kotagala plantations plc · 2020. 12. 4. · kotagala plantations plc, has reported an after tax...

KOTA

GA

LA PLA

NTATIO

NS PLC

| Annual Rep

ort 2019/20

KOTAGALA PLANTATIONS PLC

ANNUAL REPORT 2019/20

VisionTo be the foremost producer of High Quality Tea & Rubber

MissionTo maximise land and labour productivity and achieve excellence in the protable management of the Company in an acceptable and socially responsible manner.

Core ValuesIntegrity Courage Commitment

ObjectivesTo lead the way in the technical and innovative development of the Tea & Rubber agri-industries.

To provide a satisfying work experience to our employees and ensure a rewarding investment to our shareholders.

To be a trail-blazer in the shift away from producing visually graded rubber as an agricultural commodity to the production of a fully technically specied industrial polymer

CONTENTFinancial Highlights 1Chairman’s Review 2Ceo’s Review 4Board of Directors 7Risk Management 9Enterprise Governance 11Audit Committee Report 15Remuneration Committee Report 16Related Party Transactions Review Committee Report 17Our Plantations 18Our People 19Crop and Yield 20Management Discussion & Analysis 21Ten Year Summary 25Shareholder & Investor Information 26

Financial ReportingAnnual Report of the Board of Directors 28Statement of Directors’ Responsibilities 31Independent Auditor’s Report 32Statement of Profit or Loss and Other Comprehensive Income 36Statement of Financial Position 37Statement of Changes in Equity 38Cash Flow Statement 40Notes to the Financial Statements 41Glossary of Financial and Non Financial Terms 102Notice of Meeting 103Form of Proxy 107Corporate Information Inner Back Cover

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FINANCIAL HIGHLIGHTS

Group Company Change % Year ended 31st March 2020 2019 2020 2019

Statement of Comprehensive IncomeRevenue Rs.000 2,710,886 3,269,606 2,667,955 3,232,576 (17.47)Loss before tax Rs.000 (918,406) (981,364) (827,378) (1,015,610) 18.53 Loss after tax Rs.000 (920,271) (1,076,759) (829,243) (1,111,005) 25.36 Other Comprehensive income/(Expense) Rs.000 594,910 (69,732) 607,505 (105,490) 675.89 Total Comprehensive Expense for the year Rs.000 (325,361) (1,146,492) (221,738) (1,216,495) 81.77 Loss per share Rs. (12.23) (14.31) (11.02) (14.77) 25.39

Statement of Financial PositionTotal assets Rs.000 7,716,621 7,129,928 7,675,199 6,988,847 9.82 Total Liabilities Rs.000 7,165,166 6,445,224 7,155,369 6,439,516 (11.12)Total shareholders' funds Rs.000 551,455 684,704 519,830 549,331 (5.37)Net assets per share Rs. 7.33 9.10 6.91 7.30 (5.37)

Market/shareholder informationDebt/ Equity Ratio 3.36 3.11 3.57 3.88 7.99 Quick Asset Ratio 0.07 0.21 0.07 0.19 (60.46)Interest Cover (0.95) (1.73) (0.75) (1.06) (28.93)Market Price (Year end) Rs. - - 5.00 7.00 (28.57)Market capitalisation Rs.000 - - 376,125 526,575 (28.57)

Revenue

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Rs.Mn.

15/16 16/17 17/18 18/19 19/20

Shareholders' Fund

0

500

1,000

1,500

2,000

2,500

Rs.Mn.

15/16 16/17 17/18 18/19 19/20

Net Assets per Share

0

10

20

30

40

50

60

Rs.Mn.

15/16 16/17 17/18 18/19 19/20

Total Assets

0

2,000

4,000

6,000

8,000

10,000

Rs.Mn.

15/16 16/17 17/18 18/19 19/20

Kotagala Plantations PLC Annual Report 2019/202

CHAIRMAN’S REVIEW

On behalf of the Board of Directors it gives me great pleasure to welcome you to the Company’s Twenty Seventh Annual General Meeting and to present the Annual Report and Audited Financial Statements of the Company for the year ended 31st March 2020.

The Company’s crop portfolio primarily comprises of Tea, mainly in the High grown category, along with Rubber, Oil Palm and a lesser extent of Tea in the Low Country. This crop diversification strategy had supported the Company to control its risks arising through commodity price fluctuations and other negative externalities precipitated in the business landscape.

The year under review has been one of the most challenging years for the Company in recent times as the plantations sector faced multiple challenges. Climate change severely impacted crop production during the year under review, while the volatile nature in supply and demand, as well as the uncertain political climate in importing countries negatively affected the industry as well as the Company. The industry performance was further crippled by other economic and operational externalities which precipitated in the business landscape. Consequent to this, the higher labour cost led to the increased cost of production while currency depreciation in Tea and Rubber importing countries resulted in higher prices in local currencies which in turn led to decreased demand. Moreover, unstable commodity price fluctuations in the world markets for tea and rubber negatively impacted Colombo auction prices for the same.

Meanwhile, the sharp increase in cost of production continued to threaten the commercial sustainability of the industry, with the full-year impact of a 40% increase in basic wages exerting further pressure on profitability. Following the outbreak of the COVID-19 pandemic, the industry outlook worsened in the fourth quarter, almost halting import-export activities significantly and stopped production activities of plantations due to the imposition of curfew in the country to contain the contagion. These severe impediments left the entire plantation sector in a dismal situation by the end of the financial year.

However on the positive side, it is noteworthy that the pandemic’s impact on the plantation sector has been relatively less severe compared to other industries. With agriculture and plantations being classified as an essential service, the industry quickly returned to normalcy and posted an accelerated recovery supported by firmer tea prices from April 2020.

TEAThe Company’s total extent under cultivation was 2,466.45 ha during the season under review. The upcountry tea estates which covers 91% of this extent contributed 86% of the total crop harvested. The balance production was from the low country in VP Teas, which further accounted to 210 ha.

Sri Lanka’s tea production marked the 3rd consecutive year of decline, with total output decreasing by 3.8Mn kgs to 300.1Mn kg during the year under review. This decline reflects the escalating implications of climate change as warm weather conditions prevailed in most parts of the year in both regions. Similarly, the production of the Company reflected a drop of 8% against the corresponding period last season mainly due to the decrease in crop in upcountry tea estates during the year under review.

The Estate production reached a total production of 3.9 Million Kgs during the year under review. The Kotagala High Grown Tea production reported during the year was 3.6 Million Kgs, a drop of 328,000 Kgs compared to the previous year.

There has been a significant downturn in the Colombo auction prices during the year, as the NSA reported a drop of 7% to Rs. Rs.544.54 during the year under review. However, the auction volumes improved by 3.4% to 10 Mn/kgs against the previous year.

Turkey has emerged as the largest importer of Ceylon tea followed by Iraq and Russia whilst destinations such as the UAE, Japan and Hong Kong have shown a fairly significant decrease in Ceylon tea imports during the year under review.

Further, with Kenya being one of the top tea exporting nations with high volumes and competitive pricing for Orthodox and Rotorvane types of teas, we witnessed a significant decline in these teas in our factories coupled with trade sanctions encountered by the Middle Eastern countries during the year under review.

With the unprecedented challenges and subdued trading conditions taking place all around us, the overall revenue from Tea for the Company dropped by Rs. 497 Million, to Rs. 2,138 Million from the Revenue of Rs. 2,636 Million during the previous year.

RUBBERThe Rubber mature extent during the period was 2,618.76 ha. along with 349.26 ha. of immature rubber. The Company’s cultivated extent of Rubber has reduced drastically in the past years compared to the extent of 6,452 ha. taken over in 1992, as we lost the largest extent of Rubber amongst all Regional Plantation Companies due to urbanization and for other various commercial development purposes. Consequent to this, Company’s yield and production too have dropped significantly due to the loss of high yielding and the more productive land.

The production by the Company during the financial year was 1.4 Million Kgs as the Company could only generate 147 days of tapping on account of erratic weather conditions prevailed during the year under review. The Rubber prices remained at an average of Rs. 302/- compared to the average of Rs. 265/- during the previous season. Consequently, the revenue earned from Rubber was Rs. 420 Million, a reduction of Rs. 83 Million compared to the previous year.

OIL PALMThe Company could only cultivate 525.88 ha. (Immature & Mature) of Oil Palm due to the ban imposed by the Government relating to Oil Palm cultivation although your management has proposed to expand the cultivation to 1,100 ha. in the near term. Further when considering the opportunities and synergies which we can exploit in our business operations we are confident that investing in Oil Palm cultivation in the near future will contribute to diversify the business risk in our crop portfolio whist simultaneously focusing on potential cost rationalization through utilization of lower labour force .

