Fitch Ratings affirms JAT Holdings National Long-Term Rating at ‘AA(lka)’

Fitch Ratings has affirmed Sri Lankan paint manufacturer JAT Holdings PLC’s National Long-Term Rating at ‘AA(lka)’. The Outlook is Stable.

JAT’s rating reflects the company’s strong financial profile with low leverage and manageable liquidity. The rating is also supported by its leading position in the domestic wood-coating market and a growing overseas presence. The rating is constrained by JAT’s small operating scale and exposure to cyclical end-markets compared with higher-rated peers.

The Stable Outlook reflects Fitch’s view that JAT’s credit metrics and liquidity will remain adequate in the next 12-18 months, with sufficient buffers to navigate the slow recovery in the domestic economy.

“We expect JAT’s EBITDA net leverage, to stay below 1.0x in the financial year ending March 2024 (FY24) to FY27. This is in spite of softer EBITDA as the benefit of selling lower-cost inventory in FY23 dissipates and higher capex into production and R&D facilities in FY24,” said Fitch Ratings. 

It said it expect EBITDA to grow 26 percent in FY25 on improved margins with more vertical integration from the company’s new production facilities and a demand recovery in the domestic market. Capex is also likely to be lower after FY24 as JAT has no major investment projects in the near term.

Fitch expects JAT’s domestic sales to improve in FY25 amid signs of recovery in the Sri Lankan economy. Its domestic revenue grew 10 percent year-on-year (YoY) in 3QFY24, reversing a trend of YoY decline that started in 3QFY23. 

Sri Lanka’s purchasing managers’ index for the construction sector reached 52.9 in January 2024, entering expansionary territory for the first time since January 2022, as new projects increased and suspended projects were restarted. That said, we believe Sri Lanka’s paint consumption recovery will be mild and gradual amid economic challenges.

The EBITDA margin is expected to improve during FY25-FY27 after retreating in FY24. The company’s EBITDA margin is likely to weaken to below 14 percent in FY24, from 19 percent in FY23, as the benefit of selling low-cost inventory faded, while expenses, including advertising and marketing costs, increased significantly. 
“However, we expect JAT’s continued efforts in vertical integration, through the launch of a binder plant in Sri Lanka and an alkyd resin plant in Bangladesh, will help it to control costs and lift its EBITDA margin to 14 percent-15 percent in FY25-FY27.”
In addition, JAT has decreased its reliance on imported raw materials, to 43 percent in FY23 and 51 percent in 9MFY24, from 70 percent-80 percent in previous years, as it expanded local procurement to cope with import restrictions and the rupee depreciation. 
Its value of purchases from foreign suppliers are likely to rise as most import restrictions have been lifted. However, Fitch said it expect the reliance on raw material imports to remain below historical levels in the coming years, given the increased vertical integration and benefits of local sourcing. 
“We expect greater stability in JAT’s margins from the reduced exposure to imports,” said Fitch.
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“We expect greater stability in JAT’s margins from the reduced exposure to imports”- Fitch