Fitch assigns JAT Holdings first-time ‘AA(lka)’ National Rating; Outlook Stable

Fitch Ratings has assigned Sri Lankan paint manufacturer JAT Holdings PLC a National Long-Term Rating of ‘AA(lka)’. The Outlook is Stable. 
JAT’s rating reflects the company’s adequate liquidity and strong financial profile, which complement its leading share in the domestic wood-coating market, its growing international presence and well-established relationships with global suppliers. 

Counterbalancing these strengths are JAT’s small scale and exposure to cyclical end-markets with volatile demand. The Stable Outlook reflects Fitch’s view that JAT’s credit metrics will remain adequate for the rating in the next 12-18 months, with sufficient buffers to navigate a prolonged and deeper economic downturn beyond our expectations.

Fitch expects JAT to maintain EBITDA net leverage around 1.0x and EBITDA interest cover around 4.0x over the next two years, despite operational challenges, high working capital and capex. The rating agency forecasts that JAT will spend Rs.600 million-700 million on working capital a year to support revenue growth. 
“JAT’s capex in the next two years will mainly focus on capacity expansion and diversification into certain non-related sectors at around Rs.1.0 billion-1.2 billion a year. However, the rating could come under pressure if JAT continues to make non-core investments,” Fitch said.

JAT is the exclusive partner of Sayerlack products in South Asia and in certain African countries. Sayerlack accounts for 60 percent of JAT’s gross profit and has helped the company to become the market leader in wood coating in Sri Lanka, with a market share of 55 percent and holds a 25 percent market share in Bangladesh’s industrial wood-coating market. 
JAT’s longstanding relationship with Sayerlack’s principal, The Sherwin-Williams Company (SWC, Long-Term Issuer Default Rating: BBB/Stable), has helped it with preferential pricing, product customisation and extended credit periods.

JAT entered the decorative paint market in 2021, with the launch of the brilliant white emulsion paint, which has gained nearly a 10 percent market share within a short time. The company has adopted an innovative online strategy of directly selling to the customers by bypassing distributors. This has allowed JAT to offer more attractive prices than competitors. 
Fitch expects the decorative paint segment to grow by around 25 percent a year over the medium term, with JAT continuing to gain market share and contribute 20 percent to group revenue by the financial year ending March 2025 (FY25), from 8 percent in FY22.

Fitch expects JAT’s domestic sales volumes to fall by 10 percent-15 percent in FY24, amid a 2.2 percent contraction in the economy in 2023, after a Fitch-estimated 6.4 percent decline in 2022. The construction sector, JAT’s main end-market, is seeing a significant slowdown, due to budget cuts, high construction costs and rising interest rates. Consumers are also deferring maintenance work as incomes weaken. Fitch expects JAT’s recent price hikes, ranging from 30 percent to 50 percent across all categories, to counterbalance the volume decline, driving domestic revenue (9MFY23: up 28 percent YoY). 

Demand for JAT’s wood coating, decorative paints and paint brushes stems from the cyclical construction sector. The company caters mainly for the less-volatile maintenance market within the construction sector but demand is still subject to discretionary income. JAT’s rating is constrained by its small operational scale, as reflected in EBITDA size, against higher rated peers. This is because the company is a leader in a niche market within building materials and has a small share of the larger decorative paint segment. 

JAT is increasingly focusing on export markets to diversify away from the weakening Sri Lankan market. JAT started a manufacturing plant in Bangladesh in 2022 to further penetrate the retail and industrial wood-coating markets. Fitch expects onsite manufacturing to reduce costs and make JAT’s products more competitive in the Bangladeshi market, which is dominated by multinationals with large economies of scale. The rating agency expects the new plant to double the revenue contribution from Bangladesh in the next three years, from the current 20 percent. 

Meanwhile, Fitch believes that JAT’s attempt to penetrate the Indian market remains challenging, due to the market being highly price sensitive and import taxes, making JAT’s products less competitive against the locally manufactured paints. 
JAT plans to set up a manufacturing plant in East Africa in FY24, to cater for this highly underpenetrated African region with strong growth potential. It already has a presence in Africa as the authorised distributor of Sayerlack products.