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Credit profiles of listed plantation companies to further weaken: Fitch

18 November 2015 02:34 am - 0     - {{hitsCtrl.values.hits}}

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Stricken credit profiles of Sri Lanka’s listed tea plantation companies will further dampen with slumping prices and soaring wages continuing to challenge the progress of the entities, an international rating agency said. 

In an early warning, Fitch Ratings yesterday stated the depressed prices and high wages will continue to weaken the credit profiles of those companies that derive more than 50 percent of their revenue from tea.

As at end September 2015 the combined leverage calculated as net debt/ EBITDA of all listed local tea plantation companies have expanded to 9.9x from 2.4x in 2013.

“Low prices and cost increases have significantly impaired the profitability and cash flow generation of the companies.  

“Sector leverage is expected to remain at high levels in the long term because of regular wage increases and low productivity compared with other leading tea exporting countries,” said Fitch Ratings in a statement highlighting the challenge the industry is faced with.

September 2015 saw auction prices falling to an all-time low of Rs.370/kg, the lowest since February 2012.

The drop is largely attributed to reduced demand from Sri Lanka’s top customers, including Turkey, Russia and Middle Eastern nations.
Aiming to drive prices at Rs.450/kg, the government last month allocated Rs.1.0 billion for the purchase of tea at the Colombo auction. The last time the government intervened to prop up tea prices was in 2008.

Fitch warned the measure, which is yet to be implemented, will be detrimental to the sector as it will make Ceylon tea less competitive in a global market that is over-supplied.

Aggravating the turmoil is the labour cost appreciating by 25 to 30 percent in the recent years, leading the average EBITDA margin of listed tea companies to narrow by more than 10 pp between 2013 and 1H15. 

It is observed that for 2015 (so far), majority of the companies have posted losses.

The higher wages stem from the collective agreements between trade unions and plantation companies, which call for wage increases every two years.
With little or no link to productivity, the increases have averaged 20 percent in the recent past.

Observing a contraction in sector margins every time a wage increase is enforced, Fitch noted the cycle has become fixed in the sector’s cost structure.
On-going negotiations for the 2015 wage increase are currently at a deadlock with trade unions demanding a 60 percent increase while the companies are seeking a deferral till next year or a maximum increase of 10 percent given the low selling prices and their struggle to break even.

While the current auction prices hover around Rs.400/kg, which remain well below the average production cost of Rs.450/kg, any wage increase would undermine the profitability of the tea companies, cautioned Fitch. 
(SAA)
 
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