Bogawantalawa Tea Estates PLC

ICRA Lanka revises the ratings of Bogawantalawa Tea Estates PLC

Instrument* Current Rated Amount
(LKR Mn)
   Rating Action
Issuer Rating N/ARevised to [SL]BBB (Stable) from [SL]BBB+ (Negative)
Proposed Senior Convertible Unsecured Redeemable Debentures Programme LKR 850 MnRevised to [SL]BBB (Stable) from [SL]BBB+ (Negative)

Rating action

ICRA Lanka Limited has revised the issuer rating to [SL]BBB (pronounced SL triple B) with Stable Outlook from [SL] BBB+ (pronounced S L Triple B plus) with Negative outlook, for Bogawantalawa Tea Estates PLC (“BTE”/“the Company). ICRA Lanka has also revised the Issue Rating to [SL]BBB (pronounced SL triple B) with Stable Outlook from [SL] BBB+ (pronounced S L Triple B plus) with Negative outlook, for the Company’s Senior Convertible Unsecured Redeemable Listed Debenture programme, amounting to LKR 850 Mn.

Rationale

The rating actions primarily factor in the deteriorating financial performance of the company, largely due to the adverse macro-conditions affecting the plantation sector. Although the profitability, coverage and leverage indicators recovered during FY21, compared to the previous two fiscals, the company was adversely affected by the declining tea prices and increased raw material and labour costs, during the 1HFY22. The revenue growth of 2.7% in FY21, compared to FY20, was followed by a decline in revenue by 26% in 1HFY22. The profitability also declined from 4.8% PAT margin in FY21 to -6.4% in 1HFY21. Similarly, the coverage and leverage indicators for the company remain volatile, and the indicators remain stretched in 1HFY22 with the moderate performance of BTE.

ICRA Lanka takes note of the Company’s recent/ongoing diversification initiatives into the new segments such as specialty tea varieties, spices, timber plantations, and oil palm cultivations. The ratings also factor the Company’s strong brand name, which is synonymous with high quality Ceylon Tea and the leading position in the Sri Lankan tea plantation industry. The ratings take into account the experience of the promoters, the Company’s strong track record and reputation in the industry, which have enabled the Company to enjoy steady access to funding from financial institutions as well as capital markets.

However, these rating strengths are constrained by the moderation in the financial profile of BTE during 1HFY21; the Company’s capital structure remains weak due to declining profitability margins and increasing debt levels, with gearing of 1.32(x) in 1HFY22, 1.15(x) in FY21 and 2.11(x) in FY20.

Outlook: Stable

The Stable outlook reflects the healthy tea price levels in the 2HFY22 and the expected benefits from the diversification initiatives of the company. Outlook could be revised to Negative in the event the company’s performance decline further and the coverage and leverage indicators deteriorate.

Key Rating Drivers

Credit Strengths

Part of a well-established diversified Group of companies; The ratings take comfort from the 78.5% shareholding of BTE by the diversified group Metrocorp (Pvt) Ltd. The company receives operational and financial support by being part of the diversified Metrocorp Group (rated A+ (Stable) by ICRA Lanka), which is largely into related as well as synergistic/green industries such as power generation, tourism-bungalows and office support sectors. Bogawantalawa Tea Estates itself is an established brand in the Ceylon Tea Industry and this together with the company’s premium quality tea, have helped the company to entail higher realisations amongst the top plantation companies in Sri Lanka.

Favourable movement of the tea prices; The average Colombo Tea Auction prices increased by 15.9% to LKR 634 during CY2020 from LKR 547 recorded in the previous year. As a result, BTE recorded a 2.7% revenue growth, after reporting losses consecutively for the past 2 years. Revenue growth was affected in FY19 and FY20 due to the Easter events, followed by the initial outbreak of the pandemic. However, the revenue recovered strongly in FY21, due to the sharp increase in global tea prices. Despite the supply chain challenges and lower yield, ICRA Lanka expects the tea prices to remain favorable due to the strong demand for high quality Ceylon Tea. 

Diversification into organic Spices; With the diversification strategy into Palm oil hitting a roadblock, the company rerouted their plans into cultivating organic spices such as Cinnamon, utilizing some of the resources acquired for the palm oil project. Starting off with ~90 hectares, the management is planning to extend this to ~800 hectares in 7-8 years. The company is already 2 years into the project and expects to delve into the export market as well. This project holds positive prospects for the company with spices such as Cinnamon, Pepper being less labour intensive crops that offer better price stability.

Credit Challenges

Increase in minimum wage level affecting the overall cost structure; During CY21, the minimum wage for estate workers increased by 18% to LKR 1000 per day, increasing the labour cost for the company. With the strikes and protests conducted by the workforce, although the company undertake a crop loss at the beginning of the year, the subsequent negotiations led to an increase in productivity levels to 18kg per worker per day. However, BTE’s productivity levels still remain below the industry average wage levels.

