Companies defer big investments as they rush to conserve cash amid liquidity drought

Companies are delaying their planned big capital investment projects and putting on hold ongoing projects as they are rushing to conserve cash at a time when revenues have dried up triggering a liquidity crunch. 

Businesses were forced to remain shut since mid-March as health authorities advised to practice social distancing to contain the spread of the deadly pathogen originated in China. 

According to several listed entities, which had disclosed the COVID-19 impact on their businesses said they had already decided to defer capital expenditure and imposed salary cuts at senior level to conserve cash as their top lines were battered for nearly six weeks. 

“Cost cutting and cash conservation measures to protect the business have already been initiated.We have deferred capital expenditure and discretionary spending and instituted salary cuts at the senior level in the group and in businesses with very low revenues. 

Each business is working through a detailed plan on cash conservation and cost containment,” Hemas Group CEO Steven Enderby said.

Although the virus’ toll on Hemas’ business is mixed as it operates in multiple industry verticals, the overall impact is negative on the group, albeit relatively lower to an entity whose industry exposure to the pandemic 
is high. 

This week Fitch Ratings identified consumer retail, construction and hotels as the most affected from the pandemic while utilities, telecommunications and healthcare are listed as the least affected or at least neutral to the crisis. 

Hemas has interests in healthcare and pharmaceutical, FMCG, logistics and marine and leisure. Although leisure belongs to one of the worst impacted sectors, its contribution to group revenue stands at around 3 percent.

“The impact of COVID-19 pandemic has been most significant in our hotel segment with zero or minimum occupancy due to social distancing requirements, travel disruptions/restrictions, and quarantine requirements from the start of the lockdown. 

“However, the impact to the Group was reduced due to the divestment of our travel and aviation segment during March FY19/20,”Enderby said.

 
Yesterday Fitch Ratings said Hemas’ diversified nature and the relatively defensive nature of the demand for some products in the FMCG category and pharmaceutical products make the conglomerate less exposed to risks from the rating perspective. 

“Our businesses focus is primarily on the Sri Lankan consumer and healthcare sectors providing essential healthcare products and services and day-to-day fast moving, mass market consumer goods. 

“As such, we anticipate that the demand for our products and services will recover relatively quickly from the current levels. It is however not possible at this time to predict the exact timing or extent of recovery,” Enderby added. 

Meanwhile, LVL Energy Fund PLC, which owns and operates several hydro, wind and thermal projects in Sri Lanka, Bangladesh and Nepal said they had to put off the construction work of hydro power projects in Nepal delaying the completion date which was set for June 2021 due to the pandemic. Apart from the project delay, the company is also exposed to delayed cash flows from the governments in Sri Lanka and Bangladesh for the power they provided to the national grid. 

“The main problem we are faced with is the long delay in receiving payment from the Ceylon Electricity Board (CEB) for our sales. This is a problem that existed before the outbreak of COVID-19 pandemic, but the problem has got aggravated as a result of the present situation,” LVL Energy CEO Sumith Arangala said in a stock exchange filing.

While under normal circumstances the company receives payments within two months, LVL Energy said the current situation has delayed the payment receipts beyond 4 months, adding that the cash flow delays have caused problems for other project companies as well. 

“The hydro power plants are recording considerably less generation this year compared to target generation due to the severe drought that is being experienced. That together with the cashflow problems caused by the delay in receiving payment for electricity sales will have an impact on project companies’ ability to service debt in a timely manner if the banks are unable to grant a moratorium on interest and capital repayment which the project companies have sought from the banks. 

All these factors will restrict the distributable cash of project companies affecting distributions of the company in year 2020,” the statement added. 

Early this week, the Colombo Stock Exchange informed all listed entities to disclose the impact of the pandemic on their businesses as a matter of priority.