Fitch Ratings has affirmed Sri Lanka-based cable manufacturer Sierra Cables PLC’s National Long-Term Rating at ‘BB+(lka)’ with a Stable Outlook.
The affirmation reflects our view that the rise in Sierra’s leverage is temporary and that the company will be able to deleverage in the next 12 months based on a sustained recovery in demand and profitability seen since the fourth quarter of the fiscal year ending March 2018 (FY18). Revenue increased by 30% in 4QFY18, compared with a 4% decline in 9MFY18, and EBITDA margin climbed to 12.2% from 5.9%.
Weaker profitability during most of FY18 was the main contributor to the company’s high leverage, as Sierra was unable to pass on higher raw material prices and local-currency depreciation to customers. However, it has priced-in some of the cost of inflation with support from stronger demand since the start of 2018.
We expect net leverage - defined as lease adjusted debt net of cash/operating EBITDAR, excluding cash flow from overseas operations - to fall below 3.5x by FY19, the level above which the rating could be downgraded (FY18: 4.4x).
However, an inability to make meaningful progress towards deleveraging in the next 12 months could result in negative rating action.
Sierra’s rating also reflects its modest market share in the domestic copper and aluminium cable market, which is counterbalanced by its exposure to cyclical end-markets, such as infrastructure and construction. It also factors in risks associated with investments in international markets, where the company has yet to establish itself.
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The affirmation reflects our view that the rise in Sierra’s leverage is temporary and that the company will be able to deleverage in the next 12 months based on a sustained recovery in demand and profitability seen since the fourth quarter of the fiscal year ending March 2018 (FY18). Revenue increased by 30% in 4QFY18, compared with a 4% decline in 9MFY18, and EBITDA margin climbed to 12.2% from 5.9%.
Weaker profitability during most of FY18 was the main contributor to the company’s high leverage, as Sierra was unable to pass on higher raw material prices and local-currency depreciation to customers. However, it has priced-in some of the cost of inflation with support from stronger demand since the start of 2018.
We expect net leverage - defined as lease adjusted debt net of cash/operating EBITDAR, excluding cash flow from overseas operations - to fall below 3.5x by FY19, the level above which the rating could be downgraded (FY18: 4.4x).
However, an inability to make meaningful progress towards deleveraging in the next 12 months could result in negative rating action.
Sierra’s rating also reflects its modest market share in the domestic copper and aluminium cable market, which is counterbalanced by its exposure to cyclical end-markets, such as infrastructure and construction. It also factors in risks associated with investments in international markets, where the company has yet to establish itself.
www.dailynews.lk
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