Ban of chemical fertilizers by the government; The GoSL’s ban of chemical fertilizers in early FY22, has significantly affected the overall productivity and the quality of the tea production in the country. With the subsequent partial lifting of the ban by the government, although the company gained access to chemical fertilizer, the cost of the same has increased significantly. While the company is currently following the strategy of applying chemical fertilizer to the priority fields and the balance fields are fed with organic and liquid fertilizers, the fertilizer shortage is adversely affecting the cost structure of the company.

Moderate financial performance in 1HFY22; The company’s profitability indicators moderated into 1HFY22 mainly due to the increased cost levels from the chemical fertilizers and moderation of the yield. The tea prices also dropped by about 7% during 1HFY22, although the 3QFY22 saw the recovery of the prices back to FY21 levels. The deterioration of the margins reflected negatively on the coverage indicators of the company in 1HFY22; interest cover 0.79 times in 1HFY22 vis-à-vis 1.58 times in FY21 and debt to EBITDA 6.8 times in 1HFY22, vis-à-vis 2.27 times in FY21. For the 6M ended Sep-21 company reported a net loss of LKR 112Mn, vis-à-vis a PAT of LKR 225Mn in FY21.

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

Links to applicable criteria: www.icralanka.com/images/pdf/Corporate%20Rating%20Methology.pdf

About the Company:

Bogawantalawa Tea Estates has been producing predominantly high grown tea since 1869 from the Golden Valley located in the central hills of Sri Lanka and manages over 6,000 hectares of land (with 13 estates). After the privatization of the plantation estates in 1992 by the Sri Lankan Government, Metrocorp group, through Metropolitan Resource Holdings Plc (MRH) acquired the Bogawantalawa tea estates (along with some rubber estates). However, during CY2002/03, the management decided to fully focus on the tea plantation business and therefore, 17 rubber estates were subleased to Lalan Rubber (Pvt) Ltd. Therefore, currently, the Company’s operation is largely limited to the production of high grown tea (the Company has only two low grown tea estates, and the low grown tea production of this estates is about 5-7% of the total tea production). BTE was incorporated in 1992, and is today a public quoted Company listed on the Colombo Stock Exchange. Metropolitan Resource Holdings PLC (MRH) is the plantation agent of Bogawantalawa Tea Estates PLC and currently MRH owns a 79% stake in Bogawantalawa Tea Estates PLC.

About the Group:

Metrocorp (Pvt) Ltd, formerly known as Metropolitan Investment (Pvt) Ltd, was established in 1994 and has diversified interests in Agro Industries, Plantations, Hydro power, Water and Environment, Office Automation and Leisure Sectors. The mini-hydropower segment (through Eco Power Holdings (Pvt) Ltd), is the largest operating profit contributor of Metrocorp Group (rated at A+, with Stable Outlook by ICRA Lanka). Going forward, Eco Power Holdings (Pvt) Ltd intends to expand its operations rapidly in the overseas market, particularly in the African region. Eco Power has a total installed capacity of 50MW of which 37 MW installed capacity (12% of Sri Lanka’s installed mini hydro power capacity) is based in Sri Lanka, while the balance is in overseas projects. Metrocrop has recently diversified its businesses into related synergistic businesses such as water management/consultancy and leisure sectors. Currently, under the leisure sector, Metrocorp group manages 40 tourism related bungalows based in their tea estates. The group has continuously expanded its businesses through an organic as well as inorganic growth. Metrocorp Group, including BTE, currently has an asset base of LKR 25.6 Bn and consolidated revenues of LKR 7.34 Bn in FY2020.

Key financial indicators (audited)
Revenue and profitability indicators-Figs are in LKR MnFY17FY18FY19FY20FY211HFY22*
Operating Income4,368.24,933.04,667.84,557.84,682.01,738.9
OPBDITA308.5435.5254.749.6718.0125.8
PAT1.4%0.8%-1.0%-8.5%4.8%-6.4%
ROCE (%)16.3%6.6%-1.5%32.3%4.5%16.3%
NWC / OI(%)-26.6%-23.7%-24.7%-55.9%-54.1%-74.4%
Total Debt1,340.61,399.51,818.62,496.71,626.91,712.1
Networth796.81,482.31,312.81,182.11,410.41,298.4
Gearing (x)1.680.941.392.111.151.32
OPBDITA/Interest & Finance Charges(x)1.882.311.120.111.580.79
Total Debt/OPBDITA (x)4.353.217.1450.322.276.80

Note;-* Unaudited Financials

Rating history for last three years:
Analysts
Gangulee Weerakoon
+94-774781591
gangulee@icralanka.com

Nithya Debaddi
+91-9908912213
nithya.debaddi@icraindia.com

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