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* Resilient Hemas reports strong financial results, despite economic crisis
Wed, May 24, 2023, 10:15 pm SL Time, ColomboPage News Desk, Sri Lanka.

Chief Executive Officer’s Review

May 24, Colombo: Demonstrating resilience in the face of one of the most turbulent years, Hemas Holdings PLC, posted a revenue of Rs. 113.9 billion for the financial year 2022/23, a growth of 44.5 per cent over last year.

The high input costs, foreign currency limitations coupled with escalating interest costs experienced had a significant impact on the performance. The Group posted a cumulative operating profit of Rs. 11.0 billion, a 61.6 per cent growth over previous year and the earnings for the period remained flat against last year at Rs. 4.3 billion.

Operating Environment

During the year, the livelihoods of Sri Lankans were severely affected by the economic crisis, with purchasing power of an average citizen drastically deteriorating by over 50 per cent. Amidst the extreme pressure on country’s external sector, the Government imposed multiple tax reforms in early 2023 which further reduced the purchasing power of the consumers. The country qualified for USD 2.9 billion extended funded facility in March 2023 from the International Monetary Fund (IMF).

Reasonable improvements in the macroeconomic variables witnessed during the fourth quarter was due to declining global commodity prices, appreciation of domestic currency and declining momentum of the borrowing rates. National Consumer Price Index (NCPI) which reached a record high in September 2022 eased down to 49.2 per cent by the end of the financial year.

With relatively improved operating conditions, the revenue for the quarter reported a growth of 52.6 per cent while the operating profit for the quarter Rs. 3.0 billion was an increase of 96.5 per cent against last year. However, under elevated borrowing costs and increased working capital base, the earnings for the quarter remained flat at Rs 1.1 billion. Total tax payments to the Government for the year under review is Rs. 9.9 billion.

The defensive cashflows accompanied by the strong balance sheet enabled the Group’s Fitch rating of “AAA (lka)- Outlook Stable” to be reaffirmed for the fourth consecutive year even under testing circumstances.

Consumer Brands

The market witnessed price reductions and promotional trade schemes to stimulate consumption. However, changes made to the personal income tax structure severely impacted modern trade sales volumes as consumers rationalised their purchases under reduced disposable income levels. The market continued to experience double-digit volume contraction in comparison to the previous year but did witness a recovering momentum on a quarter-on-quarter basis.

With the offtake of the back-to-school season, the demand for stationery products saw significant improvement during the quarter. As there were no noticeable reduction in the size of the booklist despite the pricing pressure, the consumers opted for early purchases to even out the cash outlay during the festive season. Under improved operating conditions, all key categories including non-essential segments witnessed a recovering momentum as the prices stabilised to a greater extent.

Despite the Government’s best efforts, the inflation in Bangladesh increased to 9.3 per cent in March 2023 owing to the external sector pressure. In the face of numerous challenges including slowdown in the global economy, depreciation in Taka, heightened inflation and depleting foreign currency reserves, the country entered an IMF programme in January 2023. The value-added hair oil market witnessed a degrowth, as consumers curbed consumption in many non-essential items and switched to value-for-money alternatives.

The Consumer Brands Sector posted a revenue of Rs 47.6 billion for the year, a growth of 54.7 per cent over last year mainly due to price increases made to partially compensate the cost escalations and the seasonal shift in the Learning Segment. In line with revenue growth, operating profit and earnings for the year improved to reach Rs 5.9 billion and Rs.3.2 billion respectively. Certain product categories showed gains in market share which reflected the strength of the Brands. Increased efforts in internationalisation and efficiency improvement initiatives positively impacted the performance of the Sector.

With the shift in back-to-school season the Learning Segment drove the performance of the Sector posting a revenue of Rs. 15.1 billion for the quarter. The operating profit and earnings achieved amounted to Rs. 2.2 billion and Rs. 1.4 billion respectively.

Home and Personal Care

While the modern trade channels witnessed a slow down due to the adverse impact of the tax reforms and high cost of credit on the middle-class urban population, the general trade channels experienced significant growth and increased foot fall. The decline in global commodity prices in the second half of the year, enabled the business to make price reductions across the portfolio. However, the benefit of appreciation of the Sri Lankan Rupee in March 2023 was not seen during the quarter due to the lag effect but is expected to realise in the quarters to come, provided the current economic conditions prevail. The value-for-money products continued to perform well amidst the inflationary pressure on the economy. Marking its entry into ayurvedic wellness, the business introduced its ayurvedic product range ‘Prasara’, a 100 per cent natural brand with an extensive product line up including soap, toothpaste, face cream and face wash.

The high traction of the recent new product launches including, ‘Vivya’,’ Fems Aya’ and ‘Diva Diriya’ resulted in a 10 per cent contribution to the overall revenue of the business.

Learning

The Learning Segment posted commendable performance for the quarter with increased focus on driving seasonal revenue. The business continued to engage with communities through purpose-driven initiatives to empower students, parents, and teachers across the country. During the quarter, ‘Quirky Lanka’, the latest addition to the premium stationery range ‘Innovate’ was launched, representing the fusion of two worlds: the heritage of Sri Lanka and modern futurisms.

Consumer Brands International

The Bangladesh business increased its focus on the personal care brand ‘Actisef’ as a strategy to reduce high single brand concentration, which resulted in the brand contributing approximately 15 per cent to the overall revenue. Timely strategies on providing consumers with alternatives at lower price points assisted the business to maintain volumes during the quarter despite the adverse market conditions.

Increased focus on internationalisation and exports resulted in a 60 per cent growth in export revenue for the year primarily from the Southeast Asian and South Asian markets. Leveraging on our world class manufacturing capabilities, the business successfully secured agreements to manufacture for globally recognised brands.

