Diesel & Motor Engineering PLC | Annual Report 2007/08

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	Driving Sustainable Change
	Economic Performance
	Environmental Performance
	Social Performance - Empowering People
	Assurance Report

Economic Performance

CREATING SUSTAINABLE ECONOMIC SYSTEMS

Statement of Value Added

Value Created

		Consolidated 2007/08 Rs. ’000	Consolidated 2006/07 Rs. ’000			Company 2007/08 Rs. ’000	Company 2006/07 Rs. ’000
Gross turnover		12,687,289		12,989,916		12,169,146		12,449,644
Other income		37,900		28,380		35,804		29,221
Less: Cost of material and services bought in		(9,444,389)		(9,557,576)		(9,080,891)		(9,164,286)
		3,280,800		3,460,720		3,124,059		3,314,579
Value Shared with
		Consolidated 2007/08 Rs. ’000	%	Consolidated 2006/07 Rs. ’000	%	Company 2007/08 Rs. ’000	%	Company 2006/07 Rs. ’000

Employees	18	573,208	13	432,159	16	512,136	13	385,090
Government	58	1,906,343	64	2,206,250	60	1,882,218	65	2,163,764
Lenders	16	517,823	13	450,926	15	463,926	12	418,698
Shareholders	1	48,400	2	72,600	2	48,400	2	72,600
Retained in the business	7	235,026	8	298,785	7	217,379	8	274,427
Depreciation set aside	2	84,383	2	63,308	2	77,160	2	58,699
Profit retained	5	150,643	6	235,477	5	140,219	8	215,728
	100	3,280,800	100	3,460,720	100	3,124,059	100	3,314,579

Management Approach

Through its activities Dimo seeks to enhance the economic conditions of all its stakeholders and of society in general. While a good bottom line is a company priority, Dimo also seeks to contribute to a large ‘social bottom line’ where the fruits of entrepreneurship percolate to all social segments and to all geographical areas.

Job creation, educating the young and empowering disadvantaged communities is all part of the Company’s process of value generation. Value generation within the organisation embraces both monetary and non-monetary aspects. In this section we examine the Company’s economic impact on investors, suppliers, customers, employees and the country/Government.

Economic Performance

The ‘Statement of Value Added’ and the ‘Statement of Economic Value’ added are main tools that the Company uses to monitor its economic performance. This is supported by the use of other indices and information.

The Statement of Value Added shows the value added to the economy by the Company and the value distribution across stakeholders. Total value created for the financial year was Rs. 3.28 bn (as against Rs. 3.46 bn the previous year) which was distributed among Government, Employees, Lenders and Shareholders in the manner set out in the Statement of Value Added. Rs. 573 mn or 18% of the value created was shared with employees in comparison with the Rs. 432 mn or 13% the previous year.

The statement of economic value added measures the economic profit earned by the Company. Economic profit means the excess/(shortfall) of adjusted earnings over the economic charge on the capital consumed. The Company experienced a negative EVA during the year because of a reduction in its profitability. The EVA for the year under review was negative at
Rs. 122 mn (2006/07 - Rs. 120 mn).

shareholders

Earnings per Share dropped to Rs. 16.95 per share (2006/07 - Rs. 25.76) and the Total Shareholder Return (TSR) fell further by 22.70 % [2006/07 (9.03%)] because of a reduction in earnings. The drop in the Market Value per Share too contributed to the reducing in the TSR. The reasons for the reduction in profits are discussed in the Financial Review on page 37. The fall in profit after tax necessitated a reduction in the dividends.

The value that accrues to a shareholder is a combination of the dividends per share and the appreciation/depreciation of the share over the medium to long-term. The Total Shareholder Return Chart captures the value addition to shareholders over the medium to long-term.

Shareholders’ funds stood at Rs. 1,657 mn compared to Rs. 1,506 mn as the end of the previous financial year.

Total Shareholders Return (TSR)

	2008	2007	2006	2005	20004
Market Price per Share (Rs.)	88.75	120.00	138.50	103.00	53.00
Dividend per Share (Rs.)	4.00	6.00	6.00	5.00	3.50
Dividend per Share (Rs.)	(22.70)	(9.03)	40.29	5.00	13.00
Earning per Share (Rs.)	16.95	25.76	22.96	17.72	10.03

Economic Value Added (EVA)

Economic Value Added (EVA) is a performance measure developed by Stern Stewart &
Co. Ltd. that attempts to measure the true economic profit produced by a Company. It is frequently also referred to as ‘economic profit’ and provides a measurement of a company’s economic success (or failure) over a period of time.

		2007/08 Rs. ’000	2006/07 Rs. ’000

Total Capital Supplied
Shareholders’ fund		1,657,151	1,506,508
Long-term interest bearing loans and borrowings		730,702	477,565
		2,387,853	1,984,073
Earnings
Profit after tax		205,093	301,777
Add: Interest on long-term borrowings		67,915	58,925
Adjusted earnings		273,008	360,702
Weighted average cost of capital (WACC)		16.54%	12.12%
Economic charge		394,951	240,470
Economic Value Added (EVA)		(121,943)	120,232

	Source	2007/08	2006/07
Average Risk Free Rate (Average Treasury Bill Rate)	Central Bank	17.81%	11.88%
Beta Factor - DIMO	CSE	0.17	0.37
Risk Premium	Assumed	2%	2%
All Share Price Index (ASPI)	CSE	2,550.5	2,789.8
Average Weighted Prime Lending Rate (AWPLR)	Central Bank	17.95%	15.19%
Rate of Income Tax	Applicable Rate	35%	35%
Cost of Equity (based on CAPM)	Computed	18.15%	12.62%
Cost of Debt (After Tax)	Computed	11.67%	9.90%

Employees

The Company strictly follows all statutory requirements with regard to employee remuneration and has a market based rewards structure. The salaries are usually adjusted to reflect employee performance. In addition, the staff is entitled to a comprehensive medical insurance cover and a performance based incentive pay which is linked to a pre determined scheme.

Staff costs increased from Rs. 432 mn to Rs. 573 mn reflecting both an upward movement in salaries and an increase in the average number of employees.

Customers

Dimo provides total solutions to its customers. The sale of a product marks the commencement of a relationship with the customer and the Company continues to provide a high level of after care beyond the point of sale. Dimo’s highly trained staff provide excellent technical support which adds value to the investment made in the products and services.

Suppliers

Suppliers come in two main forms: principals and other suppliers.

The Company’s aim is to build long lasting and sustainable relationships with our principals and to foster stronger relationships with principals who share our philosophy of sustainability.

Principals provide the foundation for the Dimo brand. They are the base on which the Company builds its value. Without their participation we are not able to offer our customers a world class product.

All our contractual obligations with our principals are honoured by the Company. We also invest substantially both in financial terms and in our human resources to enhance the value of the world class products that we offer. The economic value transferred to our principals is shown in the statement of value added as ‘cost of goods and services bought’.

Government

The Company ensures that all obligations to the Government of Sri Lanka is met as per legislation. During the financial year, the Company paid out Rs. 1,906 mn by way of taxes and other levies compared to the Rs. 2,206 mn in the previous year. This represents a total value added of 58% compared to the 64% previous year. The main reason for this decrease in taxes paid was due to the reduction in vehicle imports during the year.