Hemas to withstand economic pressures due to its defensive cash flow: Fitch

• But says revenue and margins could come under pressure 
• Affirms company’s ‘AAA’ rating with a Stable outlook

Hemas Holdings PLC will be able to endure the pressures stemming from the current foreign exchange and macro-economic challenges, due to its defensive cash flows coming from its key business segments but the growth in revenues would slow down and the margins could come under pressure in the current financial year, according to Fitch Ratings. 

Hemas operates in businesses, which have strong defensive cash flows such as home and personal care (HPC), stationary, pharmaceutical and hospitals, which have the capacity even to withstand the toughest economic downturns. 
As a result, Fitch affirmed the company’s rating at ‘AAA’, with a Stable outlook. 

“The affirmation and Stable Outlook reflect Fitch Ratings’ view that Hemas will be able to navigate Sri Lanka’s weak economy in the next 12-18 months, supported by an exceptionally strong balance sheet and defensive cash flow,” the rating agency stated. 

“Fitch expects Sri Lanka’s GDP growth to slow sharply in the next 12-18 months, with rising inflation and a sharp deterioration in the local exchange rate eroding domestic consumers’ purchasing power,” it added.
Hemas for the months ended on December 31, 2021 reported a net profit of Rs.3.19 billion or Rs.5.34 a share, compared to earnings of Rs.2.39 billion or Rs.4.01 a share in the comparable period in 2020, recording a robust 33.1 percent growth.  The revenue rose by 20.5 percent to Rs.57.7 billion, reflecting the defensive nature of its business interests. 

However, the pressures could mount in the incumbent financial year with the revenue growth estimated to weaken to 5 percent, from 21 percent in the nine months through December 31, 2021.  Further, the margins are also estimated to narrow to around 7.5 percent, from 10.6 percent, due to the contraction in sales volume and the cost escalation as a result of the higher global commodities prices, supply chain bottlenecks and the impact from the rupee float. 

Fitch measures at around 90 percent of the group’s earnings before interest and tax to stem from pharmaceutical trading and manufacturing and mostly essentially from fast-moving consumer goods.  Hemas is the market leader in pharmaceutical import and distribution in Sri Lanka and it is also into pharmaceutical manufacturing and hospitals, which are benefitting from the ageing population in the country, increasing non-communicable diseases and faster penetration in health insurance.  Meanwhile, Hemas also commands the second place in the market for HPC and the leadership in the stationary business via its acquisition of Atlas Axillia. 

“We believe demand for stationery products will remain strong, despite weak consumer spending, as households will prioritise educational needs. Similarly, we believe HPC products’ essential nature means they will remain somewhat defensive in the downturn,” Fitch added.