RAM reaffirms Hayleys’ ratings at AA-/P1 with a Stable Outlook

RAM Ratings Lanka said yesterday it has reaffirmed Hayleys PLC’s respective long- and short-term corporate credit ratings at AA- and P1; the outlook on the long-term rating remains stable.

Hayleys is a diversified conglomerate with wide ranging business interests in hand protection, purification, transportation, agriculture, plantations, textiles, construction materials, fibre, consumer, industrial solutions, power and energy together with leisure and aviation.

The ratings are upheld by the Group’s diversified business portfolio, strong market positions in several key businesses coupled with the Group’s adequate debt protection indicators. Nevertheless, the ratings are tempered by the Hayleys Group’s moderately high debt levels, tight liquidity as well as its exposure to fluctuations in commodity prices and foreign-exchange risk.

RAM said the ratings continued to be supported by the Group’s diversified business profile, which has enabled it to withstand adversities affecting a particular industry sector, as weaker showing in one business can be balanced off by the strong performance in another. Meanwhile, the Group continues to enjoy strong positions in several of its key businesses. It is the world’s largest producer of coconut-shell-based activated carbon with an estimated market share of around 15%-16%.

Additionally, the Group accounts for around 5% of the global market for non-medical gloves. Meanwhile, in plantations, the Group is a sizable player that makes up around 4.5% and 2.0% of the country’s tea and rubber production, respectively.

That said, the Group’s key businesses are sensitive to fluctuations in commodity prices, which are in turn governed by a range of factors including global supply, demand and weather conditions. Thus, commodity prices directly affect the Group’s margins, as demonstrated in the past. In addition, Hayleys is also exposed to foreign exchange rates given its reliance on exports.

During the initial rating, RAM Ratings Lanka had raised concerns on the Group’s loss-making textile arm, Hayleys MGT Knitting Mills PLC, which had weighed down on Group performance. “Although Hayleys MGT continued to be in the red during fiscal 2012, we note that performance had improved during the 1st half of FYE 31 March 2013 with the division breaking-even at operational level, supported by a capital infusion by Hayleys,” RAM said.

On a separate note, the Group’s debt burden continues to be high, reflective of its debt-funded acquisitions over the past few years. The Group’s total debt continued to be on the rise, increasing nearly 30% y-o-y during fiscal 2012 to Rs. 21.56 billion (end-September 2012: Rs. 23.04 billion).

That said, the Group’s gearing levels of 0.78 times by end-FY Mar 2012, was in line with RAM Ratings Lanka’s expectations; gearing (total debts/total equity) increased slightly to 0.80 times by end-September 2012.

“We note that debt levels at Hayleys PLC level had also been on the rise, particularly during 1H fiscal 2013 with its gearing ratio worsening to 0.86 times (end-FY Mar 2011: 0.53 times). However, our concerns are somewhat mitigated given that the Company has control over the dividend policies of its subsidiaries, thus enabling dividend upstreaming when required. On the other hand, the Group’s liquidity position continued to be tight given its heavy reliance on short-term borrowings (which includes trade facilities) and relatively low cash reserves,” RAM said.

It also said the Group’s debt-protection metrics continued to be adequate and in line with our expectations. Its funds from operations debt coverage came in at 0.25 times by end-March 2012 before improving to 0.37 times by end-September 2013.

Going forward, although debt levels are expected to increase as the Group pursues capacity expansions, gearing levels are anticipated to remain relatively unchanged supported by healthy profit generation. As such, the Group’s ratings factor in RAM Ratings Lanka’s expectation that gearing will remain around 0.80 times whilst FFO debt coverage amounts to around 0.30 times.