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PROFITABILITYThe Total revenue from Tea, Rubber and Palm oil sales was Rs. 2.668 Billion against Rs. 3.232 Billion recorded in the previous year. A gross loss of Rs. 341.6 Million was reported during the year under review against a gross loss of Rs. 212.9 Million recorded in the previous year mainly due to drop in prices of Tea by 8.6% resulting in a revenue drop of Rs.193 Million. However, the gross loss from Rubber decreased by Rs.80 Million and the gross profit from Oil Palm increased by Rs.3 Million during the year under review.

Kotagala Plantations PLC, has reported an after tax loss of Rs.829 M against the loss of Rs.1.1B, the previous year mainly due to the increase in Other Operating Income.

Kotagala Plantations PLC records a comprehensive loss of Rs. 221.7 M for the current year against a loss of Rs.1.216 B last year mainly due to the revaluation gain recognized in the current year.

OUR STRATEGIC APPROACHI believe 2021 will be a challenging year for the plantation industry on account of weakening global growth and many negative externalities triggered in the domestic economy. In this context, the Company vigilantly absorbed worrying economic challenges during the year whilst concentrating on mitigating measures as well as innovation to cater to new market trends to pursue viable growth prospects.

Therefore, in this quest, the management envisages to capitalize on numerous strategic initiatives to ensure that the operations will turnaround whist focusing on potential cost rationalization. Accordingly, in order to mitigate the ever-escalating costs including the high wage rates associated with low productivity coupled with worker shortage issue, we have invested in mechanization relating to the harvesting process and successfully completed 167 hectares through the same by investing in 88 plucking machines. We intend to further facilitate this process for 297 hectares in the near term. We believe this will enhance the quality of the products by harvesting at the proper time .Proper application of agricultural inputs along with other agricultural practices such as draining and deep forking were other measures we have invested in which we are confident will contribute to obtain a better yield whilst maintaining quality.

Further as a part of our diversification strategy the Company’s focus would be to capitalize on our Oil Palm cultivation which is one of the most lucrative perennial crops in our crop portfolio once the authorities lift the ban to reach the planned planting extents. Thus, we envisage a culmination of these strategies will assist to accomplish a scalable platform to sustain profits in our business operations in the near term.

CONCLUSIONMr. Alagarajah Rajaratnam joined the Board in 1996 and served as the Chairman of the Company from the year 2003 to May, 2013 and resigned from the Board on 30th September, 2019.

I take this opportunity to convey our appreciation for steering the Company during challenging times and for his invaluable service and noteworthy contribution to Kotagala Plantations.

I also thank Mr. R.C. Peries who retired from the Board of the Company on 31st October, 2019. His longstanding service and his valuable contribution specially to the Rubber segment is noted with appreciation.

I would also like to thank Dr. L.M.K. Tillekeratne who resigned from the Board with effect from 31st January, 2020 for the advice imparted with his extensive national and international experience in the Rubber Industry.

I am pleased to welcome Mr. Anushman Rajaratnam to the Board of Kotagala Plantations PLC, enhancing the collective skills and expertise of the Board.

In conclusion, on behalf of the Board, I would like to thank our valued shareholders for their support and loyalty to the Company. I would also like to thank all our employees for their hard work and commitment in helping to drive the Company through many changes during this challenging year, to ensure our long-term success. I also extend my sincere thanks to the Board of Directors for their advice and support.

I also wish to thank our numerous stakeholders for their long-standing support and for their continued trust and confidence in the Company.

S D R ArudpragasamChairman

23rd November 2020


CEO’S REVIEW

I am honoured to present yet another Annual Report on behalf of Kotagala Plantations PLC.

The Season under review was once again a difficult one, with a Labour Wage increase, declining World Tea prices and the continuing depressed state of the Rubber industry combining to cause the company to register a loss.

Furthermore, the Season ended on an ominous note, with the World engulfed in the Covid-19 Virus pandemic from early 2020 and Sri Lanka being absorbed into the situation in mid March, 2020 with the imposition of Island-wide Curfew.

International Trade has virtually come to a standstill and the uncertainty of what might take place in future months, and maybe even years, is extremely foreboding for the prospects of the new season that commences in April, 2020. The challenges that may come about will probably be unlike any that the plantation industry has ever had to face.

At end March, 2020, the Covid-19 pandemic had not affected Sri Lanka to any significant extent and we are hopeful that we will continue in the same vein.

We were extremely vigilant and are pleased to record that we did not have a single case detection on any of our Estates due to stringent safety guidelines that we followed, working closely with Public Health Inspectors.

With the high wages being paid at present and escalating costs it is not possible to mitigate a satisfactory margin as cost of production against NSA especially in Rubber is causing great concerns.

TEA SECTOR

CropWith erratic weather conditions experienced, our High Grown Tea which comprises of 95% VP Tea did not yield as budgeted.

Stringent controls are in place where we are adhering to MRLs (Maximum Residue Levels) as demanded by all international buyers. Due to this reason, we are not accepting Bought Leaf in the Upcountry region. Even in the Low country, Bought Leaf has been restricted due to profit margins not being achieved, as some of the private factories pay in excess of the Tea Board formula, resulting in leaf suppliers being reluctant to give us Green Leaf.

With high crops being harvested in the African continent, especially in Kenya, our prices have taken a decline due to the supply/demand effect.

Sales AveragesFrom a high reached in 2017/2018, after climbing substantially in 2016/2017, Tea prices have been declining every year since.

Quality of Green Leaf and Mechanical HarvestingDelayed harvesting intervals caused by non-availability of sufficient numbers of Tea pluckers, results in the leaf maturing on the bushes and consequently producing a poorer quality of Tea.

In order to counter this situation, machine plucking has been introduced, which has to be carried out systematically and diplomatically due to the Workers being resentful of, and expressing their dissent to this operation, as they perceive it to be associated with a loss of income, which is not the case.

With the dwindling labour force and high cost, the way forward is to increase the areas in machine plucking to mitigate the above, and we are pleased to record that much progress has been achieved. The cost of harvesting is much reduced by this exercise and we consider it the way forward in the future. The extents under machine plucking will be increased depending on labour availability to manually harvest the other fields.

Despite difficulties, we are pleased that we continue to maintain good agricultural practices along with regular maintenance of machinery to ensure sustainability and a good end product.

RUBBER SECTORPoor prices during the last five years have disrupted our regular day to day operations, eventuating in negative Cash Flows. This has had a significant impact even upon our other agricultural operations (i.e.) Tea and Oil Palm, where necessary inputs have to be curtailed.

The situation was further aggravated by erratic weather conditions, which did not follow the normal, expected patterns. We have had more “Wet days” than average during the past 03 seasons. This adversely affected tapping operations and crop harvests to a great extent.

With the erratic weather being experienced in our Rubber growing areas, we were able to tap only on 147 days when in general we budget a minimum 280 days of tapping. Rubber prices remain low due to depressed markets at international level.

Despite poor trading conditions, we continue to maintain our mature and immature Rubber to desirable and acceptable levels.

Tight controls are practiced to ensure that production costs are kept to a bare minimum.

OIL PALM SECTORRestrictions imposed on the planting of Oil Palm have negatively impacted the income potential of our company.

Oil Palm is the most lucrative of the current plantation crops. We have only 525 hectares at present. Had restrictions not been enforced and our programme of Oil Palm planting allowed to proceed as projected, we would have had an Oil Palm extent of approx.1,500 hectares in bearing and been in a much more stable and secure financial position today.

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Plantation companies that are enjoying a Cash plus situation have all got substantial extents of Oil Palm in bearing.

It is imperative that the government takes cognizance of this and permits the expansion of Oil Palm planting, particularly as in Sri Lanka there is no deforestation in connection with such planting. We would merely be replacing one plantation tree crop with another (i.e.) replacing Rubber with Oil Palm.

It is true that transpiration per oil palm is 3 to 4 times greater than in a Rubber tree, but stand per hectare in oil Palm is only 130 palms, whereas Rubber is normally expected to have 515 trees per hectare. Therefore, there is hardly a difference in moisture offtake from the land.

Furthermore, such diversification is among the Terms & Conditions specified in the Indenture of Lease.

FORESTRY SECTOROur Eucalyptus plantings have been lucrative, providing finances at crucial junctures. We continue to re-plant all land areas where the suitably aged trees have been harvested, together with new plantings in land that is not suitable for other crops.

