RAM reaffirms Tokyo Cement Company’s ratings at A/P2
Wednesday, 12 February 2014 00:07
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RAM Ratings Lanka has reaffirmed Tokyo Cement Company (Lanka) PLC’s (“the Company”) respective long and short-term corporate credit ratings at A and P2; the long-term rating carries a stable outlook. The ratings are upheld by its sizable market share and sound financial profile.
Meanwhile, the ratings are moderated by its inability to immediately pass on cost increases to the customer, its dependence on the cyclical construction sub-sector as well as its short term funding mismatch.
Incorporated in 1982, Tokyo Cement was listed on the Colombo Stock Exchange in 1984. The Company and its subsidiaries are primarily involved in the manufacture and sale of cement, to both retail customers and large projects. One of its subsidiaries, Tokyo Cement Power Lanka Ltd. is expected to supply electricity to the Ceylon Electricity Board. (Tokyo Cement and its subsidiaries are collectively known as the Group.)
Tokyo Cement and other local cement manufacturers in Sri Lanka together catered to a large portion of the domestic demand for cement in 2012. The rest was met by other industry players, which distribute imported cement. Tokyo Cement, as the sole operator at the port of Trincomalee, enjoys better access to the northern and eastern regions of the country than its competitors.
The Group’s financial profile remained sound in fiscal 2013. Its gearing ratio continued to improve in FY Mar 2013, standing at 0.34 times at the end of the period (end-FY Mar 2012: 0.46 times). This is mainly attributable to the Group’s efforts in trimming its borrowings, supported by its strong cash flow; the ratio remained in line with those of its similarly rated peers.
That said, the Group’s gearing levels are expected to increase over the medium term due to its planned capital expenditure. Notably, Tokyo Cement’s debt-protection metrics have expanded in line with its improved cash flow and reduced debt burden. Its annualised funds from operations (FFO) debt coverage clocked in at 1.52 times as at end-1Q FY Mar 2014 (end-FY Mar 2013: 1.09 times) while its annualised operating cashflow (OCF) debt coverage surged to 3.90 times (end-FY Mar 2013: 1.97 times).
Its coverage levels are envisaged to moderate over the medium term, in line with its rising gearing levels.
“However, we note that Tokyo Cement is a price taker as all local cement players are compelled to adhere to the retail price cap set by the Government of Sri Lanka (GOSL). This has restricted the Group’s ability to immediately pass on cost increases to end-consumers. As such, its profit margins will be constrained until a price increase is approved by the regulators,” RAM said.
“This is reflected by the decline in its margin on operating profit before depreciation, interest and tax (OPBDIT) to 9.33% in FY Mar 2013 (FY Mar 2012: 10.17%) - a result of a 5-month delay in receiving the Consumer Affairs Authority of Sri Lanka’s (CAASL) nod for a price increase following the rupee’s depreciation,” it added.
Given that the construction sub-sector largely depends on the GOSL’s infrastructure development projects, RAM opines that this cyclical and seasonal sub-sector is highly susceptible to economic cycles. As such, local cement players could enjoy better performances during booms and experience slowdowns amid recessionary conditions in view of their strong correlation with the sub-sector. Further, Tokyo Cement’s reliance on short-term borrowings remained substantial at Rs. 1.67 billion in 1Q FY Mar 2014, accounting for around 65% of its total debt.
Although the Group’s cash and cash equivalents (CCE) to short-term debt coverage had improved slightly to 0.27 times as at end-FY Mar 2013 (end-FY Mar 2012: 0.16 times) amid its debt-reduction efforts, this is expected to moderate over the medium term due to its planned capital expenditure. That said, in the event that the Company’s performance improves going forward positive rating action may be taken.
