Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
Beer market of Vietnam: “Young tiger”Vietnam is one of the few big beer markets that continue to grow steadily. The beer popularity results from its low price, street consumption culture, and social motives. The outlooks of beer market as well as the Vietnamese economy inspire optimism, though the country is heavily dependent on export of goods. The state regulation can be called liberal, but the key risk for brewers is harbored in intensive rising of excise. Within TOP-4 there are two leaders, Sabeco and Heineken that grow at the fastest rates. The first company effectively employs its capacities, the second one focuses on marketing technologies. Almost 80% of the market belongs to century-old brands, yet the middle class and the youth are shifting their interest toward international premium that is growing taking share from the mainstream.
Analysis of beer market in China (on Russian)
Beer market of Ukraine: big three losing weightIn 2016, fast increase of excises and resulting price spike stood in the way of the beer market stabilization. Most of competition (as well as mass sorts) moved to the economy segment of the market. The biggest losses were incurred by the leading three, especially Obolon, which again experienced pressure after reallocation of Efes market share. However, one should already speak of TOP-4. Group Oasis CIS (PPB) became a strong player and competitor to transnational companies. Besides the net sales of many regional medium breweries look rather good and 16-fold cost reduction wholesale trade license for craft brewers opens up a possibility of rapid growth in 2017.
Fitch affirms Distilleries Company of Sri Lanka at AAA
KEY RATING DRIVERS
Leading Alcohol Manufacturer: DIST continues to be the market leader in alcoholic beverage production in Sri Lanka due to its strong brands, which drive demand and access to retail points across the island. DIST’s product portfolio includes its mass-market Extra Special Arrack brand, which accounts for the majority of sales, and licensed international brands channelled through its subsidiary Periceyl (Pvt) Ltd. As of the latest published statistics, DIST accounted for around half of Sri Lanka’s total alcoholic beverage production and 72% of the country’s total arrack production.
Spirits to Regain Market Share: We expect the trend of drinkers switching to beer from hard liquor to reverse in 2016, as taxes on the alcohol content in strong beer have caught up with those on hard liquor (spirits) after increases in excise taxes in October and November 2015. Taxes on strong beer increased 70% while taxes on spirits increased 24% from October 2014 to November 2015. Arrack production declined 3% annually over 2011 to 2014, resulting in a smaller share in alcohol sales for arrack, DIST’s main product. However, Fitch expects sales of spirits to grow in the mid-single digits over the next three years, which will help the segment to regain lost market share.
Demand to Grow: We expect demand for alcohol in 2016 to rise as tax-led price increases are likely to be absorbed by rising disposable income. Disposable income is likely to rise, driven by higher per capita income along with the mid-single digit economic growth for Sri Lanka, and following the recent increase in public-sector pay, higher tax exemptions for private-sector employees and reduced essential-goods prices.
Resilient Operating Profile: Profitability remains healthy, which is reflected in the EBITDA margin continuing to be over 30% at 31.4% in the financial year ended 31 March 2015 (FY15). EBITDA margins are supported by DIST’s ability to pass on tax increases to the consumer.
Regulatory Risk: The industry is highly regulated, with a complete ban on advertising and licensing across the value chain acting as a barrier to entry. The industry is also characterised by high and frequent tax revisions, which put increasing pressure on industry players. This risk is partially mitigated by liquor’s contribution to government coffers, with Fitch estimating that liquor taxes will account for 5.1% of total government revenue in 2014. Successive governments have consistently used taxes on alcohol to boost revenue to bridge budget deficits.
Fitch’s key assumptions within our rating case for the issuer include:
– Revenue to grow by mid-single digits over the next three years
– Relatively stable EBITDAR margins driven by lower operating costs and the new bottling line
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
– Consolidated financial leverage (measured as adjusted net debt/EBITDAR excluding Melsta Regal Finance Ltd (MRF)) increasing to over 1.5x on a sustained basis. (end-March 2015: 0.9x)
– Consolidated funds flow from operations coverage of interest and fixed charges such as operating lease rentals, excluding MRF, weakening to below 4.0x, on a sustained basis. (end-March 2015: 6.7x)
– A structural change in the domestic alcoholic beverage industry that considerably weakens DIST’s competitive position
Positive: There is no scope for an upgrade since the company is at the highest rating on the Sri Lankan National Rating Scale.
At end-September 2015, the group (excluding its finance company subsidiary) had LKR2.3bn of cash and LKR12.5bn in unused facilities to meet LKR5.4bn of short-term debt. In addition, DIST has good access to bank funding because it is one of the larger corporates in Sri Lanka with a resilient cash flow.
26 Feb. 2016