Fitch assigns ‘B+(lka)’ Rating to Kotagala; Outlook Negative

Fitch Ratings Lanka has assigned Sri Lanka-based Kotagala Plantations PLC (Kotagala) a national long-term ‘B+(lka)’ rating, with a negative outlook. Fitch has also assigned Kotagala’s outstanding senior secured debentures a national long-term rating of ‘B+(lka)’.
The rating reflects Kotagala’s weak liquidity, high leverage and low end-market demand for its products, despite holding a strong market position. The Negative Outlook reflects Fitch’s expectations the weak operating environment will further deteriorate the company’s liquidity unless it can restructure its debt maturities or arrange additional liquidity lines.
As at end-December 2015, Kotagala had Rs.787 million of unrestricted cash and zero unutilised credit facilities to meet Rs.1.4bn of short-term debt (about 45 percent of which was bank overdrafts) falling due in the next 12 months, placing the company in a weak liquidity position. Fitch expects the company to be FCF negative in the financial year 31 March 2017 (FY17), owing to operational weaknesses and ongoing capex plans, further pressuring its liquidity profile.
Kotagala continued its negative trajectory, reporting losses in the year FY15 and FY14 due to weak end-market demand and cost pressures, which are faced by the entire plantation industry. Fitch expects demand from key end-markets, such as Russia and the Middle East, to remain subdued over the next 12 to 18 months, resulting in continued operating losses for the company.
The commoditised nature of agricultural products means selling prices are determined by global macroeconomic-factors and fluctuations in global prices can have a direct impact on company profitability. The tea sector also faces labour shortages and stipulated wage increases every two years, which are not linked to market prices or productivity. This has led to Kotagala’s EBITDAR margins deteriorating to 2 percent in FY15, from 19 percent in FY13. Low profitability and significant investments have impaired Kotagala’s cash flow generation, resulting in its leverage, calculated as adjusted net-debt/EBITDA, rising to 12.6x at FYE15, from 1.3x at FYE12. Fitch expects Kotagala’s leverage to remain high in the medium-term unless there is a significant turnaround in global tea and rubber prices.
Kotagala achieved better crop yields compared to peers, allowing the company to increase production without requiring significant capital expenditure. The performance of Kotagala’s tea segment has also benefitted from the acquisition of Union Commodities Private Limited in 2012, which allowed forward integration of its tea exports.