Escalating costs weigh on Hemas 2Q earnings

• Company expects margin pressure from rising global commodities prices and forex pressures to persist for sometime

Hemas Holdings PLC had to contend with the soaring producer prices, as the company’s outsize consumer product manufacturing segment felt the brunt of the rising costs and the challenges in the foreign exchange market, sending the group profits down. 
The group reported earnings of Rs.1.58 a share or Rs.944.1 million in the July-September quarter, down 26.6 percent, from Rs.2.16 a share or Rs.1.29 billion in the same period last year. 

This is despite the revenues growing by 14.7 percent to Rs.19.8 billion, albeit there were some pressure on most of its business units, specially its consumer business led by health and personal care range and the stationary business, which got affected from the lockdowns, higher consumer prices and prolonged school closures. 

“During the quarter under review, an unprecedented level of input cost inflation and foreign exchange volatility resulted in the group witnessing profitability pressure,” said Hemas Holdings Group Chief Executive Officer Kasturi C. Willson. 

The direct costs rose by as much as 22.4 percent, while the administrative costs also rose by 24 percent, due to the steep increase in the raw material costs and exchange rate volatility. 

The group’s consumer brands business consisting of home and personal care range in both Sri Lanka and Bangladesh and the stationary business through Atlas suffered from both at top line and bottom line levels, due to the aforementioned challenges. 

“The pandemic continued to influence consumer behaviour, sales mix and market channel dynamics. Footfall in the modern trade was impacted during the lockdown whilst general trade saw a stable growth,” Wilson said in an earnings release. 

“Basket value was skewed towards food and essentials, impacting shopper patterns for non-essential items. The quarter witnessed escalation in commodity prices by approximately 50 percent over last year,” she added. 
This segment of the group generated revenues of Rs.7.33 billion in the three months, slightly down from Rs.7.45 billion in the comparable period last year. 

The earnings of this segment fell sharply to Rs.497.6 million, from Rs.834.4 million, last year. 

The group’s healthcare segment, which consists of its two hospitals in Thalawathugoda and Wattala and the pharmaceutical manufacturing and trading business generated revenues of Rs.11.85 billion, up from Rs.9.31 billion in the year earlier period. 

This segment reported earnings of Rs.736.8 million for the quarter, up from Rs.654.9 million a year ago. 

While the hospitals saw an average increase in admission volumes by 4.4 percent over last year, with a fair mix of COVID and non-COVID medical admissions during the first half of the year, performance at its pharmaceutical business was affected from the “reduction in buyback volumes compared to assigned quantities under the guaranteed buyback agreement with the Health Ministry of Sri Lanka”.  

“We will be accelerating other alternative opportunities to de-risk Morison from the volatility of the buyback agreements,” Wilson said of its pharmaceutical manufacturing business housed under Morison. 

Meanwhile, the group’s mobility sector, comprising of maritime business, logistics and aviation business, reported revenues of Rs.595.0 million for the quarter, compared to Rs.502.8 million a year ago. 

However, the earnings fell to Rs.73.0 million, from Rs.106.7 million a year ago, as the transhipment volumes and TEUs dropped by 7.5 percent and 6.1 percent, respectively, resulting from over 250 vessels skipping the Port of Colombo to recover their schedules. 

However, the higher freight costs negated the adverse impact to a certain extent. 

Hemas Transportation (Private) Limited, a subsidiary of Hemas Holdings PLC, divested its entire shareholding in Spectra Logistics (Private) Limited, at a total consideration of Rs.1,275 million in October. 

“In line with the group’s strategy, the mobility sector will focus on investing in the logistics segment in a model, which enables us to leverage on the existing capabilities,” Wilson said. 

While the group anticipates improved demand with the dissipation of the virus, it expects the challenges from the higher global commodities prices, rising consumer inflation and foreign exchange pressure to continue to put pressure on the group’s profit margins in the upcoming quarters.