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Hayleys borrowed heavily over the past year to buy the country’s largest consumer durable retailer Singer Plc for 12.5 billion rupees. It also acquired Sri Lanka Shipping Company Ltd for 4.9 billion rupees to become the country’s largest ship owner with 22 vessels.
"Yes, we are overleveraged, but we are not worried," Executive Director Sarath Ganegoda told reporters.
He said that Hayleys will examine it balance sheet to identify assets that are not generating adequate returns on investment, and sell them.
"We are likely to liquidate some assets. We’re now looking at the return on assets, which we didn’t look closely at before," he said.
Hayleys group ROA fell to 1.58 percent in the year to March 2018 down from 3.88 percent a year earlier. Return on capital employed (ROCE) fell to 7.48 percent from 9.41 percent.
In the June 2018 quarter, shareholders of the parent lost money. Hayleys last reported double digit returns on shareholder funds in 2005 at 10 percent.
Analysts say in the 1980s and 1990s, nominal returns may also have been helped by high inflation and currency depreciation, though the group had a practice of revaluing assets to calculate ROCE as well as tax holidays as it had a focus on exports.
Hayley's stock price had fallen from 296 rupees to about 200 rupees in the 12-months to June 2018.
Ganegoda said that Hayleys, in its 140 year history has acquired many assets, some of which don’t have their true value shown on the balance sheet.
The group’s acquisition drive is over for the foreseeable future, and will consolidate its businesses in the 16 industries Hayleys is now in, he said.
"We are looking to be number one in every sector we get into," Chairman Mohan Pandithage said.
Pandithage said they group was targeting a billion dollar revenue in 2020, but had already achieved it after acquiring Singer Sri Lanka.
Some of the more recent industries Hayleys entered into, such as leisure and renewable energy, are putting temporary pressure according to Ganegoda.
“They are cash heavy and are putting temporary pressure on our liquidity,” he said.
These sectors are expected to drive long-term growth and stability, Ganegoda said.
Hayleys’ more traditional businesses in agriculture and manufacturing will help in the short-term profitability, liquidity and debt repayment capacities, he said.
He said that Hayleys is looking to reduce its debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio to 3x.
At the end of the last financial year in March 2018, the ratio was at 6x according to company data. For the 4 previous years leading back to 2014 the group had maintained a 3x debt to EBITDA ratio.
By the end of the June 2018 quarter, Hayleys had 35 billion rupees in long-term borrowings, compared to 20.5 billion rupees in the June 2017 quarter before the latest round of acquisitions.
Short-term borrowings in June 2018 increased to 43.1 billion rupees from 23.5 billion rupees a year earlier.
The current portion of long-term borrowings increased to 23.9 billion rupees from 4.5 billion rupees a year earlier. (COLOMBO, 13 August, 2018)