ICRA Lanka reaffirms the ratings of Hayleys PLC; Revises the Outlook from Stable to Negative
ICRA Lanka Limited has reaffirmed the issuer rating of Hayleys PLC (“Hayleys”/ “the Company”) at [SL]A+ (pronounced SL A plus1), while revising the outlook from Stable to Negative. ICRA Lanka has also reaffirmed the issue rating of [SL]A+ (pronounced SL A plus1) assigned to the Company’s two-Senior Unsecured Listed Redeemable Debenture programmes, amounting to LKR 3,527 Mn and LKR 3,000 Mn respectively while revising the outlook from Stable to Negative. At the request of the Company, ICRA Lanka has withdrawn the outstanding ratings for the Company’s two Senior Unsecured Listed Redeemable Debenture programmes, amounting to LKR 2,000 Mn and LKR 1,502 Mn respectively, as these have been redeemed.
The revision of the rating outlook from Stable to Negative is on account of the continued increase in the total debt levels of the Company, particularly at standalone level, leading to the weakening of the capital structure and the coverage indicators during FY2020 and Q1FY2021.
ICRA Lanka considers the Company’s position as one of Sri Lanka’s largest manufacturing conglomerates which is into diverse sectors such as consumer and retail, transportation and logistics, purification, hand protection, agriculture, plantations, textiles, leisure, eco solutions, construction materials, industry inputs, investment and services, and power & energy. The ratings draw comfort from the fact that several of the Hayleys group entities hold leading market positions in Sri Lanka as well as in the global markets. Over the years, Hayleys Group has diversified its revenue streams, although the retail and logistics sectors currently account for ~30% and~20% of the Group revenue, respectively. The Group’s revenues are not entirely dependent on Sri Lanka, with over 50% of the consolidated revenues being derived from exports to more than 70 countries (including deemed exports). ICRA Lanka also considers the Company’s experienced management team, the Company’s strong professional setup and its sound corporate governance practices as key positives, which have complemented its business strengths. However, these rating strengths are offset by the deterioration in the capital structure and the debt service indicators of the Hayleys Group during FY2020 and Q1FY2021 due to the increasing debt levels, particularly at the standalone level. The Company’s capital structure and debt service indicators have weakened during the past three years. The gearing of the Company at a standalone level has increased from 1.7(x) as on FY2018 to ~2.0(x), ~2.95(x) and ~3.0(x) as on FY2019, FY2020 and Q1FY2021 respectively. This has not only affected the capital structure at the standalone level, but also the Group’s debt service indicators due to relatively larger size of the standalone debts compared with the total debts at the Group level during this period. However, the Company’s liquidity risks are mitigated to a larger extent due to Company’s track record with financial institutions and easy access to capital markets, and access to undrawn sanctioned lines, which support the overall liquidity position. Although, it was expected that the Company would partly deleverage by raising funds from the proposed asset monetization and sale of partial stake in Singer (keeping controlling stake with Hayleys), the same has been significantly delayed due to the subdued market conditions prevailing over the past two years. In the post COVID-19 Pandemic, the macroeconomic conditions in Sri Lanka have further deteriorated and therefore the fund raising exercises may witness further delays. The continued moderation in financial performance or delays in fund raising exercise beyond the expected timelines would exert downward pressure on the ratings. Conversely, if there is healthy improvement in the capital structure and coverage indicators, aided by recovery in financial performance of the Group, leading to healthy dividend upstreaming to the Holding Company, while de-leveraging from timely fund raising exercise as envisaged, there could be change in rating outlook to Stable.
The Negative outlook reflects the continued moderation in the Company’s capital structure and the coverage indicators during FY2020 and Q1FY2021 as the proposed asset monetarization programme and the de-leveraging exercises have been significantly delayed due to subdued macro-economic conditions in the country.
Key rating drivers
Hayleys Group is one of the largest conglomerates in Sri Lanka with significant diversifications across several sectors of the economy; Hayleys is one of the most diversified groups in Sri Lanka with a presence spanning across 12 diverse sectors. The Group is also the largest listed manufacturing conglomerate in Sri Lanka. Starting initially with trading and Logistic & shipping operations, over the years, the Group has expanded its operations to sectors such as consumer and retail, transportation and logistics, purification, hand protection, agriculture, plantations, textiles, leisure , eco solutions, construction materials, industry inputs, investment and services as well as power and energy. In line with the Group’s policy, no division (barring Transport & Logistics and consumer sectors, after the acquisition of Singer) contributes in excess of 15% of group turnover. Further, Group’s revenues are also well spread across several geographies. This lends significant diversity to revenue streams and insulates the revenues from risk of concentration/high dependence on any one sector.
