RAM assigns AA- to RPC’s upcoming Rs. 3.5 b debenture issue

Tuesday, 1 April 2014 00:50 - - {{hitsCtrl.values.hits}}

RAM Ratings Lanka has reaffirmed respective long and short term corporate credit ratings of AA- and P1 to Richard Pieris and Company PLC. Concurrently, the long-term AA- rating has been assigned to the company’s proposed Rs. 3.5 billion listed unsecured redeemable debentures (2014/2019). Both the long-term ratings carry a stable outlook. Richard Pieris is a diversified conglomerate with wide ranging business interests including retail, plantations, rubber, tyre, plastics and services. The company together with its subsidiaries are referred to as the “Group”. The ratings are upheld by the Group’s diversified business interests. Having started operations in rubber related operations over 80 years ago, the Group has diversified largely via organic growth. Richard Pieris is currently one of the largest conglomerates in Sri Lanka, involved in a wide range of industries that include retail, plantations, rubber, tyre, plastics and other services. Notably, diversification has limited the Group’s overall revenue volatility over the years. Further, the ratings are also upheld by the Group’s strong market positions in key businesses. The Group enjoys strong market positions in several of its key businesses. The Group is the market leader in plastics, tyre and plantation industries while having significant presence in retail which are the core business segments of the Group. Notably the Group is able to leverage on its retail brand name ‘Arpico’ which is well known locally. In addition, the Group’s debt-protection metrics are also deemed above average despite high gearing levels. Despite a higher gearing levels of 1.09 times by 9M FY March 2014 (FY Mar 2013: 0.94 times), its funds from operations (FFO) debt coverage clocked in at 0.29 times at 9M FY Mar 2014 declining from FY March 2013’s levels of 0.43 times. Meanwhile, the Group’s operating cash flow (OCF) to debt coverage improved to 0.42 times as at end-December 2013. While the Group’s planned capital expenditure is mainly driven by plantations and retail segments which is expected to increase the gearing levels going forward, the Group’s FFO debt coverage levels are expected to improve to 0.35 times. Short-term debts accounted for 58% of the Group’s borrowings as at 9M FY Mar 2014, whereas the ratio of its cash and cash equivalents to short-term debts only up to 0.82 times, which mitigates our concerns on the gearing levels of the Group. Meanwhile, the ratings are weighed down by the exposure to vagaries of plantation sector. The plantation sector which is the highest profit contributor to the Group is prone to volatility in performance owing to weather conditions, operational risks and global commodity prices. While product and geographical diversity of crops somewhat mitigate such risks, the sector continues to be exposed to risks which are beyond the control of the management, thereby rendering the Group’s profitability volatile. Deterioration in the financial performance could pressure the rating. Lower rubber prices have improved the rubber segment’s performance in 9M FY Mar 2014. However, we note that the Group is exposed to foreign-exchange risk. Plantations – the largest profit contributor bears almost all costs denominated in LKR while its revenue is linked with commodity price movements. Meanwhile, Richard Pieris is volatile to exchange-rate fluctuations owing to its exports of rubber related products. Meanwhile inputs for tyre are imported while tyre sales are made locally though the Group has ability to transfer the excess cost to end user. However our concerns are somewhat mitigated by the netting-off of imports and exports of several sectors which are prone to foreign exchange risk.