We are following a systematic Timber programme that will bring substantial cyclical returns.

RAINFOREST ALLIANCE We have obtained the above Certification for seven estates namely Craigie Lea, Drayton, Derryclare, Mayfield, Mt. Vernon, Stonycliff and Yuillefield and intend extending to Bogahawatte, Kelliewatte and Chrystler’s Farm Estates. These factories have not been manufacturing in the recent past and it is our intention to carry out Leafy Grade Manufacture in these factories in the future.

CORPORATE SOCIAL RESPONSIBILITYTwo Regions namely Kotagala Up Country and Lowcountry of our Kotagala Plantations PLC have invested substantial resources in its Social Responsibility Initiatives in year 2019, investing over Rs.21 Mn for Internal Road Concreting, Rs. 8 Mn for New Housing Water Schemes and Rs. 5 Mn for construction of Play Grounds. This is a 100% grant provided by the Ministry of Community Empowerment & Estate Infrastructure Development.

We are pleased to state that Mount Vernon Estate in our Upcountry Region was the first Black Tea Factory in the world to obtain Covid 19 Certification (Safety Management).

Award Ceremony - Covid-19 Safety Management System of Tea Processing Centre on Mount Vernon Estate

DISTRIBUTION OF SAFETY EQUIPMENT & SANITIZERS TO PREVENT COVID-19With the assistance and blessings of the Plantation Human Development Trust, we are supporting their Safety Equipment & Sanitizing Programmes to the Estate Child Development Centres such as Handwashing Units, Sanitizers, Laser Thermometers and Face Masks etc.

Ceremonially handing over Safety Equipment to Kotagala Plantations by the Director General PHDT and Officials

MATERNAL CAREThe progress on maternal care on KPPLC Estates is assessed by the level and time of antenatal registration, clinics, attendance, place of delivery and postnatal care by the qualified Midwives in our Estates and nutritional levels with the support of the Estate health under the guidance of the Medical Officer of Health (MOH).

ESTATE WORKER HOUSING CO-OPERATIVE SOCIETY (EWHCS)These societies are models on our plantations which have been successfully developed. This has made a significant contribution by reducing poverty levels and uplifting the living conditions of the Plantation workers and their families.


The Resident Plantation Community has been significantly empowered by the EWHCS which are now functioning on all Estates managed by the Company by providing them loans, creating job opportunities access to many goods and services, etc to our Estates.

APPRECIATIONIn conclusion, we would like to express our sincere appreciation to the Executives and staff of our Head Office, Regional Offices, Plantation Executives, along with Field, Clerical, factory and medical staff on our Estates.

We also place on record our appreciation to our workforce that has remained committed. The dedication of all is immensely valued.

Our heart felt thanks are also extended to the Group Chairman, Chairman and Board of Directors for the advices and guidance offered.

Mahen MadugalleDirector/Chief Executive Officer

23rd November 2020

CEO’S REVIEW

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BOARD OF DIRECTORS

S. D. R. Arudpragasam – ChairmanNon- Executive

Mr. S. D. R. Arudpragasam joined the Board in 1996 and was appointed Chairman in May, 2013. He serves as Chairman of several subsidiaries of The Colombo Fort Land and Building PLC (CFLB) including Chairman, Lankem Ceylon PLC and Chairman/Managing Director of E.B. Creasy & Company PLC. He holds the position of Deputy Chairman on the Board of The Colombo Fort Land and Building PLC, in addition to holding other Directorships within the CFLB Group.

Mr. S.D.R. Arudpragasam is a Fellow of the Chartered Institute of Management Accountants (U.K.)

C. P. R. Perera - Deputy ChairmanIndependent Non- Executive

Mr. C.P.R. Perera joined the Board in 1996 and was appointed Deputy Chairman in May, 2013. He serves on the Board of The Colombo Fort Land & Building PLC (CFLB) and also serves on the Boards of several subsidiary companies of the CFLB Group. He also holds directorships in other private and public companies. He is a past Chairman of the Sri Lanka Tea Board, Sri Lanka Insurance Corporation, PERC and Bank of Ceylon. He retired as Chairman of Forbes & Walker Ltd and its subsidiary companies in June 2005 after almost 44 years of service.

He presently functions as Chairman of Ceylon Tea Brokers PLC. Mr. Perera has served as a Committee Member of the Ceylon Chamber of Commerce, The Planters Association of Ceylon and on the Committee of Management of the Ceylon Planters Provident Society.

S.S. PoholiyaddeExecutive Director

Mr. S.S. Poholiyadde joined the Board on 07th September 2018 and currently holds the position of Managing Director, Lankem Tea & Rubber Plantations (Pvt) Ltd. (LTRP), Managing Agents of Kotagala Plantations PLC and Agarapatana Plantations Ltd.

Mr. Poholiyadde is the former Managing Director of the Plantations Sector and Head of Group Human Resources of the Richard Pieris Group. He was also an executive Director of Kegalle Plantations PLC, Namunukula Plantations PLC, Maskeliya Plantations PLC, AEN Palm oil processing Pvt Ltd. He has over four decades of experience in the Plantations Industry.

He is the immediate past Chairman of the Planters’ Association of Ceylon, Former chairman of the Colombo Rubber Traders’ Association and the Plantation Services Group of the Employers Federation of Ceylon (EFC). He was also a member of the Board of Directors of the Sri Lanka Tea Board and the Rubber Research Board. He also served as a Council Member of the Ceylon Chamber of Commerce and continues to serve in the Executive Committee of the Sri Lanka Society of Rubber Industry.

Mr. Sunil Poholiyadde is a Fellow of the National Institute of Plantation Management.

M. S. Madugalle – Chief Executive OfficerExecutive Director

Mr. Mahen Madugalle commenced his planting career with Janatha Estates Development Board (JEDB). He has worked for other private sector Plantation Companies. He joined Kotagala Plantations PLC which was then managed by George Steuart Management Services as Manager Mount Vernon Estate and was promoted as Cluster General Manager of Mount Vernon under the management of Lankem Tea & Rubber Plantations (Private) Limited (LT&RP) and subsequently as Regional General Manager of the Kotagala Region. He has also held the position of General Manager of the Agras and Uva Regions of Agarapatana Plantations Ltd.

He was appointed to the Boards of LT&RP in 2012 and Kotagala Plantations PLC in January 2013 and functioned as Deputy Chief Executive Officer of KPPLC from 1st April, 2014. Mr. Madugalle was appointed as Chief Executive Officer of KPPLC with effect from 1st April, 2015. He has provided consultancy services to the FAO in Iran on tea projects. He holds a Diploma from the National Institute of Plantation Management.

D. A. RatwatteNon- Executive Director

Having commenced his career with Whittall Boustead Ltd prior to nationalisation he has contributed many years of his life to planting. After the nationalisation of estates he managed two of the most prestigious plantations in up-country after which he was invited to serve on the Board of Directors of the Janatha Estates Development Board VI.

After the privatization of management of the Regional Plantation Companies in 1992, Mr. Ratwatte took charge of the operations of Maturata Plantations Ltd. in the capacity of General Manager-Plantations in charge of the plantations. In 1999 he joined Lankem Tea & Rubber Plantations (Private) Ltd. (LT&RP), as a Regional Director in charge of the Western High Grown properties in the Kotagala and Agarapatana districts. He was appointed to the Board of LT&RP in 2002 and joined the Board of KPPLC in 2006. He was appointed Chief Executive Officer of APL on 1st March 2018, which position he relinquished with effect from 1st November, 2019. He serves as a Director in other Companies of The Colombo Fort Land and Building Group.

Mr. D. A. Ratwatte is a Fellow of the National Institute of Plantation Management.

G. D. V. PereraNon- Executive Director

He commenced his career in planting with Mackwoods Estates & Agencies Limited in 1971. With the nationalization of Estates, he worked as an Estate Manager and Visiting Agent and was subsequently promoted as a Director of JEDB in the Nuwara Eliya Region. He has provided his services to the prestigious Commonwealth Development Corporation (CDC) of UK on tea projects in Tanzania. After the privatisation of the management of Regional Plantation Companies, he returned to Sri Lanka and joined Forbes Plantation Management Services Ltd., as a Plantation Director of


Balangoda Plantations Limited in 1993. He joined Lankem Tea & Rubber Plantations (Pvt) Ltd (LT&RP), Managing Agents in 1996 and was appointed to the Directorates of LT&RP in 2002 and KPPLC in 2006. He also serves as a Director in other Companies of The Colombo Fort Land and Building Group.

