RAM assigns long-term rating of A- to Lankem’s Rs. 500 million debentures

RAM Ratings Lanka has reaffirmed the respective long- and short-term corporate credit ratings of Lankem Ceylon PLC at A- and P2.

Concurrently, RAM has assigned a long–term rating of A- to Lankem’s proposed Rs. 500 million unsubordinated unsecured redeemable debentures (2010/2015). Both long-term ratings have a stable outlook.

The ratings are supported by stable demand for Lankem’s key product – agrochemicals – and its dominant market positions in most of its business lines. On the other hand, the ratings are moderated by the Group’s heavy debt burden.

Lankem was incorporated in 1964, focusing primarily on agrochemicals. Over the years, the Group has ventured into various other sectors, including industrial chemicals and bituminous products, paints, consumer products, construction, plantations and leisure. The Group’s primary revenue drivers are its plantation and chemicals businesses.  “We note that Lankem derives assured revenue from agrochemicals, i.e. crucial inputs in the cultivation of paddy, which in turn is processed into rice, Sri Lanka’s staple food,” RAM said.

The Group enjoys dominant positions in most of its business segments; it is the market leader in agrochemicals and thinner products and one of the leading players in the paints industry. The Company is also one of the largest tea and rubber producers in the country. Lankem’s revenue almost doubled year-on-year to Rs. 4.80 billion in the first quarter of FYE 31 March 2011, primarily driven by more robust tea and rubber prices.

Elsewhere, revenue from Lankem’s consumer segment had also increased, underscored by the generally more favourable macroeconomic environment. Against this scenario, the Group’s pre-tax profit surged 52.9% y-o-y to LKR 316.47 million in 1Q FY Mar 2011, translating into a pre-tax margin of 6.59% (1Q FY Mar 2010: 7.36%).

Meanwhile, the Group’s gearing ratio eased from 1.31 times as at end-March 2010 to 1.16 times as at end-June 2010, following the repayment of some short-term borrowings. Further supported by its strong cashflow in 1Q FY Mar 2011, Lankem’s funds from operations debt coverage ratio to 0.46 times as at end-June 2010 (end-March 2010: 0.28 times).

“Moving forward, the proceeds from the Group’s proposed issuance of Rs. 500 million of debentures will be mainly utilised to refinance its existing borrowings. As such, Lankem’s financial profile is envisaged to remain largely unchanged,” RAM Ratings said.