Fitch affirms Hemas Holdings at ‘AAA’; Outlook Stable

Fitch Ratings has affirmed the National Long-Term Rating on Sri Lankan consumer brands and healthcare company, Hemas Holdings PLC, at ‘AAA (lka)’ with a Stable Outlook.

The affirmation reflects Hemas’ defensive operating cash flows, driven by its healthcare and consumer brands businesses, which contribute approximately 90% of the group’s EBIT. 

The Stable Outlook is supported by Fitch’s expectations that Hemas will continue to maintain a robust balance sheet, even as the company explores significant investments in its core businesses over the next few years.

Fitch issued the following key drivers for its rating decision:

Leading domestic market position: We expect Hemas to retain its leading position in pharmaceutical import and distribution, supported by reduced competition after import challenges in the last few years that disproportionately affected smaller players. The company’s strong local distribution network and long-standing global partnerships are also key advantages. Demand for Hemas’ pharmaceutical manufacturing and hospital operations is rising due to an ageing population.

Hemas holds a prominent position in the Home and Personal Care (HPC) segment and is the market leader in stationery products. The company has sustained its market share through the introduction of new brands and a variety of packaging options tailored to accommodate consumers’ constrained purchasing power in recent years. Stationery demand is expected to be underpinned by educational needs, while the essential nature of most HPC products continues to support demand.

Investments, capex to rise: We expect capex and investments to rise significantly to around Rs. 7 billion annually for FY26-FY27, from the Rs. 3.5 billion estimated for FY25. Planned investments include significant capacity expansions in the hospitals sub-segment over a four-year period, with cashflows from this project expected after FY27. Recurrent capex will also rise temporarily to around Rs. 4 billion annually in FY26-FY27 to balance lower investments in the last few years amid the weak domestic environment.

We expect the company to also expand its pharmaceutical manufacturing capacity over the next few years, which is supported by Sri Lanka’s ongoing efforts at substitution of imports. Fitch expects Hemas will continue to adopt a prudent approach to these and potentially other opportunistic investments, consistent with its track record. While the above projects will be financed through an increase in net debt, Hemas’ strong balance sheet should absorb the investments with limited credit impact.

Defensive cashflows: Fitch expects Hemas’ revenue to rise by 5% in the financial year to March 2026 (FY26), with gradual pick-up in growth from FY27. While Hemas does not have direct exposure to rising US tariffs, it is likely to be hit by indirect effects of slower economic growth. However, this is counterbalanced by, 

Strong financial profile: We forecast Hemas’ financial profile to remain solid over the medium term. Fitch forecasts EBITDA net leverage to remain at less than 1.0x during FY26-FY27, well below the negative rating sensitivity of 4.5x, barring any opportunistic investments or inorganic growth beyond our projections. In addition, EBITDA interest coverage is projected to average around 10 times over FY26-FY27, maintaining ample rating headroom, and allowing the company to navigate any unforeseen weaknesses in its core businesses.

Peer analysis

Diversified conglomerate Hayleys PLC (AAA(lka)/Stable), is rated at the same level as Hemas. Hayleys benefits from a significantly larger operating scale and greater geographic and business diversification compared to Hemas, with exports accounting for 54% of the group’s revenue and eight sizeable businesses contributing to 80% of its EBIT. However, Hayleys is exposed to cyclical demand in many of its businesses, which offsets some of the scale and diversity benefits relative to Hemas, whose cashflows are more defensive through the cycle.

Conglomerate Melstacorp PLC (AAA(lka)/Stable) is rated at the same level as Hemas. Melstacorp’s rating is underpinned by its dominant position in the domestic alcoholic-beverage sector. This dominance supports Melstacorp’s robust free cashflows, while it is diversified into several other businesses including leisure (both locally and overseas) and plantations, supporting significantly larger EBITDA scale compared to Hemas. While the ratings are the same, Melstacorp’s credit strengths compared with Hemas are factored into more relaxed rating sensitivity thresholds.

Sunshine Holdings PLC (AA+(lka)/Stable), a local conglomerate in healthcare, consumer products and plantations, is rated one-notch below Hemas. The one-notch difference reflects Sunshine’s smaller operating scale and more modest market positions in its key and comparable businesses compared to Hemas. We anticipate that both companies will maintain similarly strong financial risk profiles in the medium term.

Hemas, given its credit strength, is rated higher than a number of large banks, non-bank financial institutions and insurance companies in the country. The large financial institutions are more exposed to sovereign stress despite their individual credit strengths, due mainly to substantial sovereign-issued securities held for regulatory reasons, while the banks and non-bank financial institutions have broader exposure to numerous sectors in the local economy amid the weak operating environment.

Key assumptions

nRevenue to decline marginally by around 3.5% in FY25, consistent with trends observed during 9MFY25. Revenue growth to pick up slightly in FY26 amid the prospects of a global economic slowdown and potential impacts on domestic consumption.

nEBITDA margin to decline from an estimated 13.0% in FY25 to around 12% in FY26, factoring possible drag on the local exchange rate from global economic headwinds, as Hemas imports a significant part of its production inputs.

nWorking capital cycle to lengthen from around 80 days in FY25 to around 90 days in FY26, before recovering gradually. The increase is primarily driven by higher inventory, factoring in pressure from prospects of higher input costs, balanced by an improving higher value-added product mix.

nDividend payout to average around Rs.3 billion annually from FY25-FY28, in line with the payout rates observed during 9MFY25.

Rating sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

nGroup EBITDA net leverage rising above 4.5x on a sustained basis

nGroup EBITDA interest cover falling below 2.3x on a sustained basis

Factors that could, individually or collectively, lead to positive rating action/upgrade:

nThere is no scope for an upgrade, as the company is already at the highest rating on the Sri Lankan National Rating scale

Liquidity and debt structure

Hemas had Rs. 10.8 billion of unrestricted cash at end-December 2024 compared with Rs.9.8 billion of debt maturing in the next 12 months. Short-term debt was backed by net working capital assets of approximately Rs. 28.7 billion and a healthy working capital cycle of around 80 days. The company had unused but uncommitted credit lines of Rs. 45.3 billion, which also support liquidity in the normal course of business. We believe Hemas will retain strong access to banks, as demonstrated in the past, given its strong cash flow generation from defensive industries, driving its solid credit profile in the local context.