Fitch publishes ‘AAA’ rating for Hayleys’ Rs. 7 b debentures

Fitch Ratings has published the National Long-Term Rating of ‘AAA’ for Sri Lankan conglomerate Hayleys PLC’s (AAA(lka)/Stable) proposed senior unsecured redeemable debentures of up to Rs. 7 billion.

The proposed debentures are rated in line with Hayleys' National Long-Term Rating and existing unsecured notes because it believes there will be limited subordination risk to debenture holders from secured debt at the holding company and debt at subsidiaries, which will rank ahead of the debentures. 



The proceeds from the debentures will be used to repay the company’s existing short-term debt.

Fitch said Hayleys’ rating reflects its large operating scale and diversification across several prominent businesses. Its significant export earnings drive sustainable operating cash flow, despite temporary challenges in some segments. “We forecast the company’s financial profile to remain commensurate with its rating over the next two years,” it said. 

According to Fitch the following are the key rating drivers.

Revenue to rise: We expect revenue to rise by about 10% in the financial year ending March 2025 (FY25), following a 12% decline in the previous financial year. This will be supported by the transportation and logistics and consumer and retail segments, which account for 38% of revenue.

Furthermore, a recovering domestic economy is reviving construction, tourism and retail demand, which bodes well for the construction material, leisure, and consumer and retail segments, which comprise 22% of the company’s revenue. Cost-reflective energy pricing will continue to drive demand for renewable energy sources, supporting the projects and engineering segment, which contributes 5% of revenue.

Modest leverage; improving coverage: We expect EBITDAR net leverage to increase to 3.5x in FY25 (FY24: 3.3x), driven by capex and a higher dividend payout. We forecast capex of around Rs. 22 billion during FY25-FY28, with the majority allocated to the logistics and projects divisions. However, we expect EBITDAR net leverage to decrease from FY26-FY28, supported by improving cash flows. Hayleys’ financing costs should decline amid falling interest rates, leading to an improvement in EBITDAR fixed charge coverage to approximately 3.0x over the next few years, up from around 2.0x in FY24.

Geographic and business diversification: Eight businesses generate 80% of group EBIT. Direct and indirect exports account for 54% of revenue, with only 30% from Europe and the US, indicating low exposure to slower-growth developed markets. Hayleys’ manufacturing locations are also diversified beyond Sri Lanka. Only 55% of its purification segment capacity is in Sri Lanka, with the rest in Thailand and Indonesia. The hand protection segment, which produces rubber gloves, also operates in Thailand, the world’s largest source of natural rubber.

Strong market presence: Hayleys is a leader in Sri Lanka’s logistics, consumer-durable retail and tea export industries. It also has a prominent share of the fragmented global hand protection and coconut shell-based activated carbon purification markets. It has strong relationships with customers, but with significant customer concentration in some businesses, although the risk is mitigated by high switching costs and its established relationships. Hayleys’ competitive position is strengthened by its vertical integration and strong relationships with suppliers.

High costs weigh on margin: We expect higher charcoal prices in the purification segment, which contributes 14% of EBIT, to weigh on margins. Costs will rise due to climate change’s effect on the coconut supply chain, only part of which may be passed on to customers.

The plantation sector’s margin will also be squeezed by a proposed daily wage hike. High domestic energy costs will also pressure Hayleys’ margin amid the implementation of cost-reflective tariffs. However, the negative factors may be mitigated by a more stable domestic currency and rising adoption of renewable energy at most manufacturing locations.