time after payment of tax.

Return on Capital Employed

Profit before interest and tax divided by average capital employed.

Return on Equity

Profit after tax divided by average share holders’ funds.

Revenue Reserves

Reserves considered as being available for distributions and investments.

“Share” of a Company

One of the equal parts of the issued capital of the company.

Shareholders’ Funds

Total of stated capital, capital reserves and revenue reserves.

Stated Capital

The total of all amounts received by the company or due and payable to the company in respect of the issue of shares and calls on shares.

Turnover per Employee

Total turnover of the company for the year divided by the number of employees employed at year end.

Value Addition/Value Generated

The quantum of wealth generated by the activities of the Company and its application.


Working Capital

Capital required to finance the day - to - day operations

Market Value Added

A calculation that shows the difference between the market value of a company and the capita contributed by investors. In other words, it is the sum of all capital claims held against the company plus the market value of debt and equity.

Return on Assets

Profit after tax as a percentage of average total assets.Total Shareholder Return(P1 – P0 + D) / P0 X 100P1 = Market Price at the end of the yearP0 = Market Price at the beginning of the yearD = Dividend for the year

Dividend Yield

Dividend per share as a percentage of its market value

Dividend Payout

The percentage of earnings paid to a shareholder as dividends.

Quick Assets Ratio

The quick assets ratio measures a company’s ability to meets short term obligations with its most liquid assets.

Net Current Assets

Current Assets less Current Liabilities

Abbreviations

BRM - Business Risk ManagementCTC - Crush, Tear and CurlHACCP - Hazard Analysis and Critical Control PointSLFRS / LKAS - Sri Lanka Accounting Standards

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Notice is hereby given that the Twenty Third Annual General Meeting of Tea Smallholder Factories PLC will be held on Friday, 23rd June 2017 at 10.30 a.m. at the John Keells Auditorium, 186, Vauxhall Street, Colombo 02.

The business to be brought before the meeting will be:

1. To read the Notice Convening the Meeting.

2. To receive and consider the Annual Report and Financial Statements of the Company for the financial year ended 31st March 2017 with the Report of the Auditors thereon.

3. To re-elect as Director, Mr. A. S. Jayatilleke who retires in terms of Article 83 of the Articles of Association of the Company. A brief profile of Mr. A. S. Jayatilleke is contained in Board of Directors section on page 66 of the Annual Report.

4. To re-elect as Director, Mr. M. H. De Silva who retires in terms of Article 90 of the Articles of Association of the Company. A brief profile of Mr. M. H. De Silva is contained in the Board of Directors Section on page 67 of the Annual Report.

Notice of Meeting

5. To re-elect as Director, Mr. J. S. Ratwatte who is over the age of 70 years and who retires in terms of Section 210 of the Companies Act No. 7 of 2007, for which the passing of the following ordinary resolution is recommended by the Company :

“THAT the age limit stipulated in Section 210 of the Companies Act No. 7 of 2007 shall not apply to Mr. J. S. Ratwatte, who is 76 years and that he be re-elected a Director of the Company.”

6. To re-appoint Auditors and to authorize the Directors to determine their remuneration.

7. To consider any other business of which due notice has been given in terms of the relevant laws and regulations.

By Order of the BoardTEA SMALLHOLDER FACTORIES PLC

Keells Consultants (Private) LimitedSecretaries

Colombo

31st May 2017

Notes:

(i) A member unable to attend is entitled to appoint a Proxy to attend and vote in his / her place.

(ii) A Proxy need not be a member of the Company.

(iii) A member wishing to vote by Proxy at the meeting may use the Proxy Form enclosed.

(iv) In order to be valid, the completed Proxy Form must be lodged at the registered office of the Company not less than 48 hours before the meeting.

(v) If a poll is demanded, a vote can be taken on a show of hand or by poll. Each share is entitled to one vote. Votes can be cast in person, by proxy or corporate representatives. In the event an individual member and his/her proxy holder are both present at the meeting, only the member’s vote is counted. If proxy holder’s appointer has indicated the manner of voting, only the appointer’s indication of the manner of vote will be used.


Notes


I/We.............................................................................................................................................................................................

of ..........................................................................................................................................................................................being a member / members of Tea Smallholder Factories PLC hereby appoint

................................................................................................................................................................................................of

or failing him / her,

Mr. Susantha Chaminda Ratnayake failing him

Mr. Ajit Damon Gunewardene failing him

Mr. James Ronnie Felitus Peiris failing him

Mr. Eranjith Harendra Wijenaike failing him

Mr. Ravindra Erle Rambukwella failing him

Mr. Ananda Sunil Jayatilleke failing him

Mr. Jayantissa Seneviratne Ratwatte failing him

Mr. Ranjeevan Seevaratnam failing him

Mr. Manjula Hiranya De Silva

as my / our proxy to represent me / us and to vote on my / our behalf at the Twenty Third Annual General Meeting of the Company to be held on Friday, 23rd June 2017 at 10.30 am and at any adjournment thereof; and at every poll which may be taken in consequence of thereof.

