Hemas Group’s resilience shows in 1Q2023/24 results

Hemas delivered a healthy performance for the first three months of the financial year 2023/24, effectively navigating the macroeconomic headwinds as the country moves towards an economic stabilising phase.

The group posted a revenue of Rs. 29.1 billion, a 17.2 per cent growth over previous year while the operating profits witnessed a growth of 6.0 per cent to Rs. 2.2 billion. Amidst the increased finance cost, the group's earnings growth was limited, witnessing a marginal improvement of 1.2 per cent to Rs. 1.1 billion, the company said in a statement.

Year-on-year growth in the inflation rate, which stood above 70 per cent in September 2022, witnessed a significant decline and currently is at 10.8 per cent as of June 2023. This progress can be attributed, in part, to the improved liquidity in the foreign exchange market, which resulted in the Sri Lankan Rupee appreciating by over 14 per cent during the first quarter. 

“Despite the positive indicators, it is important to acknowledge that consumers continue to face challenges as their disposable income levels are impacted by the increased cost of living. Although there has been a slowdown in the year-on-year inflation and interest rates, the ratios should be carefully interpreted as the current inflation figures are based on an already inflated base,” the statement said.

Consequently, affordability continues to be a concerning issue for the public and consumption remains contracted.

Market-wide price reductions were witnessed during the quarter, attributed to the reduction in global commodity prices and appreciation in the domestic currency. However, a noticeable slowdown in consumer demand was seen across the modern and general trade channels post festive season. The increase in taxes, higher tariffs on electricity and high borrowing costs had an ongoing influence on buying patterns, despite the price reductions.

In the stationery market, the demand for value-for-money alternatives continues to surge at a significant rate as consumers remain cautious amidst the increased pressures on disposable income. The relaxation of import restrictions, the appreciation of the rupee, and the decline in paper prices have resulted in the market experiencing an influx of brands. There has been a slowdown in secondary purchases from retailers due to the anticipation of future price reductions.

The company said the economy in Bangladesh, where Hemas has some operations, continues to face challenges as its local currency, foreign reserves, and economic growth encounter notable risks stemming from inflation and the persisting global economic slowdown. With over 9 per cent growth in year-on-year inflation, consumers have curtailed their consumption of non-essential items and are opting for more cost-effective generic brand offerings and smaller pack sizes.

The Consumer Brands Sector reported a revenue of Rs. 11.1 billion for the quarter, a growth of 26.9 per cent over last year driven by relatively high market prices. In line with revenue growth, operating profit and earnings for the quarter improved by 62.8 per cent and 84.2 per cent to reach Rs. 1.1 billion and Rs.919.2 million respectively. Continuous efforts on improving supply chain efficiency and internal processes coupled with improved performance of the export portfolio positively contributed to the growth in profitability of the Sector.

Learning Segment

The Learning Segment witnessed a reduction in demand in comparison to the previous quarters attributed to the slowdown in back-to-school season and market anticipations of future price reductions. Premium market segment witnessed over 10 percentage points growth in market share owing to the success of the brand ‘Innovate”.

During the quarter, the group acquired the remaining 24.9 per cent stake in Atlas Axillia Company (Pvt) Ltd for a total consideration of Rs 3.4 billion, making it a fully owned subsidiary of the Hemas Group. The increase in stake was in line with the commitments made to the prior shareholders and aligns seamlessly with our investment mandate, which focuses on investing in consumer and healthcare companies that bring value accretive opportunities to the Group.

Consumer Brands International

In line with the Group's strategic objective of promoting internationalisation and exports, Consumer Brands International Sector made significant steps during the quarter. 

Despite the market contraction, the Bangladesh business witnessed volume growth, primarily driven by the increased traction for the personal care brand "Actisef," which was launched to reduce high single category concentration. Revenue growth in the face of mounting economic pressure was supported by consumer promotions and recent launches featuring reduced pack sizes, while the total revenue of the segment received a substantial boost of over 16 percent from the contributions of new product launches.

Healthcare

Sri Lanka's free healthcare system, which stood as a benchmark in South Asia, continues to grapple with challenges, including shortages of essential drugs and the migration of doctors, exacerbating the critical situation. Contraction witnessed in the demand for pharmaceuticals under deteriorating income levels, continued to be present where the private market witnessed a double-digit contraction resulting from volume decline in both essential and non-essential categories. With the recent appreciation of the domestic currency, the National Medicines Regulatory Authority (NMRA) granted approval for a 16 per cent reduction in the maximum retail price of NMRA registered medicine. Nevertheless, the industry remains concerned about the ad-hoc nature of price changes and acknowledges the urgent need for a transparent pricing mechanism that effectively reflects the real movement of relevant market drivers, ensuring equity for all stakeholders.

Pharmaceuticals

During the year the Pharmaceutical Distribution Business introduced over 30 products into the market in many key categories including urology, anti-infective and respiratory spaces providing the customers with wider variety of choices in chronic therapeutic segments. Despite the double-digit contraction witnessed in the market, Pharmaceutical Business volume contraction remained a low single digit range as Hemas continued to prioritise availability of medication in the country.

Mobility

Amidst the global economic slowdown, the Port of Colombo demonstrated notable resilience with a significant increase of 7.8 per cent in total throughput and 11.5 per cent in transshipment volumes during the quarter, partially attributed to a lower base from the previous year. However, the Maritime sector was adversely impacted by the global slowdown, despite observing a greater extent of stabilisation in global freight rates.

Outlook

During the recent quarter, the Sri Lankan economy experienced noteworthy improvements in several vital economic indicators, encompassing interest rates, inflation and exchange rates. Progress has been made in external and internal debt restructuring initiatives, accompanied by efforts towards comprehensive implementation of an integrated restructuring programme in collaboration with the IMF.

“We acknowledge the challenges present in the macro economy and maintain a cautious yet optimistic outlook on the immediate future. Drawing from its 75 years of experience, Hemas will anchor its strategy around the group's purpose and continue to drive long-term value growth, staying true to its roots by prioritising its core operations while actively pursuing internationalisation as a key strategic priority. The group will embark on a transformation journey to improve efficiency, deploy cost-saving initiatives, and prioritise digitisation to foster sustained growth. Understanding the ever-evolving shifts in consumer needs and catering to them through innovative solutions would be the core of our business strategy,” the statement said.