Lion Brewery (Ceylon) PLC, could face more competition in the medium-term following Distilleries Company of Sri Lanka PLC’s decision to acquire Heineken Lanka Limited, Fitch Ratings said.
Heineken Lanka Ltd. is a distant second in the Sri Lankan market for now, but Fitch believes Distilleries Company of Sri Lanka (DCSL) PLC has the industry know-how, market access and financial strength to elevate Heineken’s operations to a level that could weigh on Lion Brewery (Ceylon) PLC’s market share.
The rating agency in its statement said: “We believe a large-capacity expansion at Heineken Lanka would be required to compete effectively with ion Brewery (Ceylon) PLC. We estimate the expansion will require significant capital outlay and at least two-to-three years to complete. We believe DCSL PLC has the financial strength to fund the expansion, with its annual free cash flow, excluding dividends, averaging Rs.10-12 billion. DCSL PLC already has extensive market access covering all forms of retail channels, providing easy market penetration compared with a new entrant.”
However, Fitch expects that DCSL PLC will face near-term challenges in terms of brand building given the complete ban on media advertising on alcoholic beverages by the Government. Lion Brewery (Ceylon) PLC already has a very strong brand presence in the market compared with Heineken Lanka Ltd. due to the greater mass-market appeal of its products, with cheaper pricing and customisation to local preferences.
Lion Brewery (Ceylon) PLC’s ability to withstand competitive pressure is also supported by its strong rating headroom. Lion Brewery (Ceylon) PLC continued to maintain a net cash position as of 31 September 2023, compared with a negative rating sensitivity of EBITDA net leverage of above 5.0x. Therefore, Fitch believes this provides Lion Brewery (Ceylon) PLC the flexibility to be more aggressive with its pricing strategy to defend its market share in an increasingly competitive environment.
“We expect the acquisition to be positive for DCSL PLC as it will help the company to strengthen its market position. The acquisition will also allow DCSL PLC to take advantage of the lower excise duties applicable. There has been a shift of consumption patterns in recent months due to the significant increase in excise duties. DCSL PLC could also benefit from the revival in Sri Lanka’s tourism industry,” the rating agency explained.
DCSL PLC has not disclosed the value of the transaction, but we do not believe it will have a material drag on the company or parent Melstacorp PLC’s balance-sheet strength. Fitch rated DCSL PLC at the consolidated profile of Melstacorp based on Fitch’s Parent and Subsidiary Linkage Rating Criteria. Melstacorp’s last-12-month EBITDA to net leverage stood at 0.7x at end-September 2023, compared with a negative rating sensitivity of above 5.5x, indicating strong rating headroom. Furthermore, our rating-case assumptions include annual spending of Rs. 5.0 billion on potential M&A.