Fitch Ratings has affirmed Sri Lanka-based consumer and healthcare company 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% of the group’s EBIT. The recent exit from the cyclical leisure sector has further reduced the company’s business risk.
The rating also benefits from Hemas’ exceptionally strong balance sheet and high rating headroom, with net leverage likely to remain below 1.0x over the next two years compared with the 4.5x leverage threshold for the current rating.
KEY RATING DRIVERS
Defensive Healthcare Business: We expect 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% and 40%, 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%. 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.