He is a past Chairman of the Planters’ Association of Ceylon. He is a Director of the Plantation Human Development Trust. Mr. G.D.V. Perera is a Member of the Ceylon Institute of Planting and a Fellow of the National Institute of Plantation Management.

A. M. de S. JayaratneIndependent Non- Executive Director

Mr. A. M. de S. Jayaratne was appointed to the Board of Kotagala Plantations PLC in December 2012.

He is a former Chairman of Forbes & Walker Ltd, Colombo Stock Exchange, Ceylon Chamber of Commerce and The Finance Commission. He also served as Sri Lanka’s High Commissioner in Singapore. Mr. Jayaratne is a Director of several listed and unlisted companies. He holds a Bachelor of Science degree in Economics and is a Fellow of the Institute of Chartered Accountants of Sri Lanka and of England and Wales.

Anushman RajaratnamNon- Executive Director

Mr. Anushman Rajaratnam was appointed to the Board on 1st October 2019. He joined the Board of Lankem Ceylon PLC in 2005 and served as the said company’s Managing Director from 2009 until December 2016. He relinquished this position in December 2016 to take up the appointment as the Group Managing Director of The Colombo Fort Land & Building PLC in January 2017. In addition, he serves on the Boards of several Subsidiary Companies of the CFLB Group. Prior to joining the CFLB Group, he worked overseas for a leading global Accountancy Firm.

He holds a Bachelor of Science degree in Economics from the University of Surrey, UK, CPA Australia and MBA from the Massachusetts Institute of Technology, USA.

BOARD OF DIRECTORS

9

RISK MANAGEMENT

The Risk Management processAt Kotagala , we emphasise the importance of having a strong working culture within the organization that strengthens the internal processes. Risk Management is no longer an additional set of processes but embedded in the business process itself .The risks could influence the achievement of the strategy of business, operational and financial objectives therefore the Directors have taken the initiative to identify the organisations major risks and introduced several measures to mitigate the risks faced by the Company.

The following are some of the major risk factors that the company is exposed to while carrying out its business and the actions implemented to reduce or eliminate risk.

Operational riskThe company carries out continuous planning, quality control and disaster recovery management strategies in order to ensure the continuous operation of business.

Tangible assets are insured against identifiable risks and the associated insurance policies are reviewed and evaluated annually. Provision is also made for asset defects and malfunctions and for obsolescence due to advances in technology. We go to the best suppliers to ensure that defect free products are purchased. The factories in the estates and other infrastructure are continuously upgraded when required.

Exposure to reputation risk is minimized through product quality controls and a comprehensive quality management process which includes upgrading our factories to adhere to HACCP standards

WeatherThe Company’s product portfolio being Tea and Rubber, helps to minimize the impact as tea requires wet and rubber requires drier weather conditions. The location of our tea estates in the High grown and Low grown elevation categories also helps in this regard.

The Company has the option of increasing or decreasing quantities of bought crop according to weather patterns. Prudent agricultural practices such as rain guards for rubber trees and planting of TRI recommended clones and other agricultural practices to minimise drought effects and proactive planning has helped the company to minimise the risk of adverse weather conditions.

Business riskPrices are cyclical and have an impact on earnings. Tea Auctions in Colombo are influenced by global demand and supply, and foreign currency exchange rates. The company mitigates this impact by producing high quality tea and rubber. The direct export of rubber facilitates price stability and entering into forward contracts with rubber buyers helps reduce market risk. Kotagala Plantations process a full range of teas (low grown, high

grown and CTC) and different types of rubber which helps reduce market instability. Initiatives have been taken for diversification into other crops like cinnamon and oil palm which will reduce over dependence on tea and rubber.

The Company possesses synergistic benefits from being in a group which includes a chemical supplier and another company in the plantation business.

Healthy relationships are maintained with our suppliers. Fluctuations in the exchange rates are closely monitored and hedging techniques applied when required.

In order to minimize the dependence on a single distribution channel (brokers) the company has continued to establish its export operations. Further the company has leased out a portion of land to Mlesna (Ceylon) Ltd in Kotagala for the purpose of the sub lessee to carry out sales and operate a tea centre for their products. This facility also has provision to market KPPLC garden mark packs.

Legal and regulatoryThe Company addresses this area with great concern in order to protect its corporate image. Quality assurance standards in factories have been established over a period of time (ISO, HACCP) and continuous reviews are conducted to ensure they are maintained. The Company’s legal division ensures full compliance with all regulatory requirements including labour regulations, adherence to laws and instructions of governing authorities such as Provisions of the Companies Act, Securities & Exchange Commission and Colombo Stock Exchange requirements. The Company also obtains expert advice from its Auditors, Tax consultants, Actuaries, TRI, RRI as and when required. As a public listed company we also strive for a high standard of corporate governance in the conduct of our business.

Human resourcesKotagala Plantations has entered into Collective Agreements with trade unions as a member of the employers’ federation. This helps to ensure industrial peace and a well negotiated and affordable wage. Human Resource Management is given priority, where continuous training and development programmes and workshops are held in order to motivate and develop our human resources.

Governance riskThese risks are dealt with preventively through the actions of the company’s legal department and through frequent internal & external audits to monitor compliance. The company’s management culture stresses ethical performance in this area, following best practices at all times.

LiquidityWe strive to maintain sufficient liquidity is available to meet our debt commitments and provide for our operational capital requirements. Loans and overdraft facilities are arranged with banks to meet planned cash flow commitments.


Employee related risksRisks such as omissions, fraud, judgemental errors, negligence, are examples of employee related risks. The company has a set up a competent internal audit department which carries out exhaustive checks on a routine basis in order to eliminate the above mentioned risks. The Internal audit department functions independently and reports directly to the Executive Directors. They ensure all receipts have been banked, lodging of funds have been deployed for the intended activity. Suitable delegated authority levels have been set up and succession plans are formulated. We maintain a conducive working environment for all staff

InformationProper internal controls have been established in order to secure the information system. Routine and surprise audit checks are carried out to detect any deficiencies and improvements are suggested. The company has implemented sound backup systems and procedures, and has also entered into maintenance contracts with established agents and uses licensed software.

RISK MANAGEMENT

11

ENTERPRISE GOVERNANCE

Enterprise Governance is the combination of Business Governance and Corporate Governance, it is the set of responsibilities and practices exercised by the Board and Executive Management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that the organization’s resources are used responsibly.

Enterprise Governance is such an important framework, it encapsulates Corporate Governance, Performance Management, Internal Control and Risk Management, and it strives to achieve a balance between conformance and performance.

At Kotagala Plantations PLC we are firmly committed to the highest standards of governance. The Company’s performances are managed to the

best interest of its shareholders whilst maintaining high ethical standards. The Board is committed to adhere to various business practices in order to further establish our Company as a good corporate citizen that values responsibility.

The strategic options, implementation and risk control strategies are closely monitored in order to deliver better results. The Company is in compliance with the majority of the good corporate governance practices recommended by The Institute of Chartered Accountants of Sri Lanka and the listing rules of the Colombo Stock Exchange. Given below is a demonstration as to how we adhere to good Corporate Governance practices

Corporate Governance Principle Company’s adherence

Directors

Composition of the Board As at the end of the financial year the Board consists of two Executive Directors and six Non Executive Directors two of whom are Independent. The Directors possess a strong balanced blend of skills, experience to offer guidance in core areas important to KPPLC. These Directors are named below and profiled on page 7 and 8.

S.D.R. Arudpragasam - Non Executive(Chairman) C.P.R. Perera - Independent Non- Executive(Deputy Chairman) A. Rajaratnam - Non-Executive(Resigned w.e.f. 30/09/2019)M.S. Madugalle - Executive(Chief Executive Officer)R.C. Peries - Non Executive(Retired w.e.f. 31/10/2019)D.A. Ratwatte - Non-ExecutiveG.D.V. Perera - Non-ExecutiveA.M. de S. Jayaratne - Independent Non-Executive L.M.K. Tillekeratne - Independent Non-Executive(Resigned w.e.f. 31/01/2020)S.S. Poholiyadde - Executive Anushman Rajaratnam - Non-Executive (Appointed w.e.f. 01/10/2019)

The Non-Executive Directors have submitted declarations of their independence or non-independence to the Board of Directors.

Mr. C.P.R. Perera has served on the Board for more than nine years. He is a Director on the Boards of other Companies in which a majority of the Directors of the Company are Directors and also has significant shareholdings in another. He serves on the Board of the Ultimate Parent Company, The Colombo Fort Land and Building PLC (CFLB) and holds Directorships on certain subsidiaries of CFLB and has served on some of those subsidiaries for a period exceeding nine years. However the Board having taken into consideration all other circumstances listed in the Rules pertaining to the Criteria for Defining Independence is of the opinion that Mr. C.P.R. Perera is nevertheless Independent.

