EB Creasy from Sri Lanka rated [SL]BBB by ICRA Lanka


ECONOMYNEXT – Credit rating agency ICRA Lanka Limited has rated Sri Lanka’s EB Creasy and Company ‘[SL]BBB ‘with a stable outlook due to the stable position and improving operating profits.

Despite the stable outlook, EB Creasy’s debt profile is largely geared towards short-term loans, as the funding is largely directed towards working capital requirements; and these short-term loans are refinanced regularly, ICRA said.

As of March 2021, over 80% of total debt was in the form of short-term facilities.

“Given the reputation of the group and its banking relationships, ICRA Lanka expects the group to refinance these maturities in the short term,” the rating agency said.

The full report is reproduced below:

Action evaluation

ICRA Lanka Limited has assigned a new issuer rating of [SL]BBB (pronounced SL triple B) with a stable outlook for EB Creasy & Company PLC (“EBCR” / “the Group”).

Reasoning

ICRA Lanka has adopted a consolidated vision on the EBCR taking into account the operational and financial links between the entities of the Group. ICRA Lanka relies on the Group’s long experience and reputation, which have enabled it to benefit from regular access to financing, supporting its growth over the years. In addition, the rating takes into account the group’s strong market position in its main product segments.

The rating takes into account the improvement in profitability and the Group’s indebtedness indicators during fiscal year 2021, despite the weaker macroeconomic conditions and the impacts induced by the COVID-19 pandemic. EBCR’s operating margins improved in fiscal 2021, largely due to higher capacity utilization levels driven by market share and volume growth. The holding company was effective in reallocating spending between marketing and distribution and gained market share in key product categories. Overall profitability is also supported by historically low interest rates, allowing the Group to refinance its debt on favorable terms. The improvement in operating results resulted in better coverage and leverage indicators for the Group, although overall debt levels remained broadly stable during fiscal 2021.

While the rating takes into account the short-term nature of the borrowing profile, exposing the group to refinancing risk, the EBCR’s good relations with the banks and the track record established provide a certain level of comfort. The rating also takes into account the potential financial liabilities of the parent company, resulting from guarantees granted to other group entities and to related companies.

Outlook: stable

The stable outlook reflects the strong market position and healthy financial profile of the Group, despite weaker macroeconomic conditions.

Main scoring drivers

Credit strengths

A solid experience and a dominant position in the market in relatively stable consumer segments: over the years, EBC has grown through strategic acquisitions and now forms a diversified group with 40 Group entities dedicated to the manufacture of FMCG products, import / export of agricultural inputs / raw materials, distribution and shipping of freight, trade in chemicals / automotive components and electrical equipment (solar), hotel and plantation management.

The group is the leader in several consumer product categories and enjoys comfortable margins on most product categories. EBC is the dominant market leader for razors with approx. 74% market share, where the group represents the world-renowned BIC shaver brand. The group is also the dominant market leader in mosquito coils (around 86% market share) and incense sticks market in Sri Lanka.

In addition, the group occupies a strong position in the toothbrush market with a market share of around 38%. The rating also reinforces the group’s ability to maintain healthy profit margins in these competitive segments, due to its strong position in the market, where cost increases are largely passed on to consumers. ICRA Lanka also builds on the Group’s track record and reputation in the industry, which has helped the Company gain regular access to funding from both capital markets and financial institutions which have supported its growth in the world. over the years.

Improvement of the profit profile: despite the difficult macro environment that prevailed, the group was able to significantly increase its turnover and its results, the management being able to ensure the continuity of the activity, while the most small competitors were affected by the exceptional circumstances. During FY21, the group’s turnover grew by 22%, compared to the modest growth of 4% recorded in FY20. ICRA Lanka notes that revenue growth has been observed in most segments of the group, including the main FMCG segment.

