RAM reaffirms EB Creasy and Company PLC’s A-/P2 ratings

RAM Ratings Lanka has reaffirmed EB Creasy and Company PLC’s long- and short-term corporate credit ratings of A- and P2. The outlook on the long-term rating is stable.

The ratings are supported by its diversity in business operations, major market positions in most of its business lines, the resilient demand for agrochemicals, and above-average debt-protection metrics. However the ratings are pressured by its exposure to the volatility in the plantation segment and its vulnerability to fluctuations in raw material prices. EB Creasy and its subsidiaries are collectively referred to as ‘the group’.

EB Creasy is a diversified company with interests in consumer products and FMCG, plantations, chemicals, hardware, leisure and agriculture. EB Creasy’s ratings largely reflect the credit profile of its subsidiary Lankem Ceylon PLC, which contributed about 75% of Group revenues and pre-tax profits in FYE 31 March 2012. Lankem is also rated A-/P2 by RAM Ratings Lanka. The diversified operations enable the Group to better weather a downturn in any particular sector to a certain extent.

Meanwhile, the ratings are upheld by the group’s good market position in its key business lines. EB Creasy Group is one of the top three players in the agrochemicals industry. Furthermore, EB Creasy Group is also among the top three players in the paint industry while controlling 60% of the thinner market owing to its exclusive dealership agreements and distribution fleet.

Elsewhere, EB Creasy Group is also a major player in the bitumen industry, aided by its established brand name and distribution network. In addition, EB Creasy represents brands such as BIC, Denta, Ninja and Hacks, which also have dominant market positions in the consumer market.

Despite the subdued performance during the year and the higher debt load, RAM Ratings Lanka opines that the Group’s debt protection metrics are still above average as reflected in its funds from operations (FFO) debt coverage of 0.25 times as at end-FY Mar 2012.

In line with heightened borrowings, EB Creasy’s gearing ratio moderated to 1.18 times; albeit was more or less in line with our expectations. This coupled with the group’s subdued performance resulted in its FFO debt coverage halving during fiscal 2012. Moving ahead, the ratio is envisaged to hover around 0.20 times, despite increased borrowings.

Despite the above strengths, RAM notes that the group is highly susceptible to vagaries in the plantation sector such as weather conditions and cost pressures, particularly wages and rising energy costs. Moreover, prices are dependent on demand conditions, which are broadly linked to global economic fundamentals. The division’s performance deteriorated in fiscal 2012 owing to adverse weather conditions and an increase in plantation sector wages.

Furthermore, the group is exposed to the volatilities in raw-material prices for its hardware and chemical divisions. Although the group is able to pass on cost increases to its customers owing to its good market positions in its major businesses, its margins could be pressured should its ability to pass on cost increases to its customers on a full and timely basis be stifled amid keen competition.