LNP – Tough 2Q for Hemas but strong 1H performance

Hemas Holdings PLC said yesterday it delivered a strong first half amidst a challenging operating environment with half of the second quarter being under lockdown.

It said during 2Q an unprecedented level of input cost inflation and foreign exchange volatility resulted in the Group witnessing profitability pressure.

Second quarter top line grew by 15% to Rs. 19.8 billion whilst operating profit declined by 24% to Rs. 1.5 billion. Profit from continuing operations declined 25% to Rs. 1.4 billion and the after tax figure was Rs. 1 billion, down by 31.5%. Net profit attributable to equity holders of the parent was down by 27% to Rs. 944 million.

Cumulative Group revenue in first half rose by 19.8% to Rs. 36.2 billion. The overall cumulative operating profit was Rs. 2.6 billion whilst Group earnings rose by 1.7% to Rs. 1.6 billion.

During the quarter, Hemas’ underlying business grew by 14.7% over last year. New revenue streams across businesses grew over 100% whilst contributing to 7.5% of the total Group revenue.

The company on 15 October declared an interim dividend of Rs. 2.90 per ordinary share.

Hemas Holdings Group CEO Kasturi C. Wilson said against a challenging operating environment, she was encouraged by the progress the Group made in the first half of the year.

“Although we anticipate improved demand trends as mobility levels increase with the reduction of COVID-19 infections and accelerated vaccination drive, headwinds from higher global commodity costs, inflationary pressure in Sri Lanka coupled with numerous pressures on foreign exchange will likely have margin pressure across all entities in the upcoming quarters,” she said.

She said that Hemas would continue to execute strategies for margin recovery. “We will be accelerating other alternative opportunities to de-risk Morison from the volatility of the buyback agreements,” she added. During the quarter, Hemas’ new oral solid dosage manufacturing plant obtained the GMP approval and the commercial production is expected to commence upon receiving other required regulatory approvals towards the end of the financial year.

“Our resilient financial discipline supports the Group’s growth strategy by driving efficiency and productivity through various lean initiative measures, controlling discretionary spending, driving down working capital and sustaining return on capital employed. The Group maintains its aspiration of delivering sustainable and profitable volume-led growth and impactful innovation over the medium term. We are also ramping up digital capabilities and new channels,” Wilson said.

She said the 1Q presented a new set of challenges to our teams, but that they remained determined and worked together to ensure Hemas fulfilled its growth strategy.

Following is a brief review of the sectoral performance of Hemas Holdings.

Consumer brands

The pandemic continued to influence consumer behaviour, sales mix and market channel dynamics. Footfall in the modern trade was impacted during the lockdown whilst general trade saw a stable growth. Basket value was skewed towards food and essentials, impacting shopper patterns for non-essential items. The quarter witnessed escalation in commodity prices by approximately 50% over last year.

Operating conditions in Bangladesh continued to be challenging, with the quarter impacted by lockdown restrictions which were lifted in mid-August.

Trade union action of teachers and principals in the past three months affected online teaching at all Government schools, adding more pressure to the prolonged closure of schools.

The Consumer Brands sector recorded a cumulative revenue of Rs. 12.8 billion, a growth of 13.3% over last year. However, sector cumulative earnings of Rs. 727.8 million witnessed a year-on-year decline of 10.3%.

During the quarter, the Consumer Brands sector recorded a revenue of Rs. 7.3 billion, a decline of 1.8% compared with the corresponding quarter in FY 2021. Revenue contribution mix within the sector remained in line with last year.

Home and Personal care (HPC) segment continued the growth momentum witnessed last year, although Atlas growth was subdued. Sector earnings of Rs. 497.6 million witnessed a year-on-year decline of 40.4%, primarily due to raw material price inflation in the HPC business segment.

Home and Personal Care

HPC Sri Lanka delivered a steady double-digit volume-led growth. The launch of Dandex and Kumarika shampoo buddy packs to provide an affordable and sustainable alternative to single use sachet packets enabled a first mover advantage with double digit volume growth and increased market share. Similarly, the recent launches and relaunches have been gaining good traction.

In an on-going effort to expand the Group’s presence in the beauty and personal care category, HPC Sri Lanka launched a new brand ‘Vivya’ in the face care segment, a unique product innovated from the extract of Sri Lankan Heirloom rice.

