Janashakthi Limited

ICRA Lanka reaffirms the issuer rating of Janashakthi Limited

InstrumentRated Amount (LKR Mn)Outstanding Amount (LKR Mn)Rating Action
Issuer ratingN/AN/A[SL]BB+ (Negative); reaffirmed

Rating action

ICRA Lanka Limited has reaffirmed the issuer rating of Janashakthi Limited (JL or the Company) to [SL]BB+ (pronounced SL double B plus). The outlook on the rating continues to be negative.

Rationale

The rating factors in JL’s status as the parent entity of First Capital Holdings (FCH, rated [SL]A/Stable) and Janashakthi Insurance PLC (JIP); the healthy performance of these entities is expected to enable them to provide support to JL going forward, mainly in the form of dividend income.

However, the rating is constrained by the weak coverage indicators of the holding company, due to its high finance costs. The interest cover [1] of the company stood at around 0.6x over the last 3 financial years, while the  stand-alone net external debt level of the holding company remained high, at about LKR 17.6 Bn as in March 2022.  The leverage (Net external debt/ EBITDA) remained relatively high at 15.9 times in March 2022, compared to 15.4 times in March 2021. ICRA Lanka expects the overall debt levels to remain elevated in the near term, while the coverage indicators are negatively affected by the sharp increase in systemic interest rates.

The rating continues to take comfort from the group’s long-standing relationships with banks and financial institutions in Sri Lanka, and its ability to refinance debt through these relationships. However, the ratings also take note of the high pledging of JL’s subsidiary shares; the same is expected to reduce its ability to take on more bank funding, going forward. ICRA Lanka will continue to monitor JL’s financial risk profile, and progress made on capital infusions, asset disposals and/or asset monetization initiatives  in the near term.

Outlook: Negative

The Negative outlook factors in the rising debt levels, modest coverage indicators and weakening liquidity at the Holding Company level. The outlook may be revised to “Stable” in case of reduction of the overall debt level and improvement in the coverage indicators and liquidity profile. The ratings may be downgraded in case of further increase in the debt level, deterioration of coverage indicators and further weakening of the overall liquidity profile of the Company.

Key rating drivers

Credit strengths:

Holding company of JIP and FCH: Janashakthi Limited (JL) is the holding company of Janashakthi Insurance PLC (JIP), with 79% ownership and First Capital Holdings PLC (FCH), with 83% ownership. JIP is the 7th largest life insurance company in Sri Lanka with a market share of about 4% as in December 2020. First Capital Treasuries PLC (FCT), subsidiary of FCH (A stable) is the leading stand-alone primary dealer in Sri Lanka with a 45 – 50% market share in the secondary bond market.  FCH and JIP collectively account for about 56% of the subsidiary investments (at market value) of JL, and the dividend income of JL is primarily driven by these two subsidiaries. Also, ICRA Lanka notes that JL is unlikey to provide incremental capital support to its NBFI subsidiary, Orient Finance PLC, in the medium term, as the subsidiary now meets the regulatory capital requirements.

Credit challenges

Sustained high debt levels at the Holding Company: The company is primarily dependent on asset disposals for its debt repayments, and has thus been rolling over its principal repayments. Consequently, the stand-alone net external debt level of the holding company remained high, at about LKR 17.6 Bn as in March 2022, vis-à-vis about LKR 16.7 Bn in March 2021. The leverage (net external debt/EBITDA) remained relatively high at 15.9x in March 2022, compared with 15.4x in March 2021; ICRA Lanka expects the overall debt levels of the company to remain elevated over the short term, as the asset disposals are likely to delay, given the challenging market outlook

High finance costs continue to lay pressure on coverage indicators: JL is primarily dependent on the dividends upstreamed by its subsidiaries for operating income. Historically, JL has recorded weak coverage indicators due to sizable finance costs, in comparison to its operating income. JL’s interest cover adjusted for the final dividend stood at about 0.6x over the last 3 financial years. The Net Finance  cost was reported at about LKR 1.6 Bn as in FY2022 and FY2021. ICRA Lanka expects the finance cost to significantly increase in FY2023, as the incremental cost of funds has increased with the sharp increase in systemic interest rates.

Refinancing risk stemming from the exposure to short-term borrowings: As of Mar-22, about 25% of JL’s total debt consisted of commercial papers, which have short-term maturities. ICRA Lanka notes that the recent increase in systemic interest rates has created some pressure on the commercial paper market, as the institutional investors are increasingly focusing on treasury investments. However, JLs’ good relationships with banks and other funding parties are expected to provide some comfort, from a liquidity point of view.

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

Links to applicable criteria: ICRA Lanka’s Issuer Rating Methodology 

Company Profile:

Janashakthi Limited

Janashakthi Limited 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. Following the acquisition and merger of Dunamis Capital PLC (DCP) by JL in December 2019,  investment banking outfit First Capital Holdings (FCH) and Kelsey Development PLC became its step-down subsidiaries.

During the financial year ended March 31, 2021 Janashakthi Limited reported a standalone net loss of LKR 521 Mn, on a total asset base of LKR 28 Bn, compared to the net profit of LKR 1,671 Mn on a total asset base of LKR 27.2 Bn in the corresponding period of the previous fiscal.

Janashakthi Limited (Standalone company)
LKR MnMar-20Mar-21Mar-22[2]
Total Operating Income[3]1,0821,2811,291
Profit After Tax-1,4771,671-521
Reported Net Worth5,7118,0697,600
Total Gross Debt16,44118,78319,889
Operating Expenses /ATA0.62%0.72%0.69%
RPAT /ATA-6.51%6.15%-1.86%
Gearing (reported)2.882.332.62
Total Assets22,67127,16327,955
Rating history for the last three years:

Analysts
Shewmay Chang
Senior Analyst
shewmay@icralanka.com

[1] Interest cover based on realized income

[2] Unaudited financials

[3]Realized operating income


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