Hemas Achieves Steady Earