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Saturday October 23rd, 2021
Bonds & Forex

Sri Lanka’s EB Creasy rated [SL]BBB by ICRA Lanka

ECONOMYNEXT – Credit Rating Agency ICRA Lanka Limited has rated Sri Lanka’s E B Creasy and Company ‘[SL]BBB’ with a stable outlook due to the steady position and improvements in Operation profits.

Despite the stable outlook, E B Creasy’s debt profile is largely skewed towards short-term loans, as the funding is largely for working capital requirements; and these short-term loans are refinanced on a regular basis, ICRA said.

As of March,2021, over 80 percent of the total debt was in the form of short-term facilities.

“Given the group’s reputation and banking relationships, ICRA Lanka expects the group to refinance these short-term maturities,” The rating agency said.

The full report is reproduced below:

Rating action

ICRA Lanka Limited has assigned fresh issuer rating of [SL]BBB (pronounced S L triple B) with Stable outlook for E B Creasy & Company PLC (“EBCR”/“the Group”).

Rationale

ICRA Lanka has taken a consolidated view on EBCR given the operational and financial linkages between the Group entities. ICRA Lanka draws comfort from the Group’s long track record and reputation, which has helped the Group to enjoy steady access to funding, supporting its growth over the years. Also, the rating takes cognizance of the strong market position of the group in its core product segments.

The rating takes into consideration the improvement in the profitability and the debt metrics of the Group during FY2021, notwithstanding the weaker macro-economic conditions and the impacts brought about by the COVID-19 pandemic. EBCR’s operating margins have improved during FY2021, largely due to higher capacity utilization levels driven by market share and volume growth. The holding company has been efficient in re-allocating expenses across marketing and distributing and has gained market share in key product categories. The overall profitability is further supported by the historically low interest rates, enabling the Group to refinance its debt at favorable terms. Improvement in operating profits have resulted in better coverage and leverage indicators for the Group, despite the overall debt levels remaining largely stable during FY2021.

While the rating takes cognizance of the short-term nature of the borrowing profile, exposing the group to refinancing risk, EBCR’s good relationships with banks and the established track record provide some comfort. The rating also takes into account the potential financial liabilities of the parent company, from the guarantees extended to other group entities and related companies.

Outlook: Stable

The Stable Outlook reflects the strong market position and healthy financial profile of the Group, despite the weaker macro-economic conditions.

Key rating drivers

Credit strengths

Strong track record and dominant market position in the relatively stable consumer segments: over the years, EBC has grown by strategic acquisitions and now constitutes a diversified group with 40 Group entities which are into manufacturing of FMCG products, import/export of agricultural inputs/commodities, distribution and freight forwarding, trading of chemicals/auto components and power equipment (solar), managing hotels and plantations.

The group is a market leader in several consumer product categories and enjoys comfortable margins from most of the product categories. EBC is the dominant market leader in the shaving razor market with approx. 74% market share, where the group represents the globally renowned BIC razor brand. The group is also the dominant market leader in the mosquito coil market (approx. 86% market share) and the joss stick market in Sri Lanka.

In addition, the group has a strong market position in the toothbrush market with approximately 38% market share. The rating further takes comfort from the group’s ability to maintain healthy profit margins in these competitive segments, due to its strong market position, where the cost escalations are largely passed on to the consumer. ICRA Lanka also draws comfort from the Group’s track record and reputation in the industry, which has helped the Company to enjoy steady access to funding both from the capital markets as well as financial institutions that have supported its growth over the years.

Improvement in the earnings profile: despite the challenging macro environment that prevailed, the group was able to significantly grow its revenue and earnings, as the management was able to ensure business continuity, while the smaller competitors were affected by the exceptional circumstances. During FY21, group revenue recorded a 22% growth, vis-à-vis the modest growth of 4% reported in FY20. ICRA Lanka notes that the revenue growth was witnessed across most of the segments of the group, including the core FMCG segment.

