Fitch says consumer-spending recovering after virus snag

Fitch Ratings has observed that the consumer spending is recovering after the pandemic crushed most of the demand last year due to lockdowns and health guidelines, which restricted people from their ability to loosen their purse strings.

In a report which affirmed Sri Lanka’s Hemas Holdings PLC at ‘Aaa(lka) with a Stable outlook, the rating agency said the, “recovery in consumer spending” would translate into a high single digit growth in the top-lines in the nest two years at its Home and Personal Care (HPC) business and the Stationary business.

“The segment has been weak since April 2019 due to the Easter Sunday attacks and the Covid19 pandemic, but HPC revenue has recovered to pre-2019 levels by end-december 2020. Hemas’ stationery revenue is still below historical levels as schools were closed for most of FY21, but should recover from FY22 after schools reopened in March 2021,” Fitch Ratings said. Hemas’s ‘AAA’ rating was underscored by the defensive nature of its cash flow stemming from pharmaceutical trading and manufacturing and the fast moving consumer goods business, which act as a bulwark against negative economic odds.

The two segments account for 90 percent of the group’s earnings before interest and tax, Fitch measured. The other segment, which the group has a sizeable share is, its mobility business, which offers 3PL services.

Hemas exited its leisure business in December 2020 by selling its remaining stake of 55.6 percent at Serendib Hotel PLC to Eden Hotel Lanka PLC for Rs.792.9 million.

Fitch termed the exit from the leisure sector which contributed 7 percent to the group earnings before interest and tax as, ”timely”, as it would have been a prolong cash drain on the group as they believe tourism is unlikely to return to normalcy until at least 2023.

With the current portfolio, specially after the exit from leisure, Hemas appears nearly invincible as all of its sectors which the group has interests are able to generate revenues irrespective of the conditions prevail in the market.

The group’s healthcare business, which consists of the pharmaceutical distribution business and its hospitals would act as strong buffers, blunting potential negative impacts from elsewhere as the rating agency projects the combined segment to grow by low double digits over the medium term.

Hemas’s pharmaceutical distribution business is the country’s largest and is supported by the strong relationships with global principals and an extensive distribution network. Meanwhile the hospitals will be benefited by the, “strong demand from an ageing population, higher incidents of non-communicable diseases and rising affordability of private healthcare”.

“The segment performed well during the Covid-19 pandemic, with revenue and earnings before interest and tax rising by 21 percent and 40 percent, respectively, in the nine months to December 2020”, Fitch added.

However the risks remain form the regulated drug prices and the weakening of the rupee against the dollar which could narrow margins, although Hemas could mitigate such risks due to its contractual arrangements with global suppliers and cost efficiencies.

Meanwhile, Fitch also expects the group’s new pharmaceutical manufacturing plant, which is expected to commence commercial operations in the financial year ending March 2022 to triple pharmaceutical manufacturing revenue in the medium term compared with the revenues in the year ended in March 2020.

“The new plant has capacity to produce five billion tablets per year, and Hemas will use the new capacity to manufacture drugs under contract with its global principals for the domestic market and for export. Hemas also has the option of selling output to the government under its buy-back programme as the government seeks to reduce drug imports”, Fitch cited as strong cases for the segment’s upside.