Sri Lankan companies rated by Fitch will lose Rs30 billion in revenue to the coronavirus in the financial year ending March 2021, the rating agency said in a July 2020 report. This will be a 7% drop from the previous year. Listed telcos Dialog and Sri Lanka Telecom are the least exposed to the sedated economy still recovering from the two-month lockdown to contain covid-19. Remove the two telcos from Fitch’s rating portfolio, and the combined revenue loss plunges to Rs40 billion, it said.
Telecoms: unfazed by the pandemic
The least impacted by the coronavirus pandemic, listed telecoms will see revenues increase at ‘high single-digit levels’, Fitch says. “Despite our lower expectations of national GDP growth, demand for 4G data and fixed-broadband will remain strong, as the need for online connectivity and remote access increases due to the pandemic,” the rating agency notes. Roaming revenue will decline due to travel restriction but this segment contributes a small share to total revenue.
The re-opening of retail stores should increase gross subscriber additions and prepaid reloads from the second half of the year. “We expect companies to upsell data services and bundles to increase average revenue per user and accelerate cost-cutting efforts to manage EBITDA margins”. The extension of credit payments to post-paid customers and SMEs may temporarily increase working-capital needs.
Fitch forecasts capex/revenue to increase in 2020 from 2019 levels to address the increasing demand for 4G network and broadband connectivity due to higher data demand, which was a trend even before the pandemic.
Alcoholic Beverages: a spirited recovery
Listed brewers and distilleries will recover the fastest. The combined revenue of listed companies in this sector will see revenues for the 2020 financial year declined 15% from the previous year with a lockdown ban on liquor sales expected to drive revenue down by 30% during the June 2020 quarter.
“Alcoholic beverages should recover faster than most other sectors, with sales reaching pre-pandemic levels by the December 2020 quarter,” Fitch says.
The inherent inelastic demand for liquor supports this growth together with increased retail purchases as incomes recover and a gradual opening of the tourism sector. Demand will be low for mild beer and foreign labels which mainly cater to the tourism sector. Locally produced spirits could fall if low incomes persist and consumers switch to illicit liquor.
The import ban will impact supply chains, but Fitch believes the government will allow the import of malt and ethanol to sustain tax incomes from this sector.
Agriculture: pray to the weather gods
If the weather gods are kind, then Fitch listed companies in tea, rubber and palm oil will see stable revenue flows over the next 12-18 months. Tea volumes will be encouraging helped by better yields and improving global demand. Auction prices rose 20% since March 2020 on increasing demand for the beverage as an immunity booster. Supply disruptions in other tea exporting countries benefited Ceylon Tea too!
“Supply from India, which is the world’s second-largest tea exporter, will remain weak for the rest of the year due to the pandemic,” Fitch says.
Rubber will see subdued demand, despite increasing demand for rubber gloves and personal protection equipment. Fitch expects a global supply glut will keep prices muted. The palm oil sector will be resilient against the downturn, helped by import restrictions, a weakening currency and price controls to protect local producers. The profitability of palm oil producers will improve this year, while tea will return to profits before the year ends. Rubber will continue to make losses, Fitch says.
Healthcare: slow medicine
Fitch classifies rated listed companies in healthcare into two categories; pharmaceuticals manufacturing and distribution, and hospitals. Revenue from pharmaceutical sales will be flat despite limited disruptions from the lockdown. Online and calland-deliver sales volumes picked up as drug stores closed during the early stages of the lockdown.
Pharmaceutical distributors had placed bulk orders ahead of the lockdown, but manufacturers experienced a supply shortage in March and April as most active pharmaceutical ingredients imports come from China.
“Pharmaceutical distributors import almost all the drugs they sell, exposing themselves to significant currency risk. However, distributors have been able to mitigate profit-margin pressure from a weakening currency owing to their contractual arrangements with global suppliers,” Fitch notes.
Social distancing and low incomes eroded hospital toplines by 10-15% in the first half of the 2021 financial year.
“Hospital sector revenue should rebound and surpass pre-pandemic levels from the 2022 financial year, once economic conditions improve”.
FMCG: recovery after a sharp fall
Fitch-rated companies in the FMCG will see revenues decline 6-7% during the current financial year. The revenue decline is sharpest at 25% in the June 2020 quarter and will recover to historic levels in the following quarter. Most FMCG products categorized as essential and had been available to consumers during the lockdown through online platforms and mobile delivery services.
“The country’s low penetration of online sales saw much lower revenue generated than during pre-pandemic. Most retail stores reopened in earlyMay and companies say sales have now mostly normalised,” Fitch says.
Production disruptions due to the lockdown are not likely to be significant because demand had been low in April and May. Manufacturers also tend to carry around one or two months of finished goods inventory. Imports are a major component of manufacturing inputs.
While the government’s import ban is unlikely to target FMCG manufacturers, currency risks remain high. The cost of production for most manufactures will increase amid a weakening domestic currency and limited ability to pass on higher costs to consumers.
Consumer Durables: a mixed bag
Consumer durables retail sector revenues will decline 12% during the March 2021 financial year due to the two-month-long lockdown in the first quarter, and lower disposable incomes from job losses, pay cuts and lower inward remittances. Sales spiked for some goods after the lockdown due to pent up demand: for instance, IT and communications devices saw a pickup in sales due to WFH and homeschooling.
“Demand should start to recover towards the end of the financial year ending March 2021 if the agricultural sector yields a better harvest, consumers react to cuts in direct and indirect taxation, and domestic interest rates continue to fall or at least remain stable,” Fitch said.
A prolonged import ban beyond 2020 will hurt cashflows and liquidity positions. The government has relaxed import restrictions on refrigerators, washing machines and, communicationand IT devices if suppliers provide the required credit period or importers have foreign currency deposits to back such imports. On the positive side, collections of hire-purchase receivables had normalised, by June.
Hotels: inhospitable conditions
The worst-hit from the covid-19 economic fallout, listed hotels rated by Fitch will realise minimal revenues for most of the year. There will be a small recovery with revenue reaching 30% of pre-covid levels by the of the 2021 financial year. Provided tourist arrivals see a revival during the peak season.
“The tourism sector has come to a complete standstill since March,” Fitch said.
Since June, hotels have gradually resumed operations for locals under strict social distancing guidelines. Sri Lanka hopes to open borders to tourists from August 2020. But elections that month and the ongoing repatriation of Sri Lankan migrant workers stuck overseas may delay recovery prospects for the sector. The government will revive international campaigns to revive tourism.
Quarantine is not required of visitors, but they will need to undergo multiple tests before and after entering the country. A large influx is not expected since Sri Lanka’s major markets India, the UK and Europe are still affected by the pandemic. Hotels will sustain deep losses despite several layoffs and steep cost cuts to conserve cash flow.
“The hotel sector is bound to face cash flow pressure in the next six to 12 months; as such, the government has extended the sector-wide debt moratorium till end-September 2020. There is a possibility of a further extension given the industry’s slow recovery prospects,” Fitch notes.