Mr. A.M. de S. Jayaratne is a Director of the Ultimate Parent Company, The Colombo Fort Land and Building PLC (CFLB) and serves on the Boards of several subsidiaries of CFLB. He has served on the Board of the Ultimate Parent and on several of its subsidiaries for over a period of nine years. He a Director of certain such subsidiary companies of which a majority of the Directors serve on another and also has significant shareholdings in another. However the Board having taken into consideration all other circumstances listed in the Rules pertaining to the Criteria for Defining Independence is of the opinion that Mr. A.M. de S. Jayaratne is nevertheless Independent.



Directors

Decision making of the Board In addition to Board Meetings, matters are referred to the Board and decided by Resolutions in writing. The Board has met on five occasions during the year under review.

The Board is responsible for:-• Ensuring the conduct of the Company’s affairs in the best interest of its stakeholders. • Identifying Strategic options implementation and monitoring their success. • Appointment of the Directors, ensuring staff succession and determining remuneration of senior executives and staff

in consultation with the respective Committees. • Ensuring an effective internal control system. • Ensuring a proactive risk management system. • Ensuring compliance with highest ethical standards and legal standards. • Approval of major capital investments acquisition expansions and Budgets • Approval of interim and annual financial statements for publication.

Company Secretaries The Company and all Directors may seek advice from Corporate Managers & Secretaries (Pvt) Ltd who are qualified to act as Secretaries as per the provisions of the Companies Act No. 7 of 2007.

Independent Judgement The Board of Directors at all times exhibit high standards of integrity, commitment and independence of judgement.

Obtaining independent professional advice

Advice is sought from independent experts whenever the Board deems it necessary. The Directors are updated on the changes in the plantation industry as well as on the general aspects which may affect the Company’s operations.

Managing Agents The Board of Directors has delegated the management of Plantation and the task of achieving the strategic objectives set out by the Board to the managing agents, Lankem Tea & Rubber Plantations (Pvt) Ltd (LT &RP). The Board of LT&RP meets frequently and review the progress towards achieving the budgets and discuss the operational issues. The successful implementation of the Capital Expenditure programmes and focussing on the development strategies are also key priorities.

Finance Acumen The Board comprises of three finance professionals who possess the knowledge and the competence to offer the Board the necessary guidance on matters relating to finance.

Supply of Information on a timely manner

Prior to each meeting all Directors are given a file of Board Papers which includes Summarized Financial Statements, operational statistics, performance reviews, sales reports, Schedules of Capital Expenditure and a Progress Report, covering all significant issues with the comparatives of prior year and budget. This information is provided at least 7 days prior to the meeting which gives Directors adequate time for qualitative deliberation and analysis.

Nomination Committee/Appointments to The Board

New Directors are proposed for appointment by the Nomination Committee in consultation with the Chairman of the Company in keeping with the provisions of the Articles of Association of the Company in relation to same and in compliance with the Rules on Corporate Governance.

The Company’s Nomination Committee comprises of Mr. A.M. de S. Jayaratne - Chairman, Mr. C.P.R. Perera, Independent Non- Executive Directors and Mr. S.D.R. Arudpragasam, Non Executive Director.

Disclosure of appointments of New Directors to the Shareholders.

The new appointments are made available to shareholders by making announcements to the Colombo Stock Exchange.

Re-election of Directors In terms of the Articles of Association of the Company a Director appointed to the Board holds office until the next Annual General Meeting, at which he seeks re-election by the shareholders. The Articles require one-third of the Directors in office (excluding the Managing Director and the Appointed Directors) to retire by rotation at each Annual General Meeting. The Directors who retire are those who have been longest in office since their last election. Retiring Directors are eligible for re-election by the shareholders.


13


Relations with Shareholders

Annual General Meeting The Company always welcomes the active participation of the shareholders at the Annual General Meeting. Questions put up by the shareholders are answered thus promoting a healthy dialogue. The required number of days notice has been given to the shareholders in terms of the Companies Act No.7 of 2007 and the Articles of Association of the Company.

Communication with Stakeholders

The Company publishes the Annual Report together with the interim reports in order to communicate information to the shareholders in a timely manner.

Major Transactions There have been no transactions during the year under review which fall within the definition of “Major Transactions” as set out in the Companies Act.

Price Sensitive Information Due care is exercised with respect to share price sensitive information.

Others The Company maintains a website under the name www.lankemplantations.lk which offers any individual or corporate, information on the Company and its affairs. The Company’s principal communicator with all its stakeholders are its Annual Report and Quarterly Financial Statements. The shareholders are free to communicate with the Company. Whenever possible, the Company implements their suggestions.

Accountability and Audit

Financial Reporting The Board attaches high priority to timely publication of quarterly and annual results with comprehensive details (both financial & non financial) going beyond statutory requirements. This enables both existing and prospective shareholders to make fair assessments on the Company’s performance and future prospects. The financial statements are prepared in accordance with Sri Lanka Accounting Standards. The Company’s accounting formats and procedures are in compliance with the procedures laid down by the regulatory authorities.

Disclosures The Annual Report of the Board of Directors is on pages 28 to 30 of this report. The Statement of Directors responsibilities for the financial reporting is on page 31 and the Auditors’ Report on the financial statements is on the pages 32 to 35 of this annual report.

Going Concern The Board of Directors after reviewing the financial position and the cash flow of the Company are of the opinion that the Company has adequate resources to continue operations well in the foreseeable future. Therefore the Board adopts the going concern basis in preparing Financial Statements.

Internal Control The Directors are responsible for maintaining an effective internal control system and proactive risk management strategy. Internal controls cover both financial and operational matters and risk management to safeguard the assets of the Company. The risk management strategy of the Company is on pages 9 and 10 of this report. The Company also ensures that effective internal and external audit procedures are followed and the Board reviews the reports in order to maintain the progress of the systems and results.

Internal & External Audits The Internal Audit division comprises of the Internal Audit Manager and Assistants who report directly to the Executive Directors. They are empowered to examine and review the financial reporting systems, internal control procedures, accounting policies and compliance with accounting standards. It also reviews the adequacy of systems for compliance with legal, regulatory and ethical requirement and company policies. The Company maintains a professional relationship with the external auditors, KPMG. This ensures their objectivity, independence and compliance with regulatory and ethical requirements

Audit Committee The Audit Committee Report is set out on page 15 of this Report.



Directors’ Remuneration

Remuneration Committee The Remuneration Committee Report is set out on page 16

Disclosure of Remuneration Aggregate remuneration paid to Directors is disclosed in Note 7 to the Financial Statements.

Related Party Transactions

Related Party Transactions Review Committee

The Related Party Transactions are disclosed in Note 32 to the Financial Statements.The Report of the Related Party Transactions Review Committee appears on page 17

Others

Management Committees The Management Committee comprises of Directors, Consultants, General Managers and Deputy General Mangers. Meetings are held once a month where a review in detail is carried out on the performance of each individual estate based on both financial and relevant non financial indicators.

Compliance with Legal Requirements

The Board of Directors through the Company’s Legal & Finance divisions makes every endeavour to ensure that the business complies with all laws and regulations.

Social & Environmental Matters The Company has for many years recognized the benefits that accrue from responsible employment, environmental and community policies which are dealt with in detail in the Chairman’s Review and CEO’s Review.

Rights of Employees /Other Stakeholders

The Company identifies the rights of employees. Several employee performance enhancing mechanisms such as performance appraisals and training initiatives are in place for the career building of our employees. A series of best practices and techniques are now embedded in the business and applied intelligently within the organization. Constant responsiveness to all stakeholder interests and an effective risk management process are critical success factors to ensure that the governance process will continue to add value in the future. The Extent to which the good Corporate Governance practices are adopted in the Company is given as above in this report.


15

AUDIT COMMITTEE REPORT

The Committee assists the Board of Directors in fulfilling its oversight responsibility to the Shareholders and other Stakeholders relating to the Company’s financial statements and the financial reporting process to ensure that the financial reporting system is in adherence with the Sri Lanka Accounting Standards and other regulatory and statutory requirements. It also reviews the adequacy of internal controls and the business risks. The Committee peruses the operational reviews and assesses the future prospects of the business operations and the fact that the going concern assumption used in the preparation of the Financial Statements is appropriate.

