ICRA Lanka re-affirms the ratings of Janashakthi PLC
|Instrument||Previous Rated Amount (LKR Mn)||Current Rated Amount (LKR Mn)||Rating Action|
|Issuer rating||N/A||N/A||[SL]BBB- with Negative outlook; Reaffirmed|
|Senior Unsecured Redeemable Debenture Programme||1,000||–||[SL]BBB- with Negative outlook; Withdrawn|
|Proposed Guaranteed Redeemable Debenture Programme||2,000||–||[SL]A-(SO) with Stable outlook; Withdrawn|
|Senior Unsecured Redeemable Debenture Programme||1,000||1,000||[SL]BBB- with Negative outlook; Assigned|
ICRA Lanka Limited, subsidiary of ICRA Limited, a group company of Moody’s Investors Service, has reaffirmed the issuer rating of [SL]BBB- (pronounced SL triple B minus) with Negative outlook for Janashakthi PLC (JPLC or the Company). ICRA Lanka has withdrawn the outstanding issue rating of [SL]BBB- (pronounced SL triple B minus) with Negative outlook for the LKR 1,000 Mn senior unsecured redeemable debenture programme of the Company, as the said debentures have matured and are fully redeemed and, there is no amount outstanding against the rated instrument. ICRA Lanka has also withdrawn the outstanding issue rating of [SL]A-(SO) (Pronounced SL A minus Structured Obligation) with stable outlook for the LKR 1,000 Mn (with option to increase up to LKR 2,000 Mn) proposed guaranteed redeemable debentures programme of the Company, as same will not be issued. Further, ICRA Lanka has also assigned the issue rating of [SL]BBB- (pronounced SL triple B minus) with Negative outlook for the LKR 1,000 Mn senior unsecured redeemable debenture programme formerly held under Dunamis Capital PLC (DCP); as the said debentures are now held by JPLC following the amalgamation of DCP with JPLC which was completed on December 06, 2019.
The ratings factor in JPLC’s status as the parent entity of First Capital Holdings (FCH, rated [SL]A-/Stable) and Janshakthi Insurance PLC (JIP); the healthy performance of these entities are expected to enable them to provide support to JPLC going forward, in terms of dividend income. The ratings also take into account the deterioration in gearing indicators post- acquisition of Dunamis Capital PLC (rated [SL]BBB-/Negative), and its subsequent amalgamation with JPLC in December 2019.
JPLC’s standalone gearing (net of loan from directors), prior to amalgamation with DCP, stood at 1.33 times in September 2019 vis-à-vis 1.70 times in March 2019. However, ICRA Lanka envisages gearing level to increase post-amalgamation with increase in the debt levels by LKR 3.3 Bn; ICRA Lanka estimates the fair value-based gearing of the combined entity at about 2.78 times in September 2019. The ratings also factor in the currently constrained capital position of its NBFI subsidiary, Orient Finance PLC (OFP, rated [SL]BB+/Negative), that would need fresh capital support to comply with minimum regulatory capital requirements.
ICRA Lanka is cognizant that currently JPLC is faced with a weak earnings profile because of high finance costs relative to its operating income, which are mainly dividends from subsidiaries and interest income. ICRA Lanka notes the various initiatives that are planned to bring down standalone debt, including the divestment of non- core assets/investment property and stake sale in subsidiaries, which may improve coverage and leverage indicators. However, it is crucial for the Company to significantly reduce its debt levels in the near term and, the same would be a key rating sensitivity.
The ratings continue to take comfort from the group’s long-standing relationships with banks and financial institutions in Sri Lanka, which is expected to support the Company’s liquidity. ICRA Lanka will continue to monitor JPLC’s financial risk profile, and progress made on divestments in the near term.
The Negative outlook factors in the steady weakening in JPLC’s financial risk profile which was further impacted post acquisition of DCP. The outlook may be revised to ‘Stable’ in case of a sizeable improvement in the earnings and gearing profile. The ratings may be revised downwards in case the Company is unable to significantly improve its capital profile from current levels and if the earnings continue to remain weak. Lower than expected liquidity support from lending institutions, which can further impact its cash flows, would also be a credit Negative.
Key rating drivers
Holding company of JIP and FCH: JPLC is the holding company of JIP (insurance entity, 79.75% ownership) and OFP (NBFI, 92.68% ownership). It is also the holding company of FCH (investment bank, 83.01% ownership), and Kelsey Development PLC (real estate company, 86.07% ownership), subsequent to the acquisition of DCP in December 2018, and the amalgamation of that entity with JPLC. Dividend income and capital gains from investments (as JPLC operates primarily as an investment holding company) have been the key sources of operating income for the Company in the past, and is expected to be so in the medium term. JPLC has plans to partially divest its shareholding in some of its subsidiaries, in the near to medium term. The transaction proceeds are expected to improve its gearing profile, through the reduction of borrowings at standalone level.
