Hemas’ exit from leisure sector; good decision, says Fitch Ratings

The exit of Hemas Holdings, which had many hotels, last December from the leisure sector selling a majority stake to the LOLC group, was a wise decision, says Fitch Ratings in its latest ratings’ update on the group.

“We believe the exit was timely as the segment would have been a cash drain on the group because tourist arrivals to the country are not expected to normalize until at least 2023. The segment has been posting operating losses since April 2019 and would have required continuous maintenance capex to compete with larger and newer properties entering the market,” Fitch said while affirming Hemas Holdings PLC's National Long-Term Rating at 'AAA(lka)' with a stable outlook.

The affirmation reflects the defensive nature of Hemas' operating cash flows stemming from its pharmaceutical trading and manufacturing, and fast-moving consumer goods (FMCG) businesses, which account for more than 90 per cent of the group's EBIT. The recent exit from the cyclical leisure sector has further reduced the company's business risk.

Fitch said it expects Hemas' healthcare business to grow in the low double digits over the medium term, amid strong demand from an ageing population, higher incidents of non-communicable diseases and rising affordability of private healthcare. Hemas is the leader in pharmaceutical distribution in Sri Lanka, supported by strong relationships with global principals and an extensive distribution network. The segment performed well during the COVID-19 pandemic, with revenue and EBIT rising by 21 per cent and 40 per cent, respectively, in the nine months to December 2020.

Risks in Pharmaceuticals: The price of pharmaceuticals is regulated, with government approval required to increase prices on all drugs. Local distributors, such as Hemas, import most of the drugs they sell and a weakening rupee could lead to thinner margins when prices remain fixed. The government has revised prices of essential drugs only twice in the past four years, despite a currency depreciation of 35 per cent. “We expect Hemas to be able to mitigate the risk from a weaker currency due to its contractual arrangements with global suppliers and cost efficiencies,” Fitch said.

It is expected that Hemas' new pharmaceutical manufacturing plant, which is expected to start commercial operations in the financial year ending March 2022 (FY22), would triple pharma manufacturing revenue in the medium term compared with FY20.

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' consumer business in home and personal care ( HPC), and stationery is expected to grow in the high single digits in the next two years amid recovery in consumer spending. The segment has been weak since April 2019 due to the Easter Sunday attacks and the COVID-19 pandemic, but HPC revenue has recovered to pre2019 levels by end-December 2020.