Hayleys makes history with S&P ‘B+’ foreign currency rating

Chairman and Chief Executive Mohan Pandithage (left) and Co-Chairman Dhammika Perera

• First Sri Lankan corporate to secure foreign currency issuer credit rating from S&P Global Ratings
• ‘B+’ rating with Stable Outlook stands above Sri Lanka’s ‘CCC+’ sovereign rating
• Half of Group revenue generated outside Sri Lanka; Asia accounts for 25%, US and Europe 10% each
• S&P forecasts 13%-14% revenue growth in FY27 and 10%-12% annual EBITDA growth over next 2-3 years
• Annual capex of Rs. 40-50 b forecast for FY27-FY28, led by purification and hand protection expansion
• Says Hayleys ‘is largest conglomerate in Sri Lanka’
• Notes Hayleys’ resilience relative to its sovereign surfaced during Sri Lanka’s currency crisis and debt default

Hayleys PLC has become the first Sri Lankan corporate to receive a foreign currency issuer credit rating from S&P Global Ratings, securing a ‘B+’ with a Stable Outlook — above Sri Lanka’s ‘CCC+’ sovereign rating — underpinned by its export earnings, diversified operations, and ability to withstand periods of sovereign stress.

Commenting on the outlook assigned to Hayleys, the ratings agency said: “The stable rating outlook reflects our expectation that the Sri Lanka-based conglomerate will expand its revenue base, generate healthy operating cash flow, and maintain business diversity and liquidity access over the next 12-24 months. We also expect continued Balance Sheet discipline such that its ratio of funds from operations (FFO) to debt remains above 12%.”

Commenting further, it said Hayleys’ export revenue and limited exposure to foreign-currency debt support the ratings above those on Sri Lanka (‘CCC+’/Stable/‘C’). 

S&P Global Ratings said:

“We believe the company will maintain adequate liquidity during periods of sovereign stress. It derives its export revenue primarily from its glove, purification, textile, and tea segments, which it will likely continue to expand over the coming years,” the ratings agency said.

Hayleys’ resilience relative to its sovereign surfaced during Sri Lanka’s currency crisis and debt default in 2022-2023. S&P Global Ratings lowered the foreign currency sovereign rating to ‘SD’ and the rating on the sovereign’s senior unsecured notes to ‘D’ in April 2022. Even then, Hayleys remained current on its obligations. The company’s Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) also jumped 71% in that year, propped up by export revenue that benefitted from the Sri Lankan rupee (LKR) depreciation.

 Any upside to our foreign currency issuer credit rating on Hayleys remains capped at two notches above the ‘B-’ transfer and convertibility assessment on Sri Lanka. The cap reflects the fact that Hayleys derives half of its revenue in the local currency, and the risk that Sri Lanka could enact stricter capital or foreign currency controls on exporters.

Hayleys’ dominant market position in Sri Lanka tempers its credit weaknesses. The company is the largest conglomerate in Sri Lanka, with top positions in the retail, textile, and logistics segments. Its established market presence creates barriers to entry. Hayleys maintained a healthy compounded annual revenue growth rate of 20% through the country’s economic adversities in the past five years,

Hayleys’ retail business under its 86%-owned subsidiary Singer (Sri Lanka) PLC accounts for 20% of the Group’s earnings. We estimate Singer has a 37% share of Sri Lanka’s consumer durables market through an extensive retail and dealer network, strong brand equity, and multi-brands. In our view, Singer’s one-stop-shop concept and credit programs translate into a sticky domestic customer base.

Hayleys’ presence in multiple geographies and business lines adds a layer of earnings stability.

The company derives half of its revenue outside Sri Lanka, namely from the US (10%), Europe (10%), and Asia (25%). Primary exports include gloves, activated carbon, and tea. It also supplies fabric to domestic garment manufacturers serving global apparel chains. This geographic diversification helps mitigate idiosyncratic economic volatility in each market.

Hayleys also has diverse earnings from several industries. These include retail (Singer), consumer staples and nondurables (gloves, purification, textile, and tea), and logistics. Although these segments have their respective cyclical demand and raw material cost pressures, each has mostly independent dynamics and demand drivers. This cushions overall earnings volatility from weakness in any segment.

We forecast annual EBITDA growth of 10%-12% for the next two to three years on a pickup in Sri Lankan economic activity and exports due to easing tariff uncertainties. As a result, Hayleys could have a stable debt-to-EBITDA ratio of 3.0x-3.5x through fiscal 2028, despite higher debt to fund growing working capital needs. This ratio is within the ballpark of Hayleys’ leverage tolerance. The company aims to keep its debt-to-EBITDA ratio below 3.0x, based on its own calculations. We estimate this translates to about 3.5x on an S&P Global Ratings-adjusted basis. We expect Hayleys’ ratio of FFO to debt to remain above 15%, comfortably above our downside threshold of 12%. The ratio could trend closer to 12% should EBITDA margins fall below 10%. Failure to pass on increases in raw material prices could result in such a scenario.”

Assumptions

• Sri Lanka’s real GDP to grow 3.7% in 2026, 3.5% in 2027, and 3.5% in 2028.

• Hayleys’ revenue to rise by 13%-14% in fiscal 2027. Drivers to be the consumer durables and nondurables segments. Annual revenue to rise by 9%-10% thereafter.

• Stable EBITDA margins of 11%-12% over the next 12-24 months, reflecting the company’s ability to pass on rising input costs to end users.

• Annual capital expenditure (capex) of Rs. 40-50 billion in fiscal 2027-2028, mostly for expanding the purification and hand protection businesses.

• Annual dividends of Rs. 8-10 billion in fiscal 2027-2028, including dividends paid to non-controlling interests. This is in line with historical trends.