ICRA Lanka upgrades the ratings of Hayleys PLC
|Instrument||Current Rated Amount|
|Issuer Rating||N/A||Upgraded to [SL] AA- (Stable) from [SL] A+ (Stable)|
|Senior Listed Rated Unsecured Redeemable Debenture Programme (Issued on 8th Aug, 2018)||3,527||Upgraded to [SL] AA- (Stable) from [SL] A+ (Stable)|
|Senior Listed Rated Unsecured Redeemable Debenture Programme (Issued on 26th Aug, 2019)||3,000||Upgraded to [SL] AA- (Stable) from [SL] A+ (Stable)|
|Proposed Senior Listed Rated Unsecured Redeemable Debentures programme||3,000||[SL] AA- (Stable); assigned|
ICRA Lanka Limited has upgraded the issuer rating of Hayleys PLC (“Hayleys”/ “the Group) to [SL]AA- (pronounced S L Double A minus) from [SL]A+; the Outlook remains Stable. ICRA Lanka has also upgraded the issue ratings to [SL]AA- (pronounced S L Double A minus) from [SL]A+, 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 the outlook remains Stable.
Further, ICRA LAnla has assigned an issue rating of [SL] AA- (pronounced S L Double A minus) with Stable outlook to the proposed Senior Unsecured Listed Redeemable Rated Debentures programme amounting to LKR 3,000Mn, of the Group.
ICRA Lanka has taken a consolidated view of Hayleys PLC and its group entities given the strong operational linkages among the group entities and the high degree of control the holding company has over the dividend streams of the subsidiaries. ICRA Lanka notes that the scale and the diversity of the group has enabled Hayleys to demonstrate good performance amidst the challenging macro environment. The performance of the core segments of the Group, mainly Retail and Logistics, has significantly imporved during the 9MFY2022, driving the overall group performance. The Group recorded an annualized revenue growth of 34% during 9MFY2022, and 15% in FY2021, as opposed to a 4% decline in FY2020. The Operating margins continue to be at a healthy levels in FY2021 and 9MFY2022. The healthy profitability of the group and the Company on a standalone basis have resulted in better coverage and leverage indicators for FY2021 and 9MFY2022. In addition, ICRA Lanka notes that low interest rates have also supported the group earnings profile.
ICRA Lanka also considers the Groups’ experienced management team, the strong professional setup and its sound corporate governance practices as key positives, which have complemented its business strengths.
However, the ratings take cognizance of the relatively high stand-alone debt level at the Holding company, as the planned asset monetizations have got delayed due to adverse macro environment. Also, the deteriorating financial profile of the leisure sector of the group remains a challenge from a rating point of view.
The Stable Outlook reflects the improved financial performance and the debt metrices of the group, and ICRA Lanka’s expectation that the group would continue to perform well over the short to medium term.
Key rating drivers
One of the largest conglomerates in Sri Lanka with significant diversifications across several sectors and geographies: Hayleys is one of the most diversified groups in Sri Lanka with a presence spanning across 12 diverse sectors. The Group is one of the largest listed conglomerates in Sri Lanka in terms of the total revenue. 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. The ratings take comfort from the group’s well diversified business portfolio, with no sector (with the exception of transportation & logistics and consumer & retail) accounting for over 15% of group revenue. The business risk profile is also strengthened by the georgrahical diversification of the group, with only 51% of the group revenue being generated within Sri Lanka.
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 PLC is a global leader in charcoal based activated carbon market with a 16% market share, while DPL is among the top players in the global industrial rubber gloves industry. Hayleys Plantations, logistics and construction materials businesses are also the market leaders in their respective fields in Sri Lanka. The logistics segment, represented by Hayleys Advantis is the largest logistics company in Sri Lanka, handling approximately 18% of total annual container throughput of the Colombo Port. Group’s Agriculture Sector is the largest exporter of processed fruits and vegetable with a market share of over 45%, and is the market leader in Agri inputs in Sri Lanka. Singer (Sri Lanka) Plc, which was acquired in Sep 2017, is the market leader in the consumer durables sector, with an island-wide network of over 432 stores. ICRA Lanka notes that the dominant market positions of the group entities in their respective sectors enable the group to benefit from economies of scale and superior earnings performance.
