Beer volume declines to persist through March next year until normalcy returns: Fitch

• ‘Strong beer’ volumes show more resilience than ‘mild beer’ as former consumed off-premise

 Pandemic related economic stress could continue to drive down beer sales through March 2022 before staging a growth with the gradual restoration of economic normalcy, lifting of movement restrictions and the recovery of tourism trade, all of which could become possible from the ongoing vaccination drive, according to Fitch Ratings. 

Affirming the rating of Lion Brewery (Ceylon) PLC, the country’s beer market leader at AAA with a Stable outlook, the rating agency estimated the sales volumes to decline by 8 percent during the company’s ongoing financial year ending in March 2022 (FY22), continuing from the decline of 3 percent recorded in the previous financial year.

Fitch forecasted a faster decline in mild beers compared to strong beers as the latter is mostly consumed off-premise and therefore has more resilience. However, a meaningful recovery in the mild beer is expected only in late FY23 in tandem with the recovery in tourism, Fitch said. 

Fitch estimated the volume sales of mild beer with alcohol content of 5 percent or less to decline sharply by 25 percent against the 5 percent decline in strong beer, which has alcohol content of more than 8 percent. 

However, the rating affirmation comes amid a strong balance sheet at Lion which acts as buffer against prolonged disruptions and weak consumer condition up to another 12-18 months, should they persist. 

 Fitch estimates the company would be able to maintain its leverage at below 1.0x in the medium term from 0.2x by the end of June 2021, even after factoring the slowdown expected in revenue growth in the ongoing financial year, decline in EBITDA margins stemming from challenges in passing through cost inflation amid weak economic condition. Fitch estimated the company’s net revenue to rise by just 1.6 percent in FY22 due to their expectation of an increase in the selling price.

In the quarter ended in June 30,2021, Lion reported revenues of Rs.10.6 billion, which was a decline of 28 percent from the previous three months ended in March as there was “zero sales”, recorded for a month due to a month long lockdown. Despite rising raw material costs, part of which are imported, the company finds it unable to fully pass on the higher operating cost to the consumer due to weak consumer and economic conditions, hence resulting it some amount of narrowing in its EBITDA margins. 

Fitch assumes the company’s EBITDA margins on gross revenue to decline by 70 basis points to 11.6 percent in FY22 before staging a marginal recovery to 11.8 percent in FY23 on improving volumes.   Fitch also expects Lion to have stretched working capital cycles due to slower receivable collections, and the need to build buffer stocks of raw material imports as a contingency against the country’s challenging import environment. 

The company’s imports haven’t seen any severe disruptions to-date when importing raw materials as the company has managed to secure its commodity requirements for FY22.  “Fitch does not foresee severe import disruptions for Lion, which remains a key source of government tax revenue,” the rating agency added. 

Meanwhile, the rating agency also assumed the Excise duties for beer to rise by 10 percent in FY22 followed by a steady growth of 5 percent over FY23 - FY25 as the government might look for ways and means to strengthen its revenues lost due to the pandemic.