CompositionThe Audit Committee for the financial year ended 31st March, 2020 comprised of two Independent Non-Executive Directors and a Non- Executive Director of Kotagala Plantations PLC.

The names of the members are set out below:

Mr. A.M. de S. Jayaratne - Chairman

(Independent Non-Executive Director - KPPLC)

Mr. S.D.R. Arudpragasam

(Non Executive Director-KPPLC)

Mr. C.P.R. Perera

(Independent Non- Executive Director-KPPLC)

The members have varied experience and financial expertise with a high standing of integrity and business acumen to carry out their role effectively and efficiently. Two of the members are finance professionals including the Chairman.

The Company’s Secretaries, Corporate Managers & Secretaries (Private) Limited function as the Secretaries to the Audit Committee.

Meetings and AttendanceThe Audit Committee has met on 5 occasions during the financial year ended 31st March, 2020 and the attendance was as follows;

Mr. A.M. de S. Jayaratne 5/5

Mr. S.D.R. Arudpragasam 4/5

Mr. C.P.R. Perera 5/5

Other members of the Board and Senior Management Personnel of the Company as well as the External Auditors were present at discussions where appropriate. The Proceedings of the Audit Committee are reported to the Board of Directors.

Terms of Reference The role of the Committee which has specific terms of reference is set out in the Audit Committee Charter and addresses the Purpose of the Committee, its duties and responsibilities including the scope and functions of the Committee.

ComplianceThe Committee has scrutinized the quarterly accounts and the accounts for the year ended 31st March, 2020 and has taken necessary measures to ensure that the Interim Financial Statements and the Annual Report are timely published and they are prepared and presented in accordance with Sri Lanka Accounting Standards.

External AuditThe Company has appointed KPMG as its External Auditors and the services provided by them are segregated between audit/ assurance services and other advisory services.

The Committee after evaluating the independence and performance of the External Auditors has recommended to the Board the reappointment of KPMG as Auditors for the financial year ending 31st March, 2021 subject to the approval of the Shareholders at the Annual General Meeting.

ConclusionThe Audit Committee is satisfied that the accounting policies and operational controls provide reasonable assurance that the Company is managed in accordance with the Group policies and adequate controls are in place to safeguards the Company’s Assets.

A.M. de S. JayaratneChairmanAudit Committee

23rd November 2020


REMUNERATION COMMITTEE REPORT

The Remuneration Committee of the Company consists of the following members;

Mr. A.M. de S. Jayaratne - Chairman – Independent Non- Executive Director

Mr. C.P.R. Perera - Member – Independent Non-Executive Director

Mr. S.D.R. Arudpragasam - Member – Non-Executive Director

The Committee analyses and reviews the remuneration packages of the key management personnel prior to the determination of such packages and guidelines are set for the compensation structures of the Management Staff.

Some members of the Board participate in the deliberations where appropriate.

It is ensured that the remuneration of executives at each level of management is competitive and they are rewarded in a fair manner based on their performance.

A.M. de S. JayaratneChairmanRemuneration Committee

23rd November 2020

17

RELATED PARTY TRANSACTIONS REVIEW COMMITTEE REPORT

The Related Party Transactions Review Committee (RPTRC) is entrusted with the responsibility of ensuring compliance with the rules and regulations governing Related Party Transactions for Listed Entities. It focuses on ensuring that the Stakeholders’ interests are protected in all related party transactions.

CompositionThe Related Party Transactions Review Committee of Kotagala Plantations PLC comprises of the following members:

Mr. A.M. de S. Jayaratne - Chairman - Independent / Non-Executive

Mr. C.P.R. Perera - Member - Independent / Non-Executive

Mr. S.D.R. Arudpragasam - Member - Non-Executive

The Company’s Secretaries, Corporate Managers & Secretaries (Private) Ltd. function as the Secretaries to the Related Party Transactions Review Committee.

Meetings and AttendanceThe Related Party Transactions Review Committee has met on 4 occasions during the financial year ended 31st March, 2020 and the attendance was as follows;

Mr. A.M. de S. Jayaratne- Chairman 4/4

Mr. C.P.R. Perera 4/4

Mr. S.D.R. Arudpragasam 3/4

In addition to these meetings certain related party transactions were referred to the Members of the RPTRC and were reviewed and recommended by Resolutions in Writing.

Functions of the Committee:• Review all proposed Related Party Transactions (Except for exempted

transactions)

• Determining whether the relevant Related Party Transaction is fair to, and in the best interests of the Company and its stakeholders.

• Obtain updates on previously reviewed Related Party Transactions from Senior Management and approve any material changes.

• Establish guidelines for Senior Management to follow in ongoing dealings with related parties.

• Direct the transactions for Board approval / Shareholder approval as deemed appropriate.

• Ensuring that immediate market disclosures and disclosures in the Annual Report as required by the applicable rules and regulations are made in a timely and detailed manner.

ConclusionThe Related Party Transactions Review Committee has reviewed the Related Party Transactions entered into during the financial year under review and has communicated its comments and observations to the Board of Directors.

The Committee is free to seek external professional advice on matters within their purview when necessary.

The Board of Directors have also declared in the Annual Report that there was one non- recurrent related party transaction which exceeded the respective thresholds mentioned in Section 9 of the Colombo Stock Exchange Listing Rules. The recurrent related party transactions entered into with related parties are exempt in terms of the Colombo Stock Exchange Listing Rules and are duly disclosed on pages 90 to 92 of the Annual Report. The Company has complied with the requirements of the Listing Rules on Related Party Transactions.

A.M. de S. JayaratneChairmanRelated Party Transactions Review Committee

23rd November 2020


OUR PLANTATIONSEs

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19

OUR PEOPLE

Workers Clerical, Technical & Other Staff

Executives Total

2019/20 2019/20 2019/20 2019/20

Total Employees 5,991 461 60 6,512

Region Wise Kotagala 3,739 246 21 4,006

Horana 2,252 204 23 2,479

Head Office 11 16 27

Gender Wise Male 2,317 336 52 2,705

Female 3,674 125 8 3,807

Age Distribution Below 30 Years 457 37 8 502

30 - 45 Years 2,907 242 20 3,169

Over 45 Years 2,627 182 32 2,841

Service Distribution Below 5 Years 1,491 172 14 1,677

5 - 15 Years 2,068 192 31 2,291

Over 15 Years 2,432 97 15 2,544


CROP AND YIELD

Estate Crop (KG ‘000) Yield (KG /Ha)

2019/20 2018/19 2017/18 2016/17 2015/16 2019/20 2018/19 2017/18 2016/17 2015/16

TEAWestern High GrownBogahawatte 177 200 223 243 292 1,364 1,548 1,724 1,874 2,255 Chrystlers' Farm 188 200 212 190 235 1,614 1,669 1,662 1,613 2,000 Craigie Lea 371 466 389 402 478 1,613 2,025 1,693 1,745 2,029 Derryclare 284 306 292 292 332 1,542 1,634 1,588 1,474 1,689 Drayton 426 509 566 433 595 1,835 1,951 1,778 1,719 2,111 Kelliewatte 128 183 228 335 340 1,518 1,806 1,647 1,685 1,835 Mayfield 418 563 606 468 626 1,490 1,779 1,577 1,396 2,231 Mount Vernon 832 783 926 789 963 2,210 1,913 1,807 1,796 2,528 Stonycliff 435 570 520 517 637 1,470 1,931 1,769 1,686 2,101 Yuillefield 406 475 611 551 649 1,385 1,465 1,371 1,125 1,559 Sub Total 3,664 4,255 4,573 4,220 5,146 1,651 1,795 1,665 1,581 2,058

Low GrwonEduragala 29 36 39 34 40 1,601 2,007 2,189 1,922 1,981 Hedigalle 9 7 10 14 15 1,288 754 1,065 1,193 1,637 Gikiyanakanda 165 262 247 94 158 1,302 1,569 1,659 1,513 1,322 Rayigam 313 352 419 411 547 1,352 1,475 1,629 1,561 1,841 Vogan 84 96 194 125 182 1,296 1,251 2,189 1,154 1,540 Sub Total 599 753 909 678 942 1,349 1,464 1,606 1,423 1,666 Total-Tea 4,263 5,008 5,482 4,898 6,088 1,624 1,766 1,660 1,567 2,023