With the increase in turnover, the group’s operating margins improved during FY21, to 12.9%, compared to 6.7% in FY20 and 3.1% in FY19. ICRA Lanka notes that the higher capacity utilization levels and tight cost controls are largely attributable to the increased operating margin. Overall profitability was further supported by the sharp drop in systemic interest rates, where the group’s financial cost fell by around 30% during FY21. In FY 21, EBC reported a group PAT of LKR 832 million, compared to a loss of LKR 425 million in fiscal 2020 and a loss of LKR 749 million in fiscal year 2019.

Improvement in coverage and leverage indicators thanks to healthy operating results: the group’s coverage indicators improved significantly thanks to strong growth in operating income over the period; EBITDA increased approximately 2.4 times in FY21 compared to FY20. The group’s interest coverage improved to 4.3x during FY21 against 1.3x during FY20, while the group’s indebtedness also improved to 0.81x against 1, 07x during the period, although the overall debt level remained largely stable. In the future, ICRA Lanka expects the overall debt level to increase somewhat in the short to medium term, due to the group’s significant investment plans; however, the hedging indicators should remain fairly comfortable due to the good outlook for operating income.

Credit challenges

Short-term nature of the financing profile, exposing the group to refinancing risk: the group’s debt profile is largely oriented towards short-term loans, the financing being mainly intended for working capital requirements; and these short term loans are refinanced regularly. As of March 21, over 80% of total debt was in the form of short-term facilities.

While the short-term nature of the debt profile exposes the group to refinancing risk, given the group’s reputation and banking relationships, ICRA Lanka expects the group to refinance these short-term maturities. In addition, the rating is reassured of unencumbered shares of group entities and unused financing lines of the group, which would provide financial flexibility.

Potential funding obligations of underperforming group entities and related entities: as on June 21, parent entity EBC has granted guarantees and commitments worth approximately LKR 1.4 billion to its group entities and related entities. Of this amount, LKR 832 million is being extended for the former associated company Lankem Ceylon PLC (Lankem), which is significantly underperforming. Lankem was an associated company of EB Creasy & Co PLC, and is engaged in the manufacture and distribution of agrochemicals, decorative paints and industrial chemicals and bitumen.

In recent years, the entity has suffered heavy financial losses due to several reasons, including adverse weather conditions in the past, working capital constraints and regulatory issues related to its agrochemicals business. During fiscal year 2021, EBC further diluted its stake in Lankem from 34% to 18%, as the entity is no longer recognized as an associate

Analytical Approach: In arriving at the ratings, ICRA applied its rating methodologies as outlined below.

Links to the applicable criteria: https://www.icralanka.com/issuer-rating-methodology/

About the Group:

Founded in 1878, EB Creasy & Company PLC (“EBCR” / “the Company”), was converted into a limited liability company and listed on the Colombo Stock Exchange (CSE) in 1968. It is one of the oldest Sri Lankan companies. . The company is one of the pioneers of the Ceylon Chamber of Commerce, having joined it in 1890 while Darley Butler – a wholly owned subsidiary – has the distinction of being one of the three oldest members since 1852. Au Over the years, EBCR has grown through organic growth as well as through strategic acquisitions and is now a diversified group. The Group is active in more than 9 business sectors and operates 30 brands and 40 companies. The Group’s business entities include logistics and transport, distribution of pharmaceutical items, manufacturer of galvanized wire and all other varieties of steel wire, manufacturer of a range of confectionery products and alkaline type batteries. and CFL bulbs. Since fiscal year 2018, Lankem Ceylon PLC (LCEY) is considered as an associated company of EBCR.

As of June 30, 2021, due to the dilution of the investment, the investment has been recorded as an investment held at fair value through other comprehensive income.
The Company independently manufactures, markets and distributes a range of home care, personal and household care products. The range offered includes imported and manufactured disposable razors, toothbrushes, mosquito coils and mosquito repellent liquid sprays. During fiscal year 2020, the company withdrew from its hardware and automotive battery segment. In addition to its own activities, the Company also acts as a key holding company for the entities of the Group.


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