Dec 03, 2016

Sunshine Holdings' sales drop under price control

Government’s price control mechanism on drugs will reduce Sunshine Holdings' pharmaceutical sales revenue by 15-20 percent.

However, Fitch rating agency believes the impact of the new regulation will be temporary and the long-term fundamentals for the segment remain intact as the population is rapidly aging, urbanisation is rising and per capita income is increasing, which will drive spending on healthcare.

Sunshine Holdings' palm oil segment will be the key growth driver in the medium term and will provide buffer against downturns in most other segments, the rating agency said adding that the company is the largest palm oil producer in the country and is strongly positioned to benefit from the government's policies protecting the sector to expand local production.

Higher taxes on imported palm oil, an increase in global palm oil prices due to the recovery in oil prices and continuous capacity expansions by Sunshine Holdings should support the growth trajectory and profitability of the segment in the medium term, Fitch rating agency said.

Margin in Sunshine Holdings' fast-moving consumer goods segment, which is the largest branded tea company in Sri Lanka , has narrowed due to higher tea prices in the past six months.

The rating agency expects tea prices to moderate in the next 12 months once supply stabilises, which should benefit Sunshine Holdings' margins in this segment.

The company’s strategy to tap the higher growth by selling to the hotel, restaurant and catering industry should also help the segment, both in terms of top line growth and profitability.

Sunshine Holdings' tea segment posted operating losses for the third consecutive year in the financial year ended 31 March 2016 (FY16) as low global tea prices and escalating costs made it difficult for tea plantations to break even.

Fitch does not expect a meaningful turnaround in the tea segment in the medium term owing to lower demand from Sri Lanka 's key markets, such as Russia , Ukraine , and the Middle East , and cost pressures stemming from wage increases for plantation workers that are not based on productivity.

The company is expanding its capacity in its power and dairy sectors, with the company expecting the majority of the new capacity to come online before end-FY19. Fitch believes the new projects will enable Sunshine Holdings to reduce its dependency on the highly volatile agricultural sector and improve overall margins as the new projects provide higher margins.