Weak earnings profile: Total income including fair value gains for FY2019 stood at LKR 364 Mn compared to LKR 1,314 Mn in FY2018 (income in FY2018 was augmented by a capital gain of LKR 982 Mn due to a share buyback carried out by subsidiary, JIP). The standalone operating income is modest compared to the significant finance costs (total interest costs of LKR 935 Mn in FY2019 vis-à-vis LKR 1,230 Mn in FY2018), which has impacted the profitability level of the Company. Company reported a standalone net loss of LKR 672 Mn in FY2019 compared to the net profit of LKR 8 Mn in FY2018; in the 6M ended September 2019, due to the high finance cost of LKR 633 Mn, Company reported a standalone net loss of LKR 485 Mn on a total income of LKR 200 Mn. Going forward, ICRA Lanka envisages the future interest servicing to be high in comparison to the Company’s recurring income, which would exert pressure on its earnings profile and overall cash flows, unless JPLC carries out the planned divestments in a timely manner.
High leverage indicators: JPLC’s standalone gearing (excluding loan from directors)stood at 1.33 times in September 2019, compared to 1.70 times March 2019 and 2.98 times March 2018. Despite higher borrowings at the JPLC level, standalone gearing has improved due to the recognition of fair value gains on its net worth. However, amalgamated standalone gearing (excluding loan from directors) stood at 2.78 times in September 2019, based on the combined borrowings and net worth of DCP and JPLC; additional debt taken on for the acquisition of DCP has largely contributed to the increase in gearing indicators. JPLC would also need to provide support to its NBFI subsidiary, in order to meet the minimum regulatory capital hurdles, set for CY2020 and CY2021. ICRA Lanka takes note of the various initiatives taken by the Company, including the planned divestments of stake in some subsidiaries, and the planned divestments of real estate and other equity investments which may bring down its borrowings going forward, and improve its gearing profile; in this regard, ICRA Lanka takes cognizance of the recent divestment of JPLC’s investment in nCinga Innovations for a total consideration of LKR 465 Mn. ICRA Lanka is cognizant that the timely reduction of debt is critical for JPLC, and would be a key monitorable.
Modest coverage indicators; resulting in high dependence on refinancing for timely debt servicing: JPLC’s (standalone) debt servicing obligations (principal repayments and interest) stands in the range of LKR 1.8 – 3.0 Bn per annum over the period FY2020-FY2021, and the Company has been dependent on refinancing for timely servicing of its debt, due to operating losses on account of high finance costs. However, envisaged divestments of investments provide some comfort in terms of debt servicing. Moreover, the group’s long standing relationships with banks and financial institutions in Sri Lanka and access to funding (Company had around LKR 400 Mn in unutilized bank facilities in September 2019 with another LKR 2.0 Bn under negotiation), provides comfort from a liquidity perspective.
Janashakthi PLC (Parent company)
Janashakthi PLC is an investment holding company incorporated in the year 1994. The Company is owned and managed by the Schaffter family (Mr. Prakash Schaffter 50%, Mr. Ramesh Schaffter 50%). Subsidiaries include Janashakthi Insurance PLC, which is an established insurance company in Sri Lanka operating for over two decades and Orient Finance PLC, which is a listed finance company in Sri Lanka. In September 2018, JPLC also acquired a 41.1% stake in Dunamis Capital PLC (DCP), an investment holding company with exposure to the finance and real estate sectors, and subsequently concluded a voluntary offer in December 2018 to obtain the remaining 58.9% of the shareholding. On October 29, 2019 shareholder approval was obtained for the amalgamation of DCP and JPLC. Full amalgamation was completed in December 2019, resulting in DCP ceasing to exist and its subsidiaries (namely, First Capital Holdings and Kelsey Development PLC) becoming the step-down subsidiaries of JPLC.
During the financial year ended March 31, 2019 Janashakthi PLC reported a standalone net loss of LKR 672 Mn, on a total operating income of LKR 364 Mn, compared to the net profit of LKR 8 Mn on a total operating income of LKR 1,314 Mn in the corresponding period of the previous fiscal.
On a consolidated basis, Janashakthi group reported a net profit of 1,689 Mn on a total operating income of LKR 10,497 Mn in FY2019, compared to a net profit of LKR 8,563 Mn on a total operating income of LKR 7,807 Mn in the previous fiscal.
For the 6M ended September 30, 2019, JPLC reported a standalone net loss of LKR 485 Mn on an operating income of LKR 200 Mn and a consolidated loss of LKR 208 Mn on an operating income of LKR 7,806 Mn.
 Directors/promoters of JPLC have lent LKR 1.6 Bn as a debenture instrument to the company in FY2019. This is considered a long term loan and will not be repaid to directors till all other borrowings have been re-paid.
 nCinga Innovations (Pvt) Ltd is a non- quoted software firm based in Sri Lanka, in which JPLC held 16% ownership. In December 2019, JPLC divested its stake in nCinga to a Singapore –based company. Total consideration received is LKR 465 Mn, of which LKR 46 Mn has been retained for a one year period.
Note: The symbol “&” in parenthesis suffixed to a rating symbol indicates that the rating is under watch with developing implications. *Rating withdrawn as debentures have matured. ** Debenture programme was formerly held under DCP, up to the point of amalgamation.
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