ECONOMYNEXT – The National Long-Term Ratings of ‘AAA(lka)’ of Melstacorp and its subsidiary Distilleries Company of Sri Lanka have been affirmed by Fitch Ratings. The Outlook is Stable.
The ratings are based on the consolidated credit profile of Melstacorp, Fitch said.
“We expect the group to be conservative in its investments, preserving most of the large free cash flow (FCF) to strengthen its credit profile.”
The group will maintain a strong credit profile despite modest demand conditions for its core spirits business, which accounts for around 65% of the group’s EBITDA, Fitch said.
“Fitch expects spirits segment revenue to rise by 12% in FY25 and 3% in FY26, recovering after a 19% decline in FY24, on improving domestic consumption.”
The acquisition of Heineken Lanka Limited will help Distilleries diversify its product portfolio “to help navigate evolving consumer preferences and support its market leadership in spirits”.
The full statement is reproduced below:
Fitch Affirms Melstacorp and Subsidiary Distilleries at ‘AAA(lka)’; Outlook Stable
Fitch Ratings – Colombo – 15 May 2025: Fitch Ratings has affirmed the National Long-Term Ratings of Sri Lanka-based conglomerate Melstacorp PLC and its subsidiary, Distilleries Company of Sri Lanka PLC (DIST), at ‘AAA(lka)’. The Outlook is Stable.
The ratings on Melstacorp and its stronger subsidiary DIST are based on the consolidated credit profile of Melstacorp, in line with Fitch’s Parent and Subsidiary Linkage Rating Criteria.
Melstacorp’s rating reflects Fitch’s view that the group will maintain a strong credit profile despite modest demand conditions for its core spirits business, which accounts for around 65% of the group’s EBITDA. We expect the group to be conservative in its investments, preserving most of the large free cash flow (FCF) to strengthen its credit profile.
We include Melstacorp’s 51% share of its subsidiary Aitken Spence PLC but exclude its insurance business Continental Insurance Lanka Limited (National Insurer Financial Strength: A(lka)/Positive), in assessing Melstacorp’s credit profile.
Key Rating Drivers
Solid Financial Profile: We expect Melstacorp to maintain EBITDAR net leverage below 1.0x over FY25-FY27 (0.8x at the end of the financial year to 31 March 2024 (FY24)), following business recovery and stabilisation.
We forecast annual FCF of over LKR10 billion and expect Melstacorp to use it to strengthen its balance sheet amid limited visibility on planned investments. We expect future investments to be for its core operations with annual capex of LKR4.0 billion-5 billion over FY25-FY27 for maintenance and business development.
We expect Melstacorp’s EBITDAR fixed-charge cover to improve to close to 7.0x in FY26 (FY24: 5.1x) on falling debt, declining interest rates and steady profitability. We also expect revenue rise by a mid-single-digit rate on average amid economic recovery and EBITAR margin to remain close to the FY24 level of 34%.
Recovering Demand for Spirits: Fitch expects spirits segment revenue to rise by 12% in FY25 and 3% in FY26, recovering after a 19% decline in FY24, on improving domestic consumption. Fitch expects Sri Lanka’s GDP to rise in the low single-digit percentages in the next two years, after contracting in 2022-2023. Domestic inflation has moderated significantly from the peak of around 70% in September 2022 (March 2025: deflation of 2.6% yoy) and is likely to settle at around the central bank’s target of 5.0% in 2025 and over the medium term.
Fitch expects excise tax increases on alcohol to moderate over the medium term, compared to peak increases of 40% in 2023. We expect the government will balance the need for higher tax revenue against the potential impact of sharp tax hikes on consumer demand, which could lead to lower tax revenues. Excise taxes on alcohol historically amounted to around 7% of annual government revenues.
Domestic Leader in Spirits: DIST is the leading alcoholic beverage company in Sri Lanka, accounting for around 65%-70% of the spirit market. DIST has a strong brand presence in the low-to mid-priced spirits market, which is not easy for a competitor to emulate given the complete ban on alcohol advertising in the country. The entrenched brand name has enabled the company to raise prices regularly to pass on excise tax revisions and cost escalations, partially offsetting the impact on its volumes.
Rising Share of Beer Market: We expect DIST’s share of the local beer market to rise over the medium term, from around 10% today by the company’s estimates, compared to around 5% in early 2024 when it acquired 99.4% of Heineken Lanka Limited. We believe this acquisition will benefit DIST by diversifying its product portfolio to help navigate evolving consumer preferences and support its market leadership in spirits.
Growth Potential in Leisure: We expect the leisure segment’s revenue, which made up around 30% of Melstacorp’s revenue, to rise by slightly below 10% on average in FY26-FY28, supported by a tourism industry resurgence in Sri Lanka. Tourist arrivals jumped by 38% to 2.1 million in 2024, almost back at the pre-Covid-19 level of around 2.3 million. The country is targeting 3 million tourist arrivals in 2025 in a conservative scenario. Melstacorp aims launch targeted marketing campaigns to draw more tourists from markets such as China and India.
