Annual Report 2018/19

Risk Management

Risk Management

At Sunshine Holdings, we manage our affairs and resources with the utmost intellectual honesty and diligence, giving due care to corporate ethics and social responsibility. This has always been our way.

As a listed, diversified entity, we are keenly aware of the need to successfully manage risk. Failure to do so can affect our operations, our stakeholders, and the society and environment within which we operate. Such risks can negatively impact our financial performance or attract the ire of regulators, seriously affecting our ability to create value. They have the potential to damage a hard-won reputation that was half a century in the making.

Each of our subsidiaries maintains separate risk management functions while, at Sunshine Holdings, we manage these risks through an effective governance framework that ensures regulatory compliance, transparency, and accountability, avoiding conflict of interest and safeguarding the integrity of our financial reporting and disclosures.

Our diversification into the various sectors, industries, and markets is a strategy that supports risk management from the Company’s perspective as well as that of its shareholders.

Sector Risk category Risks Implication/consequences of not addressing the identified related risk Risk control measures/Risk mitigation actions
Healthcare Regulatory and compliance risk Delay in registration of products or import licenses Unavailability of products leading to loss of market share and product loyalty Comply with all regulations relating to the product and develop close relationships with the regulator while continuously following up on the process
Price control of pharmaceutical drugs and medical devices Margin contraction. Increase in demand leading to out of stock situation Streamlined ordering process. Adjusting to the market environment as quickly as possible.
Negotiating prices of drugs and medical devices with principals to maintain margins
Supply chain risk Physical disruptions, environmental and industrial disruptions or loss of key suppliers Non-availability of adequate inventory levels resulting in loss of credibility while competitor brands capture the market share Improving demand planning function and establishing strong relationships with principals while being up to date with detailed information on competitor products
Disruptions to logistics Damage to inventory/storage facilities from natural disasters such as floods or fire which could result in losses Ensuring that all safety measures are being taken according to the International Standards
Insurance cover
Product risk Risk of product failures and declining demand for existing products Loosing the market share of the individual product and entire product range linked to it Continuous monitoring and communication with business partners for identifying the best product for the market
Attrition Shortages in qualified staff Affecting the long-term sustainability of the Organisation Matching the overall expectations of the employees with the market standards or above. Continuous employee engagement and development
Exchange rate Depreciation of the Sri Lankan Rupee Decrease in margin due to higher input costs Exchange loss relating to payables Forward contacts and renegotiations with principals for better rates Price increase of non-price controlled molecules and negotiations with NMRA to increase the prices of price controlled molecules
Interest rate Increase in interest rates on borrowings Higher finance cost on working capital and drop in net profitability Renegotiations with the banks for favourable terms and consider multiple financing options.
Better working capital management
FMCG Commodity price risk Increase in input costs Reduction in margins until the price adjustments are effected Effecting price increases based on market dynamics
Tea purchasing strategy – based on the last four years’ price trend, purchasing will be done at an optimal price
Supply chain risk Reduction in brand loyalty due to unavailability of products on shelf Reduction in sales coupled with decrease in market share while competitive brands capture the market share Stronger engagement with distributors and retailers.
Inventory optimisation for finished goods. Continuous monitoring of market demand
Stiff competition Loss of market share Reduction in revenue and profitability in the short term and losing business sustainability in the long term Aggressive marketing and promotions above the competition
Capital and finance Liquidity and credit risk Payment delays by debtors will pressurise the working capital cycle and increase collection risk Continuous follow up on debtors settlement and improved working capital management. Consider multiple financing options with favourable rates
Product quality Quality risk Deterioration in the brand equity Management of stringent quality control activities at manufacturing plant.
Promptly responding to customer inquiries while implementing total quality control measurements
Agribusiness Weather and climate Unpredictable extreme weather unfavourable to agriculture Drop in quantity and deterioration in quality of crop leading to reduced revenue Follow sustainable agricultural practices including RSPO recommendations. Conservation of environment and water resources
Commodity price risk Volatility in prices due to demand and supply dynamics Decrease in prices could lead to contraction in margins Forward contracts to sell Palm oil, tea swaps derivative instruments to hedge tea prices. Value addition and branding of tea by the Consumer Goods segment
Energy cost Increase in energy cost High costs leading to contracting margins Use of cheaper energy sources, use of internal hydropower, briquettes and solar power and use of green building concepts
Regulations on agrochemicals Non-availability of agrochemicals without proper alternatives Higher costs incurred for manual weeding and alternative agrochemicals Move to alternative agrochemicals
Labour shortage Operational disruptions Reduction in quantity and quality Process automation and usage of third party labour
Land availability Limitations in planning for revenue growth Decrease in revenue growth in the medium to long term Actively looking for suitable land outside the RPC with proper agroclimatic conditions and scientifically increasing the yield per hectare
Feed costs Increase in feed purchase prices due to seasonality of crops Increase in cost leading to contracting margins Scientifically identifying the best feed mix. Close relationship and engagement with
out-grower farmers to increase their efficiency and reduce cost
Quality of milk Decrease in milk quality Lower retail prices for milk and lower revenue Use of good quality feeding ration/industry practices/staff training, state-of-the-art milking parlour with no room for contamination and obtaining competitive prices from different buyers
Energy Interest rate risk Increase in interest rates leading to increase in finance cost Reduction in profits and stress on cash flows Re-finance of long-term debt with preferential terms and equity investors
Machine breakdowns Inability of supplying electricity to the grid Reduction in revenue and profits Continuous maintenance and keeping all machinery agreements up to date
Weather and climate Reduction of power generation Reduction in profits and stress on cash flows Maintenance of sufficient cash reserves to cover debt service payments.
Diversification in to other forms of renewable energy