RUBBERArappolakande 168 186 185 239 256 686 754 763 983 1,024Dalkeith 195 273 271 335 319 670 952 924 1,149 975Eduragala 79 110 122 123 121 444 597 612 663 562Gikiyanakande 102 135 134 177 154 344 434 416 587 545Hedigalla 41 62 57 118 94 293 401 381 785 465Millewa 9 65 162 164 525 490 831 874Padukka 137 198 212 264 258 594 828 784 941 882Paiyagala 158 249 249 289 282 527 830 797 918 944Rayigam 134 161 172 205 185 642 720 770 914 760Sorana 144 185 206 251 242 609 790 723 988 861Uskvalley 108 164 174 221 211 528 758 724 932 872Vogan 137 181 161 196 175 473 607 557 641 559Total -Rubber 1,403 1,913 2,008 2,580 2,465 536 705 687 865 785

OIL PALMArapolakande 359 346 184 152 81 12,186 11,729 6,251 5,831 7,529Dalkieth 512 433 261 186 113 6,564 5,547 3,573 3,097 2,946Uskvalley 547 538 252 251 110 4,390 4,324 2,021 2,770 1,613Gikiyanakanda 306 257 186 116 64 13,892 11,682 8,460 5,256 -Sorana 535 541 235 215 43 8,969 9,080 3,946 5,324 -Rayigam 93 61 18 7 2 5,146 3,399 1,013 - -Hedigalla 163 145 17 17 - 3,509 - - - -Vogan 38 35 5 3 - 2,562 - - - -Total-Oil Palm 2,552 2,356 1,158 947 413 6,492 6,563 3,479 3,739 2,910

21

MANAGEMENT DISCUSSION & ANALYSIS

RUBBERNatural rubber production in Sri Lanka is declining at an alarming rate from 155000 Mt produced in 1967 to 74,800 Mt last year recording a significant decline of 51% over the years and the lowest annual output in history. Sri Lanka with over 140 years history as the pioneer rubber grower in the world outside South America, was in the fourth place in the world as a NR producer in late nineteen sixties has already fallen down to the 12th position, overtaken by countries entered into growing rubber much later, such as Vietnam, Cambodia and Myanmar.

At present, the contribution from the rubber industry to the total export value of Sri Lanka is only 0.2% against 0,3% last year. The export revenue reduced from US$ 31.6 M last year to US$ 24.2M this year, recording a decline by 23.4%.

Hence, the time has now come for the RPCC to consider converting their estate latex used for the manufacture of latex crepe to good grades of RSS at a lesser cost, but selling at almost at the price of best quality latex crepe to meet the shortfall of RSS for local industries.

One of the major reasons for the drop in productivity of all agricultural crops in the country is the escalating labour wages, which makes the weeding cost very high, particularly after the banning of the use of the weedicide Glyphosate citing health reasons which is an unfounded fear. As a result, farmlands are not properly weeded now to minimize the absorption, by weeds, of limited quantities of nutrients, added to the soil as fertilizers, at a very high cost.

Global Rubber production of natural rubber has been around the range of 13.9 M/Mts during the current year against 13.3 M Mts the previous year showing a growth of 4.5%.

At present Sri Lanka is among the worlds’ top ten largest producers and the7th largest exporter in Natural Rubber, but it is sad to report that the extent under tapping is in the declining trend over the years as a result of competition for land for more lucrative agricultural crops such as oil palm etc. The lower prices over a considerable period of time has led to the abandonment of tapping in marginal lands, as proceeds could not even cover the cost of production making rubber cultivation less attractive.

Sri lankan Rubber production at 74.8 M/Kgs during 2019 against that of 82.6 M/Kgs in 2018 records a significant decrease of 10% , depicting a continued declining trend recording the lowest production volume in the past 50 years mainly due to the reduction of both the extent under tapping and the number of tapping days, in response to lower prices mainly in the smallholder sector.

Reflecting the drop in international market prices in 2018, Prices of Sri Lankan RSS rubber reflected a marginal increase mainly due to COVID-19 impact . The Colombo Auction average price of RSS1 increase to Rs.288.44 against Rs.281.36 in the previous year recording an increase of 2.5% and Prices of Latex Crepe rubber decreased from Rs.321.7 in the previous year to Rs.302.61 in the current year showing a decline of 5.5%.

COMPANY PERFORMANCE

CropDuring the year under review the Company produced a crop of 1.4M/Kgs against that of 1.9M/Kgs during the previous year showing a decrease of 26.7%, mainly due to adverse wet weather conditions, decrease in number of tapping days and also due to the takeover of Millewa Estate by the Government, which is one of the high yielding rubber estate under Kotagala Plantations PLC.

YieldDuring the year under review the yield obtained in the Low Country was 536 Kgs/ha against that of the previous year 705 Kgs/ha recording a decrease of 24%.

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Net Sales AverageThe Colombo Market prices of RSS decline by 35% against 2012 prices. Latex Crepe and Scrap Crepe too recorded a drop by 35% and 53% respectively against that of 2012 prices. Besides the world production being 13.9 M/Mts the world consumption shows a tremendous increase to 29.3 M/Mts in 2018 reflecting a situation whereby the excess consumption in the market is met by excess stocks being held by China and Thailand, which clearly accounts for the drop in prices.

Kotagala Plantations were able to achieve an average price of Rs.301.66 during the current financial year against that of Rs.264.1 during the previous year recording an increase of 14.2% .

Cost of ProductionThe COP for rubber increased by 10% from Rs.369.25 (previous year) to Rs.478.63 (current year). This was mainly due to the increase in cost of production as a result of the decrease in crop by 26%.


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TEAThe year 2019 commenced with a lot of uncertainty from the previous year’s last quarter results of production and auction averages which were on the declining trend. However, as the year progressed the prices further declined from the beginning of the 2nd quarter, well below the 2018 prices and continued till the end of October 2019. Nevertheless, during November and December prices picked up yet below the previous year levels. Significant reduction of purchases from Japan, due to MCPA levels, as a result of the use of alternative products for weed control, together with US sanctions on Iran and weak economies in the Middle Eastern countries and Russia had a cascading impact on Auction prices.

Auction averages for the year 2019 totalled 544.54 against the 2018 average of 581.91 Almost all, High, Medium and Low growns reflected a decrease in prices by, Rs.62.88, Rs.52.9 and Rs.24.18 respectively against the year 2018.

Tea production for the year 2019, totalled 300.1 M/kgs showing a decrease of 3.8 M/kgs against the previous year 2018. The decrease is due to the reduction in High and Low growns by 2M/kgs each while Medium Growns have shown a marginal increase of 0.1M/kgs against the previous year 2018.

Sri Lanka Tea exports totalled 292.6M/kgs in 2019 compared to 282.3M/kgs in 2018 showing an increase of 10.3 M/kgs. And in terms of revenue earned Rs.240.6B against Rs.233.3 B against the previous year 2018.

It is noteworthy to state that the Sri Lankan tea was fetching the highest World Auction Averages during the last 12 years except the year 2012 which was held by Kenya. World Tea Production surpassed 6 B/Kgs during January-December 2019. Although this records a marginal growth when compared to 5.9 B/kgs of 2018 (around 2%) . Main contributors for this growth are China, India and Kenya. It is also relevant that countries such as Sri Lanka, Indonesia, and Vietnam have shown a negative growth YOY as well as during the past decade. World production recorded an increase of 2.4% against last year and China, India, Kenya and Sri Lanka accounted for almost 89.6% of the global production.

The 1st Quarter weekly auction volumes commenced with 6.5M/Kgs and thereafter remained at 7M/Kgs. But prices averaged to Rs.536.86 against Rs.578.07 against the previous year recording a decrease of Rs.41.21

The 2nd Quarter weekly auction volumes remained constant at 7 M/kgs compared to 2018 but the prices further declined sharply to Rs.504,27 registering a decrease of Rs.32.42 compared to the previous year.

The 3rd Quarter weekly auction volumes showed a decline to the preceding quarter below 6.5 M/Kgs. Auction prices showed a turn around, during November and December recording Rs.553.71.

The 4th Quarter weekly auction volumes ranged between 5 M/kgs to 5.2 M/kgs. but the prices reflected a slight increase. The annual Auction average of Rs.594.81 recorded a slight increase of Rs.9.51 against that of Rs.585.3 in the year 2018.

In total, the year 2019 witnessed an increase in auction volumes by 3.4% amounting to 10 M/kgs as compared to 2018, but the prices dropped by 37.37% from Rs.581.91 in 2018 to Rs.544.54 in 2019.

Both Western High/Low Growns averages showed a significant decrease by Rs.37.2/= per kg and Rs.50.3/= per kg against the last year respectively. And the company achieved an average of Rs.543.29 and Rs.577.98 for the High/Low Grown Regions for the current year against that of Rs.582.2 and Rs.596.46 in the previous year respectively.

