RAM assigns corporate ratings of A/P2 to CIC Holdings

RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of A and P2 to CIC Holdings PLC (CIC); the outlook on the long-term rating is stable.

The Group’s ratings are supported by the dominant market positions in its key business areas as well as resilient demand for agriculture related products. The ratings also reflect CIC’s adequate gearing and debt protection metrics and the Group’s diversified business profile. The ratings are however, pressured by the competitive industry landscape the Group operates in, as well as its exposure to vagaries of the agriculture segment.

CIC has diversified businesses in the agribusiness and livestock industry as well as interests in the consumer and pharmaceutical industries, paints, industrial raw material and packaging. The Group has strong market positions in most of its key business lines, particularly in its agribusiness portfolio. CIC is the largest private sector player in the domestic fertiliser industry, with an estimated 40% market share in the non-paddy segment.

The Group is one of the largest players in the pesticides market, with a share of around 25%. Additionally, CIC is also the market leader in the paint industry through its associate Akzo Nobel

Paints Lanka (Pvt) Ltd.; its Dulux brand is estimated to command around 40% of the market.

The ratings are further supported by the resilient demand for agriculture related products, which is the Group’s mainstay. Within the agriculture segment CIC caters to the fertiliser requirements of the tea industry which is an integral component of Sri Lanka’s economy. Furthermore, demand for pesticides is anticipated to be relatively resilient as it a crucial input in the cultivation of paddy, which in turn is processed to rice- Sri Lanka’s staple food.

The Group’s financial profile is deemed adequate with its gearing ratio clocking in at 0.66 times in FYE 31 March 2011. Meanwhile, CIC’s funds from operations debt coverage ratio stood at an adequate 0.38 times by end-fiscal 2011 (end-June 2011: 0.32 times). Looking ahead, the medium term capital expenditure (capex) plans are expected to push gearing to around 0.7 times, still manageable given the Group’s strong cash flow and annual FFO of around Rs. 1.50 billion.

Despite the above strengths, CIC’s ratings are moderated by the competitive industries it operates in. The Group’s core businesses such as fertiliser and crop protection products are highly competitive, largely due to the commoditised nature of these items. The competitive industry landscape that the Group operates is in reflected in CIC’s relatively thin profitability margins.

On a separate note the Group is exposed to vagaries of the agriculture segment, including inclement weather and crop failure. Additionally, the Group is indirectly exposed to prices of these crops, particularly tea and paddy.

The ratings are further moderated by CIC’s funding mismatch and weak liquidity position. As at end-fiscal 2011 the Group had Rs. 666.69 million of cash and bank balances while its short-term debts amounted to Rs. 4.89 billion, accounting for around 89% of the Group’s debt. This translated into a ratio on cash and cash equivalents (CCE) to short-term debt of around 0.14 times. CIC’s current ratio came up to 1.20 times as at end-fiscal 2011. However, RAM Ratings Lanka derives some comfort from the Group’s Rs. 700 million of unutilised funding lines.

RAM Ratings Lanka notes that the fertiliser business, the Group’s key earnings generator is highly regulated with selling prices, chemical compositions and formulation governed by the National Fertiliser Secretariat. Thus, the performance of the fertiliser division is largely exposed to changes in the regulatory framework and subsidy mechanism. Furthermore, CIC has experienced delays in receiving subsidy payments, which has in turn elevated its working capital; this had to be funded by short-term debt.