Fitch Ratings has affirmed Hemas Holdings PLC’s National Long-Term Rating at ‘AA-(lka)’ with a stable outlook, saying that the group’s business risk profile has improved from the recent acquisition of Atlas Axillia (Pvt) Ltd (Atlas), the largest domestic manufacturer and distributor of exercise books, pens, colour products and other school stationery. However, the benefits are [...]

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Fitch affirms Hemas Holdings at ‘AA-(lka)’, outlook stable

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Fitch Ratings has affirmed Hemas Holdings PLC’s National Long-Term Rating at ‘AA-(lka)’ with a stable outlook, saying that the group’s business risk profile has improved from the recent acquisition of Atlas Axillia (Pvt) Ltd (Atlas), the largest domestic manufacturer and distributor of exercise books, pens, colour products and other school stationery.

However, the benefits are offset to an extent by the operational pressures in its fast moving consumer goods (FMCG) segment that accounted for 40 per cent of EBITDA in the financial year ended March 2017 and its leisure business (12 per cent), which Fitch expects to persist in the next 12-18 months.

The Fitch media release said that it expects Hemas’ Atlas acquisition to improve cash flow stability as the latter’s business is defensive across economic cycles. Fitch expects demand for school stationery to grow over the medium term, supported by government and private-sector investments in the education sector and rising per capita income in the country.

“Atlas’s stationery business fits into Hemas FMCG segment and Atlas will be able to leverage on Hemas established distribution network once the integration is completed. We expect Atlas to contribute around 15 per cent and 25 per cent to group revenue and EBIT, respectively, in FY19, its first year of full consolidation,” it said.

Fitch said: “We do not expect Hemas to engage in any other large scale Mergers and Acquisitions(M&A) that is similar to Atlas in the medium term, but the company will continue to spend Rs. 3-4 billion on organic expansion in its core segments in the next few years. We estimate Hemas will generate around Rs. 4 billion per annum in cash flow from operations in the next few years but this may be insufficient to fully cover the planned capex and shareholder returns. We do not expect an improvement in company leverage in the medium term amid higher borrowings and a moderating operating performance.”

A slowdown in the FMCG segment is expected to continue in the next 12-18 months due to pressures in Bangladesh (around 15 per cent of FMCG revenue in FY17) arising from the restructuring of Hemas distribution network and increased competition. Hemas may have to keep investing in its Bangladesh distribution network and marketing efforts to support its bigger operational scale and counter competition, which would keep margins below historical levels in the medium term, Fitch said.

“We don’t expect a recovery in domestic Fast Moving Consumer Goods (FMCG) volumes in the near term as weak personal income and inflationary pressures may force consumers to continue to cut down on personal and home care spending. Domestic margins may also remain pressured due to a pickup in input costs and currency depreciation, which the company may find difficult to fully pass on to customers amid weak demand. However, steps taken by the company to streamline its supply chain operations are likely to generate cost savings to offset margin pressure to an extent,” Fitch said.

On leisure, Fitch said it expects Hemas hotels (around 50 per cent of leisure sector EBIT) performance to continue to weaken in the medium term on declining occupancy and room revenue due to a slowdown in tourist arrivals, oversupply of graded accommodation and competition from the informal sector.

On healthcare, Fitch said it believes the healthcare segment can offset most of the other segments’ earnings volatility. “We expect the drug distribution arm to continue winning market share from distributors exiting the market on price regulations, primarily on branded drugs. We expect the pharma segment and its hospital chain to continue growing in the medium term, supported by a rapidly ageing population, rising incidence of non-communicable diseases and undersupply in public healthcare services. However, the hospital sector may face regulatory pressure on pricing of certain services,” the release added.

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