Leading market positions of several of the group companies in both local and global markets; the Group companies have market leadership (both global and local) in their respective industries/sectors. For instance, Haycarb is a global leader in charcoal based activated carbon market, DPL is among the top players in the global rubber gloves industry, Hayleys Plantations, logistics and construction materials businesses are also the market leaders in their respective fields in Sri Lanka. Hayleys Agro equipment is the market leader in Sri Lanka and Hayley’s Pickle products command a 60% market share in Japan. Singer (Sri Lanka) Plc, which was acquired in Sep 2017, is the market leader in several segments such as sewing machines, refrigerators, smart phones and consumer durable segments. The consumer durable industry is generally expected to perform well when the disposable income levels in a country increases. Nevertheless, this sector has performed relatively well in the post COVID-19 Pandemic owing to the induced demands for consumer durables/ITC products during the lockdown periods. Moreover, Sri Lanka progressing towards upper middle income status, would result in increased business potential in the consumer durable market in the future. Therefore, Singer (Sri Lanka) PLC being the market leader in the consumer durable market in Sri Lanka, would help Hayleys Group to leverage on this potential going forward.
Experienced Management team with access to financing options; The Company’s experienced management team, strong professional setup and its sound corporate governance practices are key positives and has helped the Group to access financial institutions as well as capital markets. The Company’s access to undrawn larger sanctioned lines, provide comfort on the overall liquidity position.
High repayment obligations following increased leverage and weakening of performance of group entities, exposes the Company to refinancing risks: Hayleys on a standalone level does not have any operations of its own and as an investment holding company derives nearly 80% of its revenue as dividend income from investee companies. However, during FY19 and FY20, the Company has been able to upstream only limited dividend income (including Singer) compared to the previous years. This is largely attributable to the moderation in the group’s profitability levels during this period under review. Although, the consolidated group had witnessed ~5% YOY revenue de-growth during FY20, driven largely by the slowdown in the revenue growths in Consumer Retail as well as Transportation & Logistics segments amidst the exceptional events that took place during this period, the operating margin witnessed an improvement to 11.1% in FY20 from 9.5% in FY19 mainly due to the efficiency improvement exercises of the Group companies. The net margin has also witnessed an improvement to 1.4% in FY20 from 1.2% in FY19 notwithstanding the high interest expenses on the back of increase in leverage levels of the consolidated entity. The gearing for the Hayleys Group has increased to 1.93(x) as on March 31, 2020 compared to 1.92(x) as on March 31, 2019 and 1.63(x) as on March 31, 2018 and the coverage indicators have also considerably weakened. ICRA Lanka also takes note of the stable financial performance of the Hayleys Group in Q1FY21, notwithstanding the challenges faced due to COVID-19 Pandemic on the global scale. As mentioned earlier, the Company still intends to settle part of the debts through monetizing some of its physical/financial assets in the near/medium term. The healthy track record with financial institutions and access to capital markets also mitigates the refinancing risks.
The Hayleys Group has restrictions on inter-company lending with each division being solely responsible for meeting it capex needs and debt obligations; however, Hayleys PLC has extended financial support to some group entities in past. Going forward, with some of the Group businesses like tourism sector, which have been affected significantly in the post COVID-19 Pandemic, is expected to sustain financial losses in the medium term; additional funding support from Hayleys PLC to Group entities is not generally envisaged in the post COVID-19 Pandemic and therefore, any such incremental support remains as a rating sensitivity factor.
Company’s and Group’s exposure to foreign currency and other macroeconomic volatility; SinceHayleys consolidated revenue accounts for more than 1% of Sri Lanka’s GDP, the macro economic conditions such as volatility in interest rates, depreciation of Sri Lankan rupee and other policy directives of other sectors of the Group would likely have an impact on the overall performance of the Group. However, given that over 50% of revenues are derived from outside of Sri Lanka, the risks in relation to the market conditions, are mitigated to an extent.
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 Company:
Hayleys PLC (“Hayleys”/“the Company”) is one of Sri Lanka’s largest multinational business conglomerates with a history spanning 135 years. Initially commencing commercial operations in 1878 as Chas. P. Hayley and Company, the entity was incorporated as Hayleys Limited in 1952 and subsequently converted to a PLC. Hayleys acts as a holding company and does not have any significant operations on its own. However, through over 170 direct and step down subsidiaries as well as associates, the Company controls businesses spanning across Transportation & Logistics, Agricultural Inputs, Construction Materials, Power, Fiber, Rubber Glove Manufacturing, Leisure, FMCG, Purification products (activated carbon), Power, Plantations, Textiles and BPO. The Company’s consolidated revenues are well diversified with no sector (barring transportation & logistics and consumer) contributing to more than 15% of total revenues. Group’s operations are also well spread geographically, with export revenues (Asia, Europe, Americas and indirect deemed exports) contributing to over 50% of revenues. During FY2018, the group had acquired the controlling stake of Singer (Sri Lanka) PLC, the market leader in the consumer durable market in Sri Lanka.
Key standalone financial indicators (audited)
Rating history for last three years:
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