Strong performance of the group entities resulting in higher dividends and better debt coverage indicators for the holding company: The holding company Hayleys PLC, operates as an investment holding company, which is primarily dependent on the dividend income (over to 90% of operating income in 9MFY2022) from the operating entities. While the dividend income was moderate in FY2020, the company saw a sharp increase in its dividend income during FY2021 and 9MFY22, due to strong performance of its operating entities, particularly those of the export sectors and consumer durables (Singer). Sharp increase in the stand-alone operating income from LKR 1.4Bn in FY2020 to LKR 4Bn in 9MFY2022 resulted in standalone interest cover improving to 2.33x (0.43x in FY2020) and overall debt servicing coverage improving to 0.78x (0.15x in FY2020), during 9MFY2022. Also, despite the overall stand-alone debt level remaining high, leverage (Debt/ EBITDA) improved from 20.73x in FY2020 to 5.06x in 9MFY2021. Given the robust post pandemic performance outlook of the group entities, ICRA Lanka expects the holding company to receive a similar dividend inflow in the current financial year, while maintaining its coverage indicators stable. ICRA Lanka also notes that the group entities and the holding company are significantly benefiting from the sharp decline of systemic interest rates.
Comfortable liquidity profile with high degree of financial flexibility: Company’s liquidity profile remains comfortable with over LKR 10.4 Bn unutilized funding lines and unencumbered shares of the subsidiaries worth close to LKR 65 Bn. ICRA Lanka also expects the company to comfortably refinance its debt obligations due to the strong relationships with banks and financial institutions. Currently, the entire debt profile of the company (about LKR 25.5 Bn as in Dec-21) has been obtained on fully unsecured basis without any collateral and all the shares of its subsidiaries remain unencumbered. Hayley’s buffer over book value of its investments has significantly improved over the last financial year (to about LKR 46Bn as in Jan-22) due to both strong performance of the subsidiaries and robust market performance since March 2021.
Standalone debt level remains high due to the delay in implementing the planned asset disposals: ICRA Lanka notes that the stand-alone debt level of the holding company sharply increased following the debt funded acquisition of Singer PLC in late 2017, and remains high at about LKR 25.5Bn as in Dec-21 (LKR 26.2 in Mar-21 and LKR 27.3Bn in Mar-20). While the company is committed to the asset disposal plan, which is expected to raise about LKR 10 Bn, the macro environment has not been conducive due to the pandemic. ICRA Lanka notes that the operating income (mainly dividends) is not sufficient to cover the total debt servicing obligations of the company, exposing the company to refinancing risk. However, with the increase in dividend income of the holding company and the upstream of dividends by the subsidiaries on a quarterly basis has somewhat improved the debt serviceability of the holding company. Debt servicing coverage ratio improved to 0.78x in 9MFY2022, from 0.6x in FY2021 0.15x in FY2020; ICRA Lanka expects the same to remain at around 0.6x times during the financial year ending March 2022. Hayley’s strong relationships with banks will provide some comfort, in terms of debt refinancing.
Sizable losses at the leisure sector, due to consecutive macro-shocks: The leisure sector was under pressure since end of the CY2018, due to consecutive macro challenges in the country. The situation is aggravated as a result of the COVID pandemic. Hayleys Group’s leisure sector reported a net loss of LKR 2.4 Bn in FY2021, vis-à-vis a net loss of LKR 889 Mn during the previous fiscal. However, during 9MFY2022, the sector rebounded with losses minimized to LKR 959 Mn. ICRA Lanka expects the sector to post losses during the financial year ending March 2022, where the segment would be under pressure to meet its debt servicing obligations, which stands at about LKR 1.6 Bn for FY2022. The GoSL initiated debt moratorium is expected to be extended until the sector recovers, thus providing some comfort from a debt servicing point of view. However, ICRA Lanka expects the parent company to step-in as the last resort, in case the sector is unable to meet its debt servicing obligations.
Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below.
About the Company:
Hayleys PLC (“Hayleys”/“the Group”) is the most diversified, largest, listed conglomerate in Sri Lanka, with operations spanning across 12 business sectors and a global presence reaching across all five continents. Having origins dating back to over 143 years, Hayleys currently operates with 181 companies, with 149 of them being local. 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 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 Group’s consolidated revenues are well diversified with no sector (barring transportation & logistics and consumer) contributing to more than 15% of total revenues. The Group’s operations are also well spread geographically, with export revenues (Asia, Europe, Americas and indirect deemed exports) contributing to about 49% 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.
Consolidated financial indicators (audited)
|OPBDITA/Interest & Finance Charges(x)||1.62||1.69||3.13||3.45|
|Total Debt/OPBDITA (x)||5.34||5.60||3.64||3.86|
Rating history for last three years:
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A Group Company of Moody's Investors Service
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