Demand for Distilleries’ alcohol could rise-Fitch Rating
View(s):The alcohol business of Distilleries Company of Sri Lanka PLC (DIST) would benefit in the longer term, as the consumption of legal alcoholic beverages gradually replaces illicit spirits in line with rising per capita income levels in the country.
However, according to Fitch Rating agency, regulations such as the ban on advertising would impede the natural growth of the legal alcoholic beverages industry to an extent.
The rating agency has assigned a ‘AAA(lka)’ National Long-Term rating to Distilleries Company of Sri Lanka PLC (DIST) with ‘the rating Outlook being Stable.”
In a statement this week, Fitch said DIST’s rating is driven by its market leadership in the domestic alcoholic beverages (spirits) industry, the relatively inelastic demand for spirits through economic cycles, high entry barriers stemming from the regulatory ban on advertising and licensing constraints (which favour established manufacturers over new entrants), and future growth prospects for the industry amid Sri Lanka’s post-war development.
DIST accounted for a 65 per cent share of local alcoholic beverages produced in 2011 through legal channels, including nearly 80 per cent of arrack volumes – the major product consumed. The company’s brand portfolio is diverse and caters to varying tastes of consumers. However, a majority of DIST’s beverage sales are driven by its ‘Extra Special Arrack’ product, which is targeted at the price conscious consumer, the Fitch statement said.
“Relatively resilient demand for spirits has helped DIST sustain and improve group EBITDAR margins (FY12 ending March: 33%; FY07: 12.5%), despite frequent increases in top-line taxes by the authorities,” it said.
Fitch said DIST is exposed to foreign currency risk on any US dollar denominated debt unless adequately hedged, due to the group’s limited foreign currency related earnings. However, Fitch notes that the group’s exposure to foreign currency risk through the planned US dollar term loan of approximately US$11 million is manageable.
What could trigger a rating action? Fitch asked and in response said one of these would be a structural change in the domestic alcoholic beverages industry which considerably weakens DIST’s competitive position.
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