I/We, the undersigned hereby direct my/our proxy to vote for me/us on my/our behalf on the specified Resolution as indicated by the letter “X” in the appropriate cage:

For Against

i) To re-elect as Director, Mr. A. S. Jayatilleke who retires by rotation in terms of Article 83 of the Articles of Association of the Company.

ii) To re-elect as Director, Mr. M. H. De Silva who retires in terms of Article 90 of the Article of Association of the Company.

iii) To re-elect as Director, Mr. J. S. Ratwatte who is over the age of 70 years and who retires in terms of Section 210 of the Companies Act No. 7 of 2007.

iv) To re-appoint Auditors and to authorise the Directors to determine their remuneration.

Signed on this ......................................... day of ......................................... Two Thousand and Seventeen (2017)

.........................................Signature of Shareholder

NOTE:INSTRUCTIONS AS TO COMPLETION OF THE PROXY FORM ARE NOTED ON THE REVERSE.

Form of Proxy

Instructions as to Completion

1. Please perfect the Form of Proxy by filling in legibly your full name and address, signing in the space provided and filling in the date of signature.

2. The completed Form of Proxy should be deposited at the Registered Office of the Company at No. 04 Leyden Bastian Road, Colombo 01, not later than 48 hours before the time appointed for the holding of the Meeting.

3. If the Form of Proxy is signed by an Attorney, the relevant Power of Attorney should accompany the completed Form of Proxy for registration, if such Power of Attorney has not already been registered with the Company.

4. If the appointer is a Company or Corporation, the Form of Proxy should be executed under its Common Seal or by a duly authorised officer of the Company or Corporation in accordance with its Articles of Association or Constitution.

5. If this Form of Proxy is returned without any indication of how the person appointed as Proxy shall vote, then the Proxy shall exercise his/her discretion as to how he/she votes or, whether or not he/she abstains from voting.

Please fill in the following details:

Name : ............................................................................................................................................

Address : ..........................................................................................................................................

...........................................................................................................................................................

...........................................................................................................................................................

Jointly with : ....................................................................................................................................

Share Folio No. : ..............................................................................................................................

Form of Proxy

Designed & produced by

Printed by Printage (Pvt) Ltd

Name of CompanyTea Smallholder Factories PLC

Company Registration NoPQ32

Legal FormA Quoted Public Company with Limited Liability.Incorporated in Sri Lanka in 1991. Ordinary Shares listed on the Colombo Stock Exchange

Registered Office of the CompanyNo. 4, Leyden Bastian Road, Colombo 1, Sri Lanka

Telephone+94 11 2335870

Facsimile+94 11 2335880

[email protected]

Board of DirectorsMr. S. C. Ratnayake - ChairmanMr. A. D. GunewardeneMr. J. R. F. PeirisMr. E. H. WijenaikeMr. R. E. RambukwellaMr. A. S. JayatillekeMr. J. S. RatwatteMr. R. SeevaratnamMr. M. H. De Silva

Board Audit CommitteeMr. R. Seevaratnam - ChairmanMr. A. S. JayatillekeMr. J. S. Ratwatte

Senior ManagementMr. V. A. A. PereraChief Executive Officer / Vice President

Ms. P. A. P. PereraSector Financial Controller / Assistant Vice President

Mr. H. R. A. WanasingheHead of Operations / Assistant Vice President

Mr. M. R. IsmailGeneral Manager – Finance

Mr. M. K. S. L. D. AmarathungaManager - Extension

Mr. A. N. B. DissanayakeEngineer

Secretaries & Legal AdvisorsKeells Consultants (Private) Limited117, Sir Chittampalam A. Gardiner Mw, Colombo 02, Sri LankaTelephone : +94 11 230 6245Facsimile : +94 11 243 9037

AuditorsErnst & Young,Chartered Accountants,P. O. Box 101, Colombo 10.

BDO Partners Chartered Accountants“Charter House”No.65/2, Sri Chittampalam A Gardiner MawathaColombo 02.

BankersDeutsche Bank AGPeople’s BankBank of CeylonHatton National Bank

Corporate Information

Tea Smallholder Factories PLCNo. 4, Leyden Bastian Road, Colombo 01Tel: 011 2335870 | Fax: 011 2335880

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