Fitch affirms Lion Brewery at ‘AAA(lka)’; Outlook Stable

Fitch Ratings has affirmed Sri Lanka-based Lion Brewery (Ceylon) PLC’s National Long-Term Rating at ‘AAA(lka)’. The Outlook is Stable.

The affirmation and Stable Outlook reflect the view that Lion’s credit metrics will remain commensurate with its rating over the medium-term, as Sri Lanka’s economic environment continues to stabilise. 

“We believe Lion’s strong financial profile will buffer against any weakening in consumer demand,” Fitch said in a rating commentary.

Lion’s rating reflects its marketing leadership in the domestic beer industry, which is protected by high entry barriers stemming from licensing requirements and a ban on media advertising, strong brand presence and an extensive retail and distribution network.

Lion is expected to maintain its solid market position in the local beer industry over the medium term. 

“Our view is underpinned by Lion’s range of product offerings across price points, which makes cash flow defensive through cycles. It also benefits from prominent shelf space across its sales channels,” Fitch said.

However, Fitch said it expects competition will increase over the medium-term from the recent new beer product launch, owned by a leading local spirits manufacturer. The competition will benefit from an established retail-channel and distribution network, although Fitch believes the impact on Lion’s revenue will be gradual given production capacity will only ramp-up gradually over the medium-term.

Lion is expected to maintain a net cash position over the financial years ending March 2025 (FY25) to FY28, supported by steady operating cash flow and minimal expansionary capex plans, as Lion’s capacity is sufficient for medium-term growth. 

Annual capex of around Rs. 5.0 billion-5.5 billion is expected, mainly for maintenance and minor capacity expansionary plans, as seen in its recent set up of a mini-brewery for product research and development and the expansion of warehouse space.

Lion’s EBITDA margin is expected to decline to 14.5 percent in FY25 (FY24: 15.9 percent), driven by challenges in passing on increased costs to end-consumers. 

“We believe the company is likely to partially absorb cost increases, including excise duty hikes, to maintain sales volume, due to weaker consumer purchasing power. We forecast Lion’s EBITDA margin to decline further to around 12-13 percent from FY26, on the background of increased competition in the medium-term,” Fitch said.