Tokyo Cement Company (Lanka) PLC:
RAM Ratings assigns A/P2
RAM Ratings Lanka has assigned long and short-term corporate credit
ratings of A and P2 to Tokyo Cement Company (Lanka) PLC ("Tokyo" or "the
Group") respectively.
The long-term rating carries a stable outlook.
The ratings are supported by the Group's strong market position,
healthy balance sheet and debt coverage levels.
The ratings are however moderated by Tokyo's dependency on the
cyclical construction sector and inability to fully pass on cost
increases to consumers.
Tokyo is one of the leading companies in the domestic cement
industry. Tokyo has been able to strengthen its market position,
supported by its well-known brand and extensive dealer network.
Despite cement being a commodity, Tokyo has managed to maintain its
premium pricing due to its strong branding. Furthermore, Tokyo and
Holcim are the only cement suppliers in Sri Lanka that operate local
manufacturing plants.
The rest of the market is populated by importers. In this regard,
domestic manufacturers enjoy some tariff protection and logistical
advantage compared to importers, which face the risk of hardening cement
due to the product's short shelf life.
On a separate note, capital expenditure ("capex") for capacity
enhancement and investment in a new bio-mass plant had increased the
Group's debt burden by the end of FYE 31 March 2010 ("FY Mar 2010").
With the completion of these projects, however, Tokyo has now begun
repaying its debt facilities, thereby improving its overall financial
profile.
The Group's debt burden was reduced from Rs 4.27 billion as at
end-March 2010 to Rs 3.55 billion as at end-September 2010, thus easing
its gearing ratio from 0.75 times to 0.64 times.
This, coupled with the environment of receding interest rates, had
broadened Tokyo's interest coverage to a healthy 4.46 times as at
end-September 2010 (end-March 2010: 1.94 times).
At the same time, its funds from operations ("FFO") debt coverage
clocked in at an annualized 0.74 times (end-March 2010: 0.49 times).
With no major capex planned, we expect the Group's financial profile to
improve as its debt level is reduced further.
That said, the Group is exposed to the inherent cyclicality of the
construction sector, which is the biggest consumer of cement.
Nonetheless, the long-term outlook for the construction industry is
positive.
The industry expanded 8.5 percent year-on-year ("y-o-y") in 1Q 2010
(1Q 2009: 3.0 percent), followed by another 9.3 percent in 2Q 2010 (2Q
2009: 5.4 percent).
Further growth is expected to emanate from government-led
infrastructure projects, particularly in the recently liberated northern
and eastern regions of the country. Given that Tokyo's production
facility is located in the eastern part of the country, we believe that
it is well poised to benefit from such an upturn.
Moreover, the improving macroeconomic environment is also expected to
propel demand for housing over the medium to long-term.
Meanwhile, cement is classified as an essential commodity by the
Consumer Affairs Authority of Sri Lanka ("CAASL"); approval is requi-red
from the CAASL prior to any revision in the retail price.
Cement suppliers are therefore unable to pass on increasing costs to
customers, and are thus exposed to potential margin compression.
As such, cement manufacturers are vulnerable to adverse price
movements in its primary raw material, i.e. clinker, which accounts for
around 74 percent of its total production cost.
|