Healthcare

Despite the support of multiple parties with credit lines and donations, Sri Lanka’s state-dependent healthcare ecosystem continued to face severe challenges due to a lack of funding resulting in shortages of essential medication. Scarcity of resources, including medicines and medical equipment, has been exacerbated by the high medical professional migration, which has led to a shortage of staff in Government hospitals across the country.

During the quarter, many key therapeutic segments including medication for non-communicable diseases witnessed a double-digit decline in the market while antibiotics and respiratory related medication witnessed a significant improvement.

The Healthcare Sector reported a revenue of Rs. 64.7 billion for the year driven by the improved performance of the Pharmaceutical Segment. This is mainly due to the price adjustments made by the National Medicines Regulatory Authority (NMRA) to offset the adverse effects of the steep rupee depreciation. However, the growth momentum in revenue was not translated into earnings for the year due to elevated costs driven by inflation and devaluation of the rupee accompanied by increased investments in working capital under a high interest rate regime. Operating profit for the year stood at Rs. 4.7 billion while the earnings recorded a degrowth to reach Rs. 2.0 billion.

During the quarter, the Sector experienced a revenue growth of 34.5 percent, primarily attributable to the NMRA price adjustments mentioned. However, earnings faced a decline of 69.1 percent due to increased borrowing cost.

Pharmaceuticals

Pharmaceutical Businesses strived to prioritise availability over profitability as Hemas continued to work with its strategic partnerships to ensure availability of medication in the market. The Pharmaceutical Distribution Business recently launched over 20 new products into the market. These products are essential in providing in-patient care and performing surgical procedures.

The Pharmaceutical Manufacturing arm of the Group introduced ‘FoliMor’ 1mg variant which is used to treat or prevent folic acid deficiency, increasing the total number of new products launched under the brand Morison within the year to five. The capacity utilisation of the ‘Homagama’ factory was improved during the latter part of the quarter due to the business securing an order from the Government buyback scheme. Gradual improvements in utilisation levels are expected in the quarters to come as commercial manufacturing commences for the multiple products that are in the pipeline.

Hospitals

Despite a decline in surgical admissions due to reduced disposable income levels, occupancy at both Wattala and Thalawathugoda hospitals was over 60 per cent for the year, with improved medical admissions. In line with the strategic objective to focus on anchor specialties and digital and technological capabilities, Hospitals invested in a mammogram machine for diagnosis of breast cancers.

Mobility

Total throughput and transhipment volumes at Port of Colombo declined by over 7.0 per cent during the year due to slow down in the global economy and reduced demand for apparel and tea in western markets. Global freight rates continued to decline nearing pre-pandemic levels imposing margin pressure on shipping companies. While the passenger vertical of the Aviation business has displayed commendable growth, the cargo vertical remained challenged under excess supply of capacity and reduced economic activity in Europe and America.

Despite the challenges observed in both the Aviation and Maritime Businesses, underlying revenue for the year adjusted for the divestment of Spectra Logistics resulted in a 21.6 per cent growth in Sector revenue. Favourable impact on domestic currency devaluation also positively contributed to the 13.9 per cent growth in underlying earnings for the year to reach Rs. 769.9 million.

However, with the extreme challenges faced by the cargo vertical, quarter witnessed a revenue decline of 15.9 per cent while the reported earnings of Rs. 114.8 million is a degrowth of 62.2 per cent.

Our Commitment to ESG

The Group remained committed to its environmental and social initiatives during the quarter. As a part of its efforts to offset its plastic waste the Group partnered with Clean Ocean Force to clean up the waterways in Jaffna, becoming the first corporate to join hands with them. The partnership involves daily cleaning operations, and community awareness and engagement to keep the Jaffna waterways free from plastic. The Group partnerships have ensured the collection and responsible disposal of over 45,000 kg of plastic waste to date.

Hemas Outreach Foundation began the construction of its 62nd Piyawara pre-school in Wanathamulla, Colombo 08. Each year the initiative benefits over 4,000 students and 150 teachers.

During the quarter, the Group continued supporting our vulnerable communities and building a social security net. The Pharmaceutical businesses partnered with the Sri Lanka College of Pediatricians to tackle malnutrition through Feed a Child Community initiative. Hemas committed to distribute dry ration packs every fortnight to 150 families in the rural areas of Anuradhapura District for a period of six months. The Pharmaceutical Manufacturing business launched 'Suwadeya,' focused on providing access to affordable medicines. As a first step, the initiative offered three of Morison’s latest branded medicines to treat the two most prevalent non-communicable diseases in the country, diabetes, and cardiovascular diseases. free of charge on a monthly basis to team members and their immediate family.

Outlook

The recent quarter has witnessed relative improvements in many key economic parameters, including inflation, exchange rates, and interest rates. The successful restructure of external debt accompanied by consistent and effective implementation of policy reforms will play a pivotal role in the recovery of the economy.

The Group is poised to meet challenges head-on with a strong strategic vision to drive growth while maintaining an acceptable risk profile. Hemas will continue to leverage on the strength of the business relationships of our strategic partners to generate win-win solutions and continue investments to strengthen the core portfolio. Exports and Internationalisation will remain focus areas, while the Group explores opportunities for organic and inorganic growth primarily in Consumer and Healthcare spaces.

I am proud of the Hemas team and thankful for their dedicated efforts to successfully steer us through a challenging year and ensure that we emerged stronger from it. As we step into our seventy-fifth year in business, Hemas is confident in its team's competency and ability to think boldly to drive the business to greater heights, living by the Group's purpose of empowering families to live a better tomorrow.

Kasturi C. Wilson

Group Chief Executive Officer

May 24, 2023

Colombo

 

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