Tuesday, July 21, 2020

Pandemic to cost Lankan Corporates Rs. 30 bn in revenue - Fitch

Rated Sri Lankan corporates are set to lose around LKR30 billion in revenue in the financial year ending March 2021 (FY21) due to the coronavirus pandemic-led economic downturn, Fitch Ratings says. This is a 7% YoY decline in revenue compared with FY20.

“If the country’s two large telecom companies are excluded, the revenue loss deepens to LKR40 billion.”

However, most corporate should recoup lost growth momentum by FY22 and generate a higher revenue than in FY20.

“We also, refine our expectation of recovery trajectories to reflect easing social-distancing requirements from May 2020 and a gradual recovery in economic activity.”

Fitch has taken negative rating action on 30% of the corporates in its portfolio to reflect the impact of the pandemic, with the majority of these entities remaining on Negative Outlook or Rating Watch Negative. This suggests the possibility of further downgrades should recovery prospects be delayed, although a faster recovery than we expect could lead Fitch to revise the Outlooks to Stable.

We expect 1QFY21 revenue of the fast-moving consumer goods (FMCG) sector to be around 25% lower before the pandemic, but to recover to historical levels from 2QFY21 and surpass FY20 revenue in FY22, supported by easing social-distancing requirements, a gradual pick-up in economic activity and a recovery in demand. We forecast rated corporates within the sector to record a revenue decline of around 6%-7% in FY21.

FMCG products were made available to consumers during the lockdown, as they were categorised as essential services by the government. The products were distributed through online platforms and mobile delivery services amid store closures.

“We expect consumer durables retailers to account for the second-highest revenue drop; the sector represents 30% of the aggregate revenue loss. Demand for consumer durables has improved since the lockdown was lifted, primarily due to pent-up demand. However, demand may again weaken on falling disposable incomes after the initial post-lockdown enthusiasm dissipates.

Retail stores reopened in 19 districts on 20 April 2020, while the remaining four districts resumed operation on 11 May 2020. The lockdowns had been imposed on 23 March 2020.

Fitch expects telecoms and pharmaceutical distribution and manufacturing to prove resilient during the post-lockdown period.

The revenue of pharmaceutical trading and manufacturing companies is likely to remain flat in FY21, supported by defensive demand and little disruption to operations during the lockdown. We estimate the hospital sector will see 10%-15% top-line erosion due to lower footfall and falling personal incomes, especially in the first half. Hospital sector revenue should rebound and surpass pre-pandemic levels from FY22, once the economic conditions improve.


Hotel sector to face sharpest revenue decline

The hotel sector will see the sharpest revenue decline, with projected revenue losses of around 75% YoY in FY21, accounting for 35% of the aggregate revenue fall. Demand from domestic visitors has resumed, but we do not expect a meaningful recovery in hotel earnings until international travel normalises, which is at least nine to 12 months away.

Fitch-rated corporates’ exposure to hotels is limited and counterbalanced by exposure to more defensive sectors. However, hotels account for a disproportionate share of employment in the wider economy.

“Hotels have resumed operation for domestic visitors, but we do not expect a meaningful earning recovery until international travel is restored,” Fitch said.

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