Sector profitability was impacted due to steep increases in raw material cost along with exchange rate volatility. In an ongoing effort to reduce the burden to consumer from the inflationary impact, we have adopted multiple strategies whilst continuing to prudently manage cost for margin recovery.

HPC Bangladesh quarterly revenue remained constant over both last year and last quarter. However, cumulative revenue witnessed a high double-digit growth anchored around a similar trend in volume growth over last year with new products kicking in.

Revenue from new launches stood at 9.2%. Driving new revenue within the Value-Added Hair Oil (VAHO) segment, HPC Bangladesh launched Eva hair oil, an entry point value added hair oil. Amidst a constant revenue, profitability growth remained steady as a result of efficiency improvements.

Learning segment

Atlas continued to gain market share across all key categories including books and colour products over last year. The introduction of themed based notebooks under its “Innovate” range, enabled the company to be listed in the super premium stationery category at leading retail outlets.

This is despite the limitations faced in consumption owing to the trade union action of teachers and principals during the quarter under review. Atlas contributed approximately 30% to the Consumer brands sector revenue during the quarter with the kick-off of seasonal sales ahead of the school season in 2022.

Healthcare

Market demand for healthcare services and medicines increased during the peak of COVID cases. However, overall footfall of non-COVID patients dropped by more than 50% at all private hospitals. The COVID-19 pandemic saw the acceleration of digital adoption across the healthcare sector and as a result, e-channelling and e-pharmacies witnessed an increase in demand.

The Healthcare Sector reported a cumulative revenue of Rs. 22.2 billion, a growth of 23.6% over last year whilst sector profit of Rs. 1.8 billion was a 15.6% growth over last year.

Hemas Healthcare Sector posted a revenue of Rs. 11.8 billion whilst operating profit and earnings stood at Rs. 994.6 billion and Rs. 736.8 million respectively for the quarter. Performance was broad based with all sectors growing competitively over last year and last quarter, amidst island wide lockdown being imposed for more than half the quarter. Steep exchange rate volatility resulted in profitability pressure.

Pharmaceuticals

Pharmaceutical businesses delivered a stable revenue growth during the quarter. However, the reduction in buy back volumes compared to assigned quantities under the guaranteed buy back agreement with the Ministry of Health Sri Lanka, impacted overall performance. Pharmaceutical manufacturing arm, Morison reported a steady cumulative growth of 34.2% in revenue, driven by increased private market sales, excluding buyback volumes.

In its continuous efforts in excelling at manufacturing, Morison became the largest manufacturer in terms of volume (number of tablets) under IQVIA results for the quarter ended 30 September.

Myanmar distribution operations witnessed a quarter-on-quarter recovery in revenue although profitability remains a challenge as a result of the political unrest and currency depreciation.

Hospitals

Hospitals witnessed an average increase in admission volumes by 4.4% over last year with a fair mix of COVID and non-COVID medical admissions for the first half.

Thalawathugoda and Wattala recorded an overall occupancy of 60.7% and 58.6% respectively. Additionally, demand for diagnostics experienced a surge with outer laboratories increasing revenue and profitability during the quarter. Lean initiatives further strengthened the robust profitability improvement on the back of increased surgical revenue by 14.6%, reporting an EBITDA margin increase of three percentage points against last year.

With the acceleration of digital adoption, Hemas partnered with IFC, envisioning an integrated Digi Health eco system to uplift healthcare access and efficiency.

Mobility

Transhipment volumes and TEUS dropped by 7.5% and 6.1% during the quarter in comparison to same period last quarter resulting from over 250 vessels skipping POC to recover the schedules. Additionally, freight rates hike partially negated the adverse volume impact.

The Mobility Sector reported a cumulative revenue of Rs. 1.2 billion, a growth of 23.3% over FY 21 whilst sector profit doubled to reach Rs. 471.9 million for the first six months ended 30 September.

During the quarter, Mobility Sector reported a revenue of Rs. 595.0 million whilst operating profit and earnings stood at Rs. 230.2 million and Rs. 73 million respectively.

HHL divested its interest in Spectra Logistics in October. In line with the Groups’ strategy, Mobility sector will focus on investing in the logistics segment, in a model which enables us to leverage on existing capabilities.