RAM Ratings Lanka assigns A-/P2 to Lankem Ceylon PLC

RAM Ratings Lanka has assigned respective long- and short-term corporate ratings of A- (with a stable outlook) and P2 to Lankem Ceylon PLC ("Lankem" or "the Group").

The ratings reflect stable demand for agrochemicals and dominant market positions in most business lines; however the ratings are pressured by increased debt burden and persistent losses in the consumer segment. Lankem was incorporated in 1964 as a private limited company, before converting into a public listed company in 1968.

Although Lankems initial focus had been on agrochemicals, it has since ventured into various sectors, including industrial chemicals and bituminous products, paints, consumer products, construction, plantations and leisure.

Lankems revenue is chiefly derived from the plantation sector, closely followed by the chemicals segment. However, the latters contribution to the Groups bottom line over the past five years has been relatively stable compared to the volatile performance of the plantation sector. RAM Ratings Lanka notes that the assured revenue from agrochemicals is derived from its herbicidal products, which is a crucial input in paddy cultivation. Since rice is the countrys staple food, paddy is an essential crop in the domestic agricultural economy, occupying nearly 29% of the agricultural land in the country. As such, the demand for herbicides is anticipated to remain relatively stable.

The Group holds dominant market positions in most of its business segments. As such, Lankem is the market leader within the agrochemical industry, commanding 29% of the domestic market owing to its aggressive marketing and technically superior products. In addition, Lankem is the second-largest player in the paints industry, accounting for 20% of the market share; this has been achieved through Lankems extensive distribution network and high product quality. Meanwhile, the Group also controls 60% of the thinner market owing to its exclusive dealership agreements and distribution fleet. Elsewhere, Lankem is a leader in the bitumen industry, backed by its established name. The Group also stands among the countrys largest tea and rubber producers, accounting for a respective 4.23% and 4.02% of Sri Lankas tea and rubber output.

However, the Groups gearing ratio of 1.31 times as at FYE 31 March 2010 ("FY Mar 2010") is relatively high. Its debt burden increased from LKR 3.04 billion as at end-March 2009 to LKR 4.46 billion a year later; a share of the additional borrowings had been taken on to finance the acquisition of CW Mackie PLC in FY Mar 2010. Concurrently, Lankems operating cashflow debt coverage ratio ameliorated year-on-year from 0.15 times in FY Mar 2009 to 0.22 times in FY Mar 2010.

Although its cashflow-generating ability has improved this year, RAM Ratings Lanka views with concern the Groups potentially heavier debt burden following the capital investment plans and its reliance on short-term borrowings.

The Groups consumer segment has been suffering persistent losses for the past four years except for FY Mar 2009; it incurred another LKR 71.99 million pre-tax loss in FY Mar 2010. Despite owning strong household brands, the division has failed to turn around due to its inability to pass on raw-material cost increases to its customers amid the highly competitive market. RAM Ratings Lanka remains concerned about these segmental losses and their overall impact on Lankems performance.