ICRA Lanka Limited has reaffirmed the issuer rating of [SL]BBB- (pronounced SL triple B minus) with Negative outlook for Janashakthi PLC (JPLC or the company).
ICRA Lanka has withdrawn the issue rating of [SL]BBB- (pronounced SL triple B minus) with Negative outlook assigned for the LKR 1,000 Mn senior unsecured redeemable debenture programme of the Company, as the said debentures are fully redeemed.
The rating factors in JPLC’s status as the parent entity of First Capital Holdings (FCH, rated [SL]A/Stable) and Janashakthi Insurance PLC (JIP); the healthy performance of these entities is expected to enable them to provide support to JPLC going forward, mainly in the form of dividend income. The rating also takes comfort from the adequate liquidity profile of the Company, backed by its unencumbered investments and access to funding lines.
However, the rating is constrained by the high leverage indicators of the holding company, and the weak earnings profile due to the high finance costs. Stand-alone net debt level of the holding company remained high, at about LKR 11.2 Bn as in June 2020, vis-à-vis about LKR 11.9 Bn in September 2019 and LKR 12.3 Bn in March 2020. Leverage (Net debt/ EBITDA) remained high at 14.3 times in March 2020, compared to 22.6 times in March 2019; however, the same is expected to improve during the 12M ending March 2021, due to higher operating income for the period. JPLC’s coverage indicators remained moderate, where the interest cover adjusted for the final dividend from FCH stood at about 0.62 times for FY2020, vis-à-vis 0.29 times in FY2019.
The rating continues to take comfort from the group’s long-standing relationships with banks and financial institutions in Sri Lanka, which is expected to support the company’s liquidity. ICRA Lanka will continue to monitor JPLC’s financial risk profile, and progress made on divestments in the near term.
The Negative outlook factors in the sustained high debt level, moderate coverage indicators and weak overall profitability at the Holding Company level. The outlook may be revised to “Stable” in case of reduction of the overall debt level, improvement in coverage, profitability, and liquidity indicators. The rating may be downgraded in case of further increase in leverage, deterioration of coverage indicators and a significant weakening of the overall liquidity profile of the Company.
Key rating drivers
Holding company of JIP and FCH: Janashakthi PLC (JPLC) is the holding company of Janashakthi Insurance PLC (JIP), with 79% ownership and First Capital Holdings PLC (FCH), with 83% ownership. JIP is the 7th largest life insurance company in Sri Lanka with a market share of about 4% as in December 2019. First Capital treasuries PLC (FCT), subsidiary of FCH (A stable) is the leading stand-alone primary dealer in Sri Lanka with over 40% market share in the secondary bond market. FCH and JIP collectively account for about 75% of the investment in subsidiaries (at market value) of JPLC and dividend income of JPLC is primarily driven by these two subsidiaries. The acquisition of FCH, via the merger with Dunamis Capital PLC is a credit positive for JPLC as FCH has become the key dividend contributor to the holding company presently. FCH has also provided active funding support for the parent company, mainly via commercial papers. However, ICRA Lanka notes that, going forward, the dividend support from FCH and Janashakthi Insurance will be subject to maintaining adequate capital buffers at these operating companies.
Adequate liquidity profile backed by unencumbered investments and access to funding lines: As in September 2020, JPLC had unencumbered investments in subsidiaries of about LKR 4.4 Bn and unutilized funding lines of about LKR 2.6 Bn, in addition to the liquid investment portfolio of about LKR 673 Mn. These sources of liquidity are expected to provide some comfort from a liquidity point of view. In addition, ICRA Lanka notes that the refinancing risk of the Company has moderated, as JPLC has recently replaced its short-term commercial paper borrowings (LKR 4.5 Bn, accounting for about 30% of the total funding base as in June 2020), with long term bank loans and debentures, with longer repayment cycles. And the debt refinancing was done at favourable interest rates, thus reducing the overall cost of funds.
