RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of AA- and P1 to Hayleys PLC; the long term rating has a stable outlook.
The ratings reflect the group’s diversified business portfolio, strong market positions in several key businesses and adequate debt-protection metrics. On the other hand, the ratings are moderated by the Group’s high debt levels, fragile liquidity and a few loss-making operations.
The ratings are further pressured by Hayleys’ exposure to volatile commodity prices and foreign-exchange risk. However, our concerns on the foreign-exchange risks are somewhat mitigated given a certain level of natural hedging in the Group’s business operations, which has been achieved through vertical integration and diversification.
Having started its business in fibre-related exports more than a century ago, the Group has diversified its business interests, primarily via organic growth and more recently through acquisitions. Hayleys is currently one of the largest conglomerates in Sri Lanka, involved in a wide range of industries that include plantations, purification products, hand protection, transportation and logistics, agricultural inputs and products, construction materials, leisure and consumer goods.
Diversification has mitigated the Group’s exposure to any particular industry. Meanwhile, Hayleys enjoys strong market positions in several of its key businesses. It is the world’s largest producer of coconut-shell-based activated carbon, with an estimated global market share of around 22%.
Elsewhere, the Group accounts for some 5% of the global market for non-medical gloves. Its subsidiary, Hayleys Advantis Limited, is a pioneer in the domestic logistics industry. In plantations, the Group is a sizeable 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 vulnerable 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 vulnerable to fluctuating exchange rates due to its reliance on exports.
The ratings are also moderated by the Group’s loss-making textile arm, Hayleys MGT Knitting Mills PLC (Hayleys MGT) which has weighed down Group performance. Hayleys MGT has been affected by changing industry dynamics and operational problems since 2007, resulting in the division incurring a pre-tax loss of Rs. 823.35 million in fiscal 2011. Hayleys MGT remained in the red in the first half of FYE 31 March 2012. Several key processes are currently undergoing restructuring.
Meanwhile, RAM Ratings Lanka’s concerns hinge primarily on the Group’s high debt burden and liquidity position. In recent years, Hayleys has pursued debt funded acquisitions, which had increased its debt from Rs. 11.37 billion as at end-March 2009 to LKR 19.25 billion as at end-September 2011, with a corresponding gearing ratio of 0.69 times.
Meanwhile, Hayleys’ liquidity position has been weak in recent times. Short-term debts accounted for some 72% of the Group’s borrowings whereas the ratio of its cash and cash equivalents to short-term debts only came up to 0.12 times as at end-March 2011.
Overall, Hayleys’ debt-protections metrics are deemed adequate. Its funds from operations (FFO) debt coverage clocked in at 0.27 times as at end-March 2011, before improving to 0.30 times as at end-September. Furthermore, it is noted that Hayleys PLC, at company level, has control over the dividend policies of its subsidiaries, thus enabling dividend up streaming when required.
Looking ahead, debt-funded expansion in the leisure sector is anticipated to push the Group’s gearing level to around 0.8 times while its FFO debt coverage is still anticipated to remain at around 0.25 times. Any further weakening of its financial profile beyond our expectations is likely to result in a negative rating action.