Makers of alcoholic beverages in Sri Lanka will be able to pass on back-to-back increases in excise duties to consumers without worrying about them shifting to the more affordable illicit market, Fitch Ratings says in a new report.
Rising disposable income will absorb the higher duties, and Fitch believes the inelastic demand and increased consumer demand for refined alcohol should allow companies, including Distilleries Company of Sri Lanka PLC (DIST, AAA(lka)/Stable) and Lion Brewery (Ceylon) PLC (Lion, AA( lka)/Stable), to pass on those charges to consumers.
Fitch has assigned a Stable Outlook to Sri Lanka’s alcoholic beverage sector. It expects DIST and Lion to be able to accelerate deleveraging from the financial year ending 31 March 2016 as they have recently expanded capacity to meet future demand.
Both companies are likely to generate strong FCF that will facilitate deleveraging, and Fitch expects the two companies to maintain a stable dividend policy in 2016 in line with their historical trend. Fitch believes their liquidity positions will continue to be strong in 2016, backed by high unrestricted cash balances and extensive unutilised but committed credit lines.