Parent-Subsidiary Linkages: Fitch equalises DIST’s rating to its parent’s consolidated credit profile. This is because of ‘Open’ legal ringfencing and ‘Open’ access and control between the two entities. DIST’s cash flow has no regulatory or self-imposed ringfencing, and Melstacorp owns more than 90% of DIST, with full control over its operations and strategic direction. Funding arrangements are largely decentralised, but the entities negotiate facilities as a group.
Peer Analysis
Melstacorp has slightly weaker business risk profile than Dialog Axiata PLC (AAA(lka)/Stable), which has leadership in the larger domestic mobile segment, manifesting in Dialog’s larger operating scale and lower regulatory risk. Melstacorp, through its subsidiary DIST, controls 70% of Sri Lanka’s spirits production and has maintained market leadership with its entrenched brand and access to a countrywide distribution network, although demand is often impacted by hikes in excise taxes on spirits and beer. Still, we expect Dialog to maintain a weaker financial risk profile due to higher forecast EBITDA net leverage and weaker free cash flow generation compared to Melstacorp.
Melstacorp is rated at the same level as Hemas Holdings PLC (AAA(lka)/Stable). Melstacorp’s rating is underpinned by its dominant position in the domestic alcoholic-beverage sector. This dominance supports Melstacorp’s robust FCF, while it is diversified into several other businesses including leisure (both locally and overseas) and plantations, supporting significantly larger EBITDA scale compared to Hemas. While the ratings are the same, Melstacorp’s credit strengths compared with Hemas are factored into more relaxed rating sensitivity thresholds.
Local beer market leader Lion Brewery (Ceylon) PLC (AAA(lka)/Stable) is rated at the same level as Melstacorp. Lion’s rating reflects its dominant position in the local beer industry. Melstacorp’s larger scale, stronger margins and larger FCF, are counterbalanced by its more aggressive expansion and investment strategy.
Melstacorp has more defensive cash flow, supported by its market leadership in the protected spirits market than Sri Lankan conglomerate Hayleys PLC (AAA(lka)/Stable). Meanwhile, Hayleys is exposed to cyclical end-markets in some of its segments with volatile demand, but benefits from greater product and geographic diversification, which boosts its operating scale in terms of EBITDA, while Melstacorp’s operation is largely concentrated in Sri Lanka. Overall, we believe Melstacorp has a stronger business profile, leading to strong positive FCF generation. Comparatively, Hayleys’ FCF is mostly negative, reflecting tighter margins from stiff competition and high capex.
Melstacorp is rated one notch above local conglomerate Sunshine Holdings PLC (AA+(lka)/Stable). Both companies largely operate in sectors with defensive cash flows. However, Melstacorp’s dominance in alcoholic beverages supports its larger scale and stronger FCF generation, leading to higher leverage tolerance than for Sunshine. Sunshine is a diversified conglomerate with exposure to sectors such as healthcare, consumer goods and plantations, which account for around 90% of its EBITDA. Both companies have engaged in acquisitions in the recent past to expand their businesses while maintaining robust balance sheets.
Melstacorp is rated higher than a number of large banks, non-bank financial institutions and insurance companies in the country. The large financial institutions are more exposed to sovereign stress despite their individual credit strengths, due mainly to substantial sovereign-issued securities held for regulatory reasons, while the banks and non-bank financial institutions have broader exposure to numerous sectors in the local economy amid the weak operating environment.
Key Assumptions
Fitch’s Key Assumptions Within Our Rating Case for the Issuer:
– Revenue to increase on average by mid-single digit yoy in FY25-FY28, supported by the country’s economic recovery and expected growth in tourism.
– EBITDAR margin to remain at over 30% in FY25-FY28 on the back of business recovery and stabilising costs.
– Capex to average around LKR4.0 billion-LKR5.0 billion a year over FY25-FY27, spent on maintenance and selective expansion within the group’s core operations.
– M&A spend of LKR5 billion a year for potential acquisitions/expansions within its core operations in FY26-FY28.
– Dividend pay-out of 50% of net income over FY26-FY28.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
— Consolidated financial leverage – measured as adjusted EBITDA net leverage (including 51% consolidation of Aitken Spence but excluding Continental Insurance Lanka) rising to over 5.5x for a sustained period (FY24:0.8x).
— Group operating EBITDAR fixed charge coverage (including 51% consolidation of Aitken Spence but excluding Continental Insurance Lanka) falling below 1.8x for a sustained period (FY24:5.1x).
— Significant weakening in the group’s business risk profile, in particular due to a weaker competitive position in spirits.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
— There is no scope for an upgrade, as the company is already at the highest rating on Sri Lanka’s national rating scale.
Liquidity and Debt Structure
Melstacorp had around LKR32 billion in unrestricted cash at end-December 2024, fully covering its LKR29 billion of debt maturing in the next 12 months. The company’s liquidity is further supported by solid FCF generation of around LKR10 billion annually, and solid access to local banks with sizeable uncommitted unutilised credit lines.
Issuer Profile
Melstacorp is a leading Sri Lankan conglomerate with exposure to the spirits, telcos, plantation, leisure, maritime and logistics, and power sectors. Its core spirits business is carried out by its subsidiary, DIST.
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.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch’s latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch’s macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. (Colombo/May15/2025)
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