Friday, 13 February 2015 00:00
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Lanka Rating Agency has assigned Lanka IOC PLC’s a long- and short-term corporate credit ratings at AAA and P1 respectively. On a standalone credit profile, LIOC rated at AA+ & P1 and notched up on parent support. The long-term rating carries a stable outlook.
LIOC is mainly involved in distribution of auto-fuel and also has significant presence in lubricants, bitumen and oil-bunkering markets.
The ratings were upheld by the company’s notable presence in auto-fuel distribution, bitumen and lubricants markets. Sri Lankan auto fuel distribution segment is a duopoly market and LIOC is the second auto fuel distributor in Sri Lanka with a market share of 18% after the State-owned Ceylon Petroleum Corporation (“CPC”).
Further, LIOC has significant presence in the bitumen segment. However, the bitumen segment became highly competitive following the licenses granted to small and medium sized players. On the same note, the company’s lubricant brand SERVO has a market presence of 15.80% in lube segment and is the 2nd largest domestic player.
Further, ratings supported by the company’s strong financial profile, debt protection metrics and liquidity. LIOC’s financial profile deemed strong. The company’s gearing has clocked in at 0.36 times in FY Mar 2014 (FY Mar 2013: 0.34 times).
On the other hand, the company’s healthy cash positions (cash and cash equivalents) reflected in negative net gearing (total debts excluding cash) of 0.05 times in FY Mar 2014 (FY Mar 2013: negative 0.15 times).
As of end-Mar 2014 the company’s total debts amounted to Rs. 6.12 billion (end-Mar 2013: LKR 4.37 billion). Further, LRA notes that the debts are short term in nature and mainly used for working capital purposes (fuel import bills). On the same note, despite the increased debts, the company’s debt protection metrics remained strong which reflected in its Fund From Operations (FFO) debt coverage has improved to 0.94 times in FY Mar 2014 from 0.71 times in FY Mar 2013 mainly on the back of improved performance.
Going forward, LRA anticipates the company’s financial profile and debt protection metrics to improve further on the back of expected improvement in performance. Concurrently, the company’s liquidity position is also viewed as strong. As at end-September 2014, LIOC had Cash and Cash Equivalents (CCE) of Rs. 7.23 billion, compared to short-term debt of Rs. 6.39 billion which translated into a strong CCE to short-term debt ratio of 1.13 times in 1H FY Mar 2015 (FY Mar 2014: 1.43 times). In addition, it also notes that the company has unutilised funding lines of $ 156.50 million as at end-September 2014 (Rs. 20.3 billion).
Meanwhile, the ratings are weighed down by the company’s vulnerability to fluctuations in raw-material prices and forex risk. LIOC is dependent on imported petroleum products for its production and distribution, which exposes the company to fluctuations in global commodity prices and foreign exchange (“forex”) risk.
Although, LIOC has the ability to pass on cost increases to customers, its market presence could be somewhat affected given that most of the petroleum products it sells are generic in nature. On the other hand, the company has made forex gains in the past two years by effective forex management.
LRA, former RAM Rating Lanka’s, technical partner is CRISIL India. CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. CRISIL is India’s leading ratings agency and is also the foremost provider of high-end research to the world’s largest banks and leading corporations.
CRISIL’s majority shareholder is Standard and Poor’s. S&P, a part of McGraw Hill Financial (formerly The McGraw-Hill Companies), is the world’s foremost provider of credit ratings.
