The area under tea cultivation is stagnant or shrinking, productivity is low, the replanting rate is low, production costs are high and there is a shortage of labour willing to work in the industry.
Kotagala Plantations operating EBITDA has weakened further in the financial year ending-March 2016 (FY16) due to falling tea and rubber prices, high labour costs and poor labour productivity.
Consequently, Kotagala's operating EBITDA of LKR30 million was insufficient to cover its borrowing costs of LKR503 million and the company had to utilise cash reserves to meet most of its financial obligations.
Under this set up Fitch Ratings Lanka has downgraded Sri Lanka-based Kotagala Plantations PLC's National Long-Term rating to 'CC(lka)' from 'B+(lka)'. The agency has also downgraded the National Long-Term rating on Kotagala's outstanding listed senior secured debentures of LKR1 billion to 'CC(lka)' from 'B+(lka)'.
The downgrade follows continued deterioration in the company's liquidity,
The company's EBITDA recovered to LKR247 million in 9MFY17, from LKR198 million in 9MFY16, driven by improving tea and rubber prices.
Kotagala has around LKR546 million of bank loan maturities due in FY18. The company has benefitted from banks' willingness to restructure its borrowings in the past.