Fitch rates Distilleries Company of Sri Lanka at ‘AAA (lka)/Stable’
Fitch Ratings has assigned a ‘AAA(lka)’ National Long-Term rating to
Distilleries Company of Sri Lanka PLC (DIST). The rating Outlook is
Stable.
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.
Fitch views the high and frequent increases in top-line taxes on
spirits as a regulatory risk, which has created a large illicit spirits
market.
However, the rating factors in the agency’s expectation that DIST
will 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, the agency notes that regulations such as the ban on
advertising also impede the natural growth of the legal alcoholic
beverages industry to an extent.
DIST accounted for a 65% share of local alcoholic beverages produced
in 2011 through legal channels, including nearly 80% 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. 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.
A sustained increase in financial risk, as measured by an increase in
the group’s financial leverage (defined as lease adjusted debt net of
cash / operating EBITDAR, excluding debt at its licensed finance company
subsidiary) is a key medium-term risk, and could result from potential
debt-funded acquisitions or a substantial weakening in DIST’s group
EBITDAR margins.
DIST is also exposed to foreign currency risk on any US dollar
denominated debt unless adequately hedged, due to the group’s limited
foreign currency related earnings (approximately 8% of group EBITDAR at
FY12). |