With the increasing revenue, group operating margins have improved in FY21, to 12.9%, from 6.7% in FY20 and 3.1% in FY19. ICRA Lanka notes that higher capacity utilization levels and stringent cost controls are largely attributable to the operating margin increase. Overall profitability was further supported by the sharp decline of systemic interest rates, where the group finance cost reduced by about 30% during FY21. During FY21 EBC reported a group PAT of LKR 832Mn, vis-à-vis LKR 425Mn loss in FY2020, and LKR 749Mn loss in FY2019.

Improvement in coverage and leverage indicators due to healthy operating results: group coverage indicators have significantly improved due to robust operating income growth during the period; EBITDA grew by about 2.4 times in FY21, compared to FY20. The group interest cover improved to 4.3x in FY21 from 1.3x in FY20, while group leverage has also improved to 0.81x from 1.07x during the period, despite the overall debt level remaining largely stable. Going forward, ICRA Lanka expects the overall debt level to somewhat increase over the short to medium term, due to sizable Capex plans of the group; however, the coverage indicators are likely to remain somewhat comfortable due to the healthy operating income outlook.

Credit challenges

Short-term nature of the funding profile, exposing the group to refinancing risk: group’s debt profile is largely skewed towards short-term loans, as the funding is largely for working capital requirements; and these short-term loans are refinanced on a regular basis. As in Mar-21, over 80% of the total debt was in the form of short-term facilities.

While the short-term nature of the debt profile exposes the group to refinancing risk, given the group’s reputation and banking relationships, ICRA Lanka expects the group to refinance these short-term maturities. Also, the rating takes comfort from the unencumbered shares of group entities and unutilized funding lines of the group, which would provide financial flexibility.

Potential financing obligations from underperforming group entities and related entities: as in Jun-21 the parent entity EBC has extended about LKR 1.4Bn worth guarantees and undertaking for its group entities and related entities. Out of this, LKR 832Mn is extended for the former associate company Lankem Ceylon PLC (Lankem), which is significantly underperforming. Lankem was as an associate company of E B Creasy & Co PLC, and is engaged in the manufacturing and distribution of Agro Chemicals, Decorative Paints and Industrial Chemical & Bitumen Products.

During the past few years, the entity has sustained heavy financial losses owing to several reasons including adverse weather conditions in the past, working capital constraints, and regulatory related issues with its agro chemical segment. During FY2021, EBC further diluted its holding of Lankem from 34% to 18%, where the entity is no longer recognized as an associate

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.

Links to applicable criteria: https://www.icralanka.com/issuer-rating-methodology/

About the Group:

Established in 1878, E B Creasy & Company PLC (“EBCR”/“the Company”), was converted to a limited liability company and listed on the Colombo Stock Exchange (CSE) in 1968. It is one of the oldest companies in Sri Lanka. The Company is among the pioneers of the Ceylon Chamber of Commerce, having joined it in 1890 while Darley Butler – a wholly-owned subsidiary – enjoys the distinction of being one of the three oldest members since 1852. Over the years, EBCR has expanded by organic growth as well as by strategic acquisitions and now constitutes a diversified group. The Group is active in over 9 business sectors and operates 30 brands and 40 companies. The Group business entities include logistics and transport, distribution of pharmaceutical items, manufacturer of galvanized wire and all other varieties of steel wires, manufacturer of a range of confectionery products, and Alkaline type batteries & CFL bulbs. Since FY2018, Lankem Ceylon PLC (LCEY) was treated as an associate company of EBCR.

From 30th June 2021 onwards, as a result of the dilution of the stake, the investment has been recognized as an investment held at Fair Value through Other Comprehensive Income.
The Company on a standalone basis manufactures, markets, and distributes a range of homecare, personal care, and household products. The range offered includes imported and manufactured disposable razors, toothbrushes, mosquito coils, and mosquito liquid vaporizers. During FY2020, the company has exited from its hardware and automotive batteries segment. Besides, own operations, the Company also acts as the key holding company for the Group entities.

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