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CropIn the year under review the Company’s tea production reached 4.2 M/kgs against 5M/kgs during the previous year recording a decline of 13.9% from High grown and 20.5% from low grown with an overall decrease by 14% mainly due to erratic weather conditions prevailed in the country.

YieldDuring the year under review the yield obtained in the High Grown was 1,651 Kgs/ha against 1,796 Kgs/ha in the previous year recording an decrease of 8% and Low Country too recorded a yield of 1,349 Kgs/ha this year against that of the previous year 1,464 Kgs/ha resulting in a decrease


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of 8%. The overall Yield for the Company showed an decrease of 8% from 1,766 Kgs/ha during the previous year to 1,624 Kgs/ha in the current year.

NSAIn the year under review the Company’s NSA decreased substantially by8.6% representing both High/Low growns against the previous year resulting in a decrease of Rs.497 M in turnover.

Cost of Production (COP)The COP reached to a higher figure of Rs508/kg during the current year against that of Rs.498/kg in the previous year reflecting a slight increase by 2% mainly due to the decrease in yield by 8%.

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OIL PALMKotagala Plantations PLC has indentified an extent of 1,200 ha to be planted with this newly popular agricultural crop. The identified land is mainly confined to Kalutara District falling under shrub jungle of Godapara and some uneconomical rubber lands situated in the high rainfall areas.

Of the total programme an extent of 581 ha has already been planned. The delay in completion of the target was mainly due to the government restrictions enforced on import permits on the seeds. Out of the 525.88 Ha, approximately 331 Ha have come in to bearing yielding a crop of 2.552 M kgs of Fresh Fruit Bunches against 2.356 M Kgs the previous year showing a growth of 8.3% and generating a revenue of Rs.109M against Rs.93M last year showing a growth of 17%.

Owing to the fact that Kotagala Plantations PLC is not having a factory to process Palm Oil, the facility available with AEN palm Oil Processing (Pvt) Ltd. at Baduraliya (Agalawatte) is being patronized.

Currently Palm Oil prices have taken a upward trend in the international market. During the current year the Company achieved an average price of Rs.42.75 per kg against Rs.39.49 in the previous year showing an increase of 8.2%.

Unfortunately the Sri Lankan Government has banned any new replanting in the Oil Palm crop, despite the fact that Oil Palm appears to be a viable

crop in most of the Plantation companies, significantly contributing towards the profitability amidst losses from Rubber and Tea sectors due to decline in Auction prices.

CAPITAL EXPENDITUREThe Company invested an amount of Rs.53 M against Rs.105.8 M last year in respect of field and development expenditure. In the year under review 51.33 ha of tea, 349.26 ha of rubber and 132.76 ha of oil palm was maintained under immature extent. The Company spent Rs.32.1 M on plant & machinery , infra structure development , social work, vehicles, IT developments and to meet HACCP standards.

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CHALLENGESThe volatility in Middle Eastern markets, as a result of the US embargo on shipments to Iran, the decline in Ceylon tea prices in the international markets as a result of the MRL factor found in tea exported to Japan and increasing costs as a result of the wage increase in 2018 have created a challenging environment for the Sri Lankan tea industry. Even if global market conditions improve, rigidities in the domestic supply due to erratic weather conditions and rising cost of production could make it challenging for the domestic tea industry.

Unlike Tea, the rubber small holders account for 77% of the national rubber production and only 23% is attributable to corporate sector which is significant to the local rubber industry towards the production of the finished products. The current declining trend in the rubber prices may have cascading effect on the prices offered to small holders who may not be able to sustain losses for a longer period, which will eventually affect the rubber replanting undertaken by small holders and hence a greater impact on the country’s field latex production and there by Rubber exports.

WAY FORWARDIndustry needs to urgently improve productivity and generate new markets. Productivity appears to be the top priority as Sri Lanka’s Tea prices rank top in the world market price list. Introducing mechanized plucking becomes inevitable. New markets such as other Middle East Countries apart from Iran and other untapped European &Asian countries must be explored. The growing black tea market in China is also a possible destination to export local tea.


The way forward for Rubber is value addition. Sri Lankan rubber industry needs to attract foreign investments in order to expand and diversify. Government’s intervention in the Rubber industry is imminent towards its growth and future sustainability, by way of increased re-planting subsidy to the small holders and also revisit of the Export Cess of Rs.15/kg. levied in 2011 but has still remained in force making export prices more unattractive.

FINANCIAL REVIEWThe Company has reported a Gross Loss of Rs.341.6 M during the current year against the previous year’s Gross Loss of Rs.212.9 M which accounts for an increase by Rs.128.7 M, mainly due to the decrease in gross profit from Tea by Rs.211 M, decrease in Gross Loss from Rubber by Rs.80 M and increase in gross profit from Oil Palm by Rs.3 M.

The decrease in Tea prices by 8.6% resulting in revenue loss of Rs.193m is the main reason for the Gross loss. Cost of Sales too decreased by 11% as a result of the decrease in crop by 8.6%.

The decrease in Gross loss for Rubber was mainly due to increase in Rubber prices by 14.2%, the Rubber crop decreased by 27%, reporting in a gross loss of Rs.242 M against a gross loss of Rs.321M last year.

The Oil Palm performance reflects marginal increase compared to the previous year. Although the yield decreased by 1%, the crop and the price increased by 8.3% and 17.3% respectively. The COP increased by 13%, but the overall Gross profit increased by 7.8%, resulting in a Gross profitability of Rs.41.6 M against the previous year Gross profit of Rs.38M . The Oil Palm has just turned around to sustainable yielding cycle and expected to contribute significantly to the profitability of the company in the coming years.

Kotagala Plantations PLC, has reported a after tax loss of Rs. 829M against the loss of Rs.1.1B the previous year reflecting a decrease in loss by Rs.282 M, mainly due to the increase in Gross loss of Rs.129M together with the increase in Other operating Income of Rs. 270 M, decrease in administrative expenses, financing cost and taxation by Rs.24 M, Rs.24 M and Rs.94 M respectively.

Kotagala Plantations PLC records a comprehensive loss of Rs. 221.7 M for the current year against a loss of Rs.1.216 B last year mainly due to the revaluation gain of Rs.594 M and other fair value gains of Rs. 70 M from OCI, Actuarial gain of Rs.49m.

TurnoverThe turnover decreased by 17.5% with a revenue of Rs.2.667 B this year compared to Rs.3.232 B last year. The decrease of Rs.565 M is mainly of decrease in turnover from Tea of Rs.497M and Rubber Rs.84M netted off by the increase in turnover from Oil Palm of Rs.16 M. The decrease in turnover from Tea sector is due to decrease in prices by 8.6% and crop by 15%. The decrease in turnover from Rubber sector is due to decrease in crop by 27% despite the increase in prices by 14%. The Oil Palm sector showed an increase in both prices and crop by 8%.

Biological Assets -TimberWith the adoption of LKAS 41, the Company recognized its managed timber at fair value amounting to Rs.1,468 M in the balance sheet under consumable biological assets as at the year end and the gain recognized in the profit and loss statement amounted to Rs.143 M for the current year


against Rs.142 M the previous year. The increase was mainly due to the increase in timber content coupled with the decrease in the discount rate as a result of the decrease in risk free interest rate.

InvestmentsAll the quoted investments are stated at market value and unquoted investments are valued using estimates based on acceptable Bench Mark method adopting valuation factors of other comparable quoted Companies. Fair value reserve stands at Rs.26.5M at the year end against that of Rs.18 M last year, mainly due to the increase in the value of Unit Trust Investments.

Cash flowThe company generated net cash from operating activities of Rs. 281.8 M against Rs.453 M in the previous year. The decrease in funds amounting to Rs.171.3 M is mainly due to increase in operating profit by Rs.32 M and the net decrease in changes in working capital by Rs.203.3m

The company invested Rs.54 M in replanting and Rs.32 M in Plant & Equipment and also settled term loans and leases amounting to Rs.188M and redemption of debentures amounting to Rs. 250 M. Other inflows consist of long term borrowings amounting to Rs.105 M and Rs.14 M from grants.

The increase in the Net Cash from the operating activities of Rs.282 M was utilized in investing activities amounting to Rs.86 M and financing activities amounting to Rs.318 M resulting in a net deficit of Rs.123 M for the current year against the deficit of Rs.53 M in the previous year.

The Company closed the period

kotagala plantations plc · 2020. 12. 4. · kotagala plantations plc, has reported an after tax...

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