High leverage indicators: Stand-alone net debt level of the holding company remained high, at about LKR 11.2 Bn as in June 2020, vis-à-vis about LKR 11.9 Bn in September 2019 and LKR 12.3 Bn in March 2020. As the debt repayments of JPLC is primarily dependent on asset disposals, the company has been rolling-over its debt maturities. Leverage (Net debt/ EBITDA) remained high at 14.3 times in March 2020, compared to 22.6 times in March 2019. ICRA Lanka expects overall leverage to remain at about 5.8 times for FY2021 due to higher operating income expected during the period. ICRA Lanka notes that, market value-based net gearing of JPLC has increased in June 2020 to about 4 times, compared to 3 times in September 2019, due to sharp decline in the Colombo Stock Exchange that affected the market prices of investment holdings. ICRA Lanka expects the overall debt level to remain stable at current levels over the next 12 – 24 months, until the company divests some of its investments and recover the related party lending. Going forward, it will be crucial for the Company to expedite its planned asset disposals and reduce the overall debt level.
Weak earnings profile due to higher finance cost, despite some improvement in overall operating income and coverage indicators recently: JPLC is primarily dependent on dividend upstream by its subsidiaries for operating income, in comparison to its significant finance costs, as the investments are primarily debt funded. Historically, JPLC has recorded weak coverage indicators due to sizable finance costs, compared to the modest dividend income profile of the holding company. JPLC’s interest cover adjusted for the final dividend is about 0.62 times for FY2020, vis-à-vis 0.29 times in FY2019. Total finance cost for FY2020 has increased to about LKR 1,667 Mn, compared to LKR 935Mn in FY2019. Finance cost for the quarter ended June 2020 was about LKR 508 Mn. The overall profitability of JPLC is hampered by this higher finance cost where the company recorded a loss of LKR 1.4 Bn in FY2020, vis-à-vis a loss of LKR 672 Mn in FY2019.
However, the coverage indicators of JPLC has somewhat improved recently due to the healthy profitability outlook and dividend payouts from First Capital Holdings. For FY2020, FCH recorded a PAT of about LKR 1 Bn and paid an interim dividend of LKR 336 Mn and a final dividend payment of LKR 420 Mn for FY2020 to JPLC. For the quarter ended June 2020, JPLC recorded a PAT of LKR 44Mn due to higher dividend income and the moderation of the cost of funding during the period. ICRA Lanka expects the operating income and coverage indicators to improve in FY2021, due to healthy dividend payments from both FCH and JIP.
Links to applicable criteria: ICRA Lanka’s Issuer Rating Methodology
Janashakthi PLC (Parent company)
Janashakthi PLC is an investment holding company incorporated in the year 1994. The company is owned and managed by the Schaffter family (Mr. Prakash Schaffter 50%, Mr. Ramesh Schaffter 50%). Subsidiaries include Janashakthi Insurance PLC, which is an established insurance company in Sri Lanka operating for over two decades and Orient Finance PLC, which is a listed finance company in Sri Lanka. Following the acquisition and merger of Dunamis Capital PLC (DCP) by JPLC investment banking outfit First Capital Holdings (FCH), which has a primary dealer, became a 83% owned subsidiary of JPLC.
During the financial year ended March 31, 2020 Janashakthi PLC reported a standalone net loss of LKR 1,434 Mn, on a total asset base of LKR 19.5 Bn, compared to the net loss of LKR 672 Mn on a total asset base of LKR 13.8 Bn in the corresponding period of the previous fiscal. On a consolidated basis, Janashakthi group reported a net loss of 1,138 Mn on a total asset base of LKR 93.6 Bn in FY2020, compared to a net profit of LKR 1,689 Mn on a total asset base of LKR 89.5 Bn in the previous fiscal. For the 3M ended June 30, 2020, JPLC reported a standalone net profit of LKR 44 Mn on a total asset base of LKR 20.0 Bn and a consolidated net profit of LKR 1,158 Mn on a total asset base of LKR 80.2 Bn.