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Thursday June 8th, 2023

Sri Lanka’s Hayleys Plc rated ‘AAA(lka)’ with a stable outlook: Fitch

ECONOMYNEXT – Fitch Ratings said it has assigned the National Long-Term Rating of Sri Lankan diversified conglomerate Hayleys Plc at ‘AAA(lka)’ with a stable outlook.

“Fitch has also assigned a ‘AAA(lka)’ National Long-Term Rating to Hayleys’ senior unsecured debentures,” the rating agency said.

The rating reflects Hayleys’ large operating scale locally as a result of extensive business and geographical diversification, and strong market share in most of its businesses.

“We believe this will lead to steady operating cash flows. We expect Hayleys to maintain a measured approach to debt-funded acquisitions amid a weak domestic operating environment and high borrowing costs.”

The full statement follows:

Fitch Assigns Hayleys First-Time ‘AAA(lka)’ National Rating; Outlook Stable

Fitch Ratings – Colombo – 24 May 2023: Fitch Ratings has assigned Sri Lankan conglomerate Hayleys PLC a National Long-Term Rating of ‘AAA(lka)’. The Outlook is Stable. Fitch has also assigned a ‘AAA(lka)’ National Long-Term Rating to Hayleys’ senior unsecured debentures.

The rating reflects Hayleys’ large operating scale locally as a result of extensive business and geographical diversification, and strong market share in most of its businesses. We believe this will lead to steady operating cash flows. We expect Hayleys to maintain a measured approach to debt-funded acquisitions amid a weak domestic operating environment and high borrowing costs. This should keep its credit metrics adequate for the rating.

Hayleys’ debentures are rated at the same level as the issuer rating as we expect the company to maintain prior-ranking debt, including debt at its subsidiaries and secured debt at the company, below 2.0x-2.5x, the threshold above which we may consider downgrading the notes’ rating. The ratio was 2.0x in the financial year ended March 2023 (FY23).


Strong Business, Geographical Diversification: Hayleys operates in 12 main sectors catering to industrial and retail customers. It is exposed to defensive segments such as agriculture, hand protection, textiles and purification, as well as cyclical but growth markets like transportation, consumer-durable retail and construction. Hayleys is geographically diversified with more than 50% of its revenue from exports, limiting risk from the weak domestic market. This has supported strong EBITDA growth in the last few years, despite the challenging domestic environment.

Strong Market Presence: Hayleys is the leader in Sri Lanka’s transport, consumer-durable retail, textile, aluminum extrusion and tea production industries. It also has a sizeable share in the fragmented global hand protection and activated carbon-based purification markets. It has strong relationships with customers but high customer concentration in some businesses, although the risk is mitigated by high switching costs and its established relationships. Hayleys’ competitive position is also strengthened by its vertical integration and strong relationships with suppliers.

Tight but Adequate Coverage: Hayleys’ EBITDAR to fixed-charge cover should remain at around 2.0x (FY23: 2.0x) over the next two years amid high but moderating interest rates. Its interest cost rose threefold in FY23 as around 75% of its debt was on variable interest rates. We expect Hayleys’ interest costs to drop in line with our forecast of moderating domestic interest rates and the conversion of some local-currency debt to cheaper foreigncurrency debt. Hayleys’ lower fixed-charge coverage is offset by higher cash flows from exports than its rated peers.

Steady Leverage: We expect Hayleys’ EBITDAR net leverage to remain below 3.0x over the medium term, although rising moderately from 2.3x at FYE23 due to capex for business expansion. We expect the group to spend around LKR14 billion-16 billion in capex and acquisitions over FY24-FY26 and pay 20% of net income as dividend, largely funded by internal cash flows. The group’s balance sheet has strengthened over the past few years, helped by an improvement in operating performance and a more conservative approach to investments.

Pressure on End-Market Demand: We expect flat revenue in FY24 amid weak demand across most segments. We expect Sri Lanka’s GDP to grow 2% in 2023 after a 9.2% contraction in 2022. However, there will be a lag before the benefits of growth trickle down to consumer and private-sector spending, as the country grapples with high inflation, interest rates and taxes. We expect the agriculture segment (12% of EBIT in FY23) to remain resilient, but a recovery in domestic-focused consumer durables, construction and transportation will take longer.

Fitch forecasts GDP growth in the US and eurozone, Hayleys’ key export markets, to slow to 1% in 2023, dampening non-discretionary spending and global trade. This will moderate Hayley’s transport sector cash flows (25% of EBIT in FY23), with freight rates falling to prepandemic levels. However, demand for hand protection (7%) and purification (15%) should remain resilient amid stock replenishment and demand for air and water purification, respectively. We expect pricing pressure in most export segments due to falling commodity prices and increasingly price-conscious customers.

Lower, Albeit Healthy, Margins: We expect Hayleys’ EBITDAR margin to narrow by around 200bp to 13.0% in FY24 on lower sales volume and price pressure. Hayleys’ EBITDAR margin expanded to 15.0% in FY23, the highest in recent years, as export earnings outpaced domestic operating costs amid the nearly 80% depreciation in the local exchange rate. However, the Sri Lankan rupee has appreciated by around 15% since March 2023, reversing some gains.

We believe the drop in freight rates and falling tea prices will also push margins lower. We expect the group’s overheads to remain elevated amid high inflation, rising electricity tariffs and wage increases, which Hayleys may not be able to fully pass on.

Adequate Holding-Company Profile: Hayleys has strong ownership and control over all its operating subsidiaries, allowing the holding company to extract subsidiaries’ operating cash flows to a large extent. We therefore expect the holding-company EBITDA net leverage and EBITDA interest coverage to be maintained at around 4.0x and 1.5x, respectively, over FY24-FY26, supported by a measured approach to investments in the last few years and improving cash flow.

Hayleys has more diversified operations than peer Dialog Axiata PLC (AAA(lka)/Stable) in terms of business and geographical diversification. Dialog operates exclusively in the domestic market while Hayleys has exposure to multiple overseas markets with strong growth potential. However, Dialog is the market leader in domestic mobile telecoms with a 60% share compared with Hayleys’ relatively modest position in most of its end-markets. Dialog’s capex intensity is high and mostly non-discretionary, resulting in weaker freecash-flow (FCF) generation than Hayleys. However, Dialog has maintained lower leverage than Hayleys, supported by stronger EBITDA growth, underpinned by solid market leadership and integrated service platforms, leading to strong pricing power. Consequently, Dialog’s rating can withstand weaker financial metrics than that of Hayleys.

Domestic conglomerate Melstacorp PLC (AAA(lka)/Stable) has more defensive cash flow and a stronger FCF profile than Hayleys due to its market leadership in the protected domestic alcoholic beverage market. In contrast, Hayleys is exposed to cyclical endmarkets in some its business segments, which are also more fragmented. However, Hayleys’ greater geographical and end-market diversity mitigate some of these risks while Melstacorp’s operations are largely concentrated in Sri Lanka. Melstacorp’s stronger FCF profile supports its ability to withstand weaker financial metrics than Hayleys for the same rating.

We rate domestic conglomerate Hemas Holdings PLC (AAA(lka)/Stable) at the same level as Hayleys on Hemas’ defensive businesses, significantly stronger FCF, a record of measured expansion and stronger liquidity, which offset its smaller scale and limited geographical diversification compared with Hayleys. Nearly 90% of Hemas’ EBITDA stems from healthcare and consumer-segments, while a number of Hayleys’ end-markets, such as transportation and consumer-durable retail, are characterised by more cyclical demand. However, Hayleys is more diversified across businesses and geographies than Hemas, counterbalancing some of these risks. Hemas’ stronger FCF supports wider financial metrics than Hayleys for the same rating.

Domestic conglomerate Sunshine Holdings PLC (AA+(lka)/Stable) is rated one notch below Hayleys to reflect its significantly smaller operating scale, limited geographical diversification and regulatory risks in some of its businesses, which are counterbalanced by its better financial profile with lower leverage. Sunshine has been more conservative with its expansion than Hayleys, growing only within its core businesses without significantly pressuring its balance sheet. In contrast, Hayleys has a history of debt-funded growth, resulting in a weaker balance sheet than Sunshine.

Hayleys is much larger in scale and has more defensive cash flows than Ceat Kelani Holdings Pvt Limited (CKH: AA+(lka)/Stable), warranting a one-notch higher rating for Hayleys. CKH faces competitive pressure from imports, is exposed to cyclical demand for vehicle tyres and its addressable market is relatively small. However, CKH has maintained a significantly stronger financial profile than Hayleys, reflected in cash on hand exceeding debt, mitigating CKH’s business risks.

Hayleys’ credit considerations lead to a higher rating than for large domestic banks, nonbank financial institutions and insurance companies, which are more exposed to sovereign stress due to holdings of large sovereign-issued securities for regulatory reasons. The large financial institutions also have a broader exposure to the various economic sectors.


Fitch’s Key Assumptions Within Our Rating Case for the Issuer:

– Revenue to remain flat in FY24 as any growth stemming from expansion and defensive end-markets will be offset by weak demand in key export markets such as the US and Europe and price pressure in some segments.

– Revenue to rise by around 10% from FY25, benefitting from demand recovery across most markets.

– EBITDAR margin to narrow by 200bp to 13% from FY24 amid lower volume, appreciation of the local currency and cost increases, which the company may not be able to fully pass on due to weak demand.

– Net working-capital cycle to remain around 100 days in FY24, helped by lower inventory days and continuation of the FY23 improvement in receivable days.

– Annual capex of around LKR13 billion over FY24-FY26, mainly on capacity expansion across most segments.

– LKR3.0 billion per annum spent on M&A to account for Hayleys’ acquisitive nature even though the company has not provided any guidance on this.

– Annual dividend payment of LKR4.0 billion in FY24 as announced and 20% of net income thereafter, although the company has not publicly committed to a fixed dividend policy.


Factors that could, individually or collectively, lead to positive rating action/upgrade:

-There is no scope for an upgrade, as the company is already at the highest rating on the Sri Lankan National Rating scale.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

– Group net debt to EBITDAR increasing above 4.0x on a sustained basis (FY23: 2.3x);

– Group EBITDAR fixed-charge coverage falling below 2.0x on a sustained basis (FY23: 2.0x).

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed as deflationary policy and weak credit reduced ‘above the line’ outflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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