RAM puts Bimputh Lanka on rating watch with negative outlook

RAM Ratings Lanka has reaffirmed Bimputh Lanka Investments PLC’s respective long- and short-term financial institution ratings at BB and NP.

Concurrently, the ratings have been put on Rating Watch (with a negative outlook). This is premised on our concerns over the company’s asset quality, performance and direction following the passing of a parliamentary bill to allow the Government of Sri Lanka to expropriate Sevanagala Sugar Industries Ltd, one of Bimputh’s significant counterparties.

At present, Sevanagala remains operational and has yet to be fully handed over to the Government. Meanwhile, Bimputh’s ratings are supported by its strong liquidity and capitalisation levels, although constrained by its small stature, weak performance and funding levels, as well as moderate asset quality.

Bimputh is part of the Daya Group, a family-held concern with diversified operations focusing on the eastern region of Sri Lanka; Sevanagala was also previously part of the same Group. Prior to that, Sevenagala was a state-held entity, was privatised in 2001 and sold to Daya Gamage.

Bimputh focuses on micro-financing, through which it provides cultivation loans to sugar-cane outgrowers through Sevanagala; this currently comprises more than half of the Company’s loan portfolio.

Bimputh’s asset quality is deemed moderate given the uncertainties over its cultivation loans, distributed through Sevanagala.

The company’s gross nonperforming loans surged 116.87% year on year to Rs. 5.99 million as at end-FYE 31 March 2011, translating into a gross NPL ratio of 2.49%, albeit still in line with those of its similarly rated peers.

Bimputh’s lending is dominated by cultivation loans, which accounted for 54.23% of its total loans as at end-FY Mar 2011.

Of this amount, 89.89% comprised loans to sugar-cane outgrowers. The company’s asset quality is expected to face challenges if operational support from Sevanagala ceases on this portfolio.

In FY Mar 2011, Bimputh’s net interest margin was compressed by its enlarged deposit base amid slower loan expansion. In the past, its NIM had been broader due to its high level of shareholders’ funds. Despite the surge in gross income, its pre-tax profit dipped slightly to Rs. 9.87 million in FY Mar 2011, reined in by heftier overheads stemming from additional branches. Looking ahead, Bimputh’s profitability is likely to ease if it is unable to continue disbursing cultivation loans after the expropriation of Sevanagala.

Meanwhile the Company’s funding levels are deemed weak. Bimputh’s ability to garner deposits is limited by its weak franchise.

Its funding base remains dominated by shareholders’ funds, which amounted to 49.54% of its funding mix as at end-FY Mar 2011.

Even though the deposit base has been expanded by Bimputh’s larger branch network, more than 30% of it constitutes deposits placed by members of the Gamage family. On a separate note, Bimputh’s liquidity is viewed to be strong; its statutory liquid-asset ratio stood at 39.46% as at end-FY Mar 2011 (end-FY Mar 2010: 43%), backed by loan growth. Elsewhere, Bimputh’s capitalisation levels are strong. Its tier-one and overall risk-weighted capital adequacy ratios clocked in at 55.43% as at end-March 2011, before slipping to 53.48% as at end-September. This is well above most of its similarly rated peers.

We highlight that the ratings will be downgraded if Daya Group is unable to retain majority control of Sevanagala or in the case of a prolonged tussle, Sevanagala is unable to operate and this adversely affects Bimputh’s operations and viability.

On the other hand, the ratings may be reaffirmed (and the Rating Watch lifted) if the Daya Group successfully retains majority control of Sevanagala or there is a significant improvement in performance indicators.