Fitch Ratings has affirmed Sri Lankan paint manufacturer
The Outlook is Stable.
JAT's rating reflects the company's strong financial profile with low leverage and manageable liquidity. The rating is also supported by its leading position in the domestic wood-coating market and a growing overseas presence. The rating is constrained by JAT's small operating scale and exposure to cyclical end-markets compared with higher-rated peers.
The Stable Outlook reflects Fitch's view that JAT's credit metrics and liquidity will remain adequate in the next 12-18 months, with sufficient buffers to navigate the slow recovery in the domestic economy.
Key Rating Drivers
Leverage to Remain Low: We expect JAT's EBITDA net leverage, to stay below 1.0x in the financial year ending
Mild Recovery in Domestic Demand: We expect JAT's domestic sales to improve in FY25 amid signs of recovery in the Sri Lankan economy. Its domestic revenue grew 10% yoy in 3QFY24, reversing a trend of yoy decline that started in 3QFY23.
Margins to Improve: We expect the EBITDA margin to improve during FY25-FY27 after retreating in FY24. The company's EBITDA margin is likely to weaken to below 14% in FY24, from 19% in FY23, as the benefit of selling low-cost inventory faded, while expenses, including advertising and marketing costs, increased significantly. However, we expect JAT's continued efforts in vertical integration, through the launch of a binder plant in
In addition, JAT has decreased its reliance on imported raw materials, to 43% in FY23 and 51% in 9MFY24, from 70%-80% in previous years, as it expanded local procurement to cope with import restrictions and the rupee depreciation. Its value of purchases from foreign suppliers are likely to rise as most import restrictions have been lifted. However, we expect its reliance on raw material imports to remain below historical levels in the coming years, given the increased vertical integration and benefits of local sourcing. We expect greater stability in JAT's margins from the reduced exposure to imports.
Strong Brand Portfolio: JAT is the exclusive partner of Sayerlack in south
We expect the decorative paint segment to see sustained strong growth over the medium term, with JAT continuing to gain market share. The company has adopted an innovative online strategy of selling directly to customers, by-passing distributors. This has allowed JAT to offer more attractive prices than competitors. JAT entered the decorative paint market in 2021 with the launch of the brilliant white emulsion paint, which acquired a close to 10% market share within a short period of time.
Growing Overseas Presence: We expect JAT to continue expanding its overseas presence in a bid to increase foreign currency-denominated revenue and improve geographical diversification. In addition to a manufacturing plant launched in 2022, JAT recently commenced operations at a new alkyd resin plant in
Cyclical Demand and Small Scale: Demand for JAT's wood coating, decorative paints and paint brushes stems from the cyclical construction sector. The company caters mainly to the less-volatile maintenance market within the construction sector, but demand is still subject to discretionary income. JAT's rating is constrained by its small operational scale, as reflected in EBITDA size, against higher-rated peers. This is because the company is a leader in a niche market within building materials, and has a small share of the larger decorative paint segment.
Derivation Summary
JAT is rated one notch below domestic conglomerate
JAT is rated one notch below
JAT's business risk profile is weaker than that of domestic footwear and tyre manufacturer
JAT is rated one notch above domestic consumer-durables retailer
JAT's credit considerations lead to a higher rating than for large domestic banks, non-bank financial institutions and insurance companies, which are more exposed to sovereign stress due to their holdings of large sovereign-issued securities for regulatory reasons. The large financial institutions also have broader exposure to the various economic sectors.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Revenue to grow at the low- to mid-teens over FY24-FY27 amid a recovery in the domestic market and sustained growth in
EBITDA margin to moderate to around 13% in FY24 and rise to 14%-15% in FY25-FY27, reflecting a more sustainable cost structure, price increases, and cost savings from increased domestic manufacturing and vertical integration.
Capex of
Dividend payment of
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
We do not anticipate an upgrade in the medium term. The rating may be upgraded in the longer term if there is a material increase in scale while maintaining the current financial risk profile.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
EBITDA interest coverage falling below 2.0x on a sustained basis;
A significant weakening in the company's liquidity profile.
Liquidity and Debt Structure
Manageable Liquidity: JAT had
We expect the company to have some flexibility to lengthen its supplier credit, if needed, to lower a degree of pressure in its collection cycle, considering its long-standing relationship with and the credit standing of its main global supplier, SWC. In addition, JAT had
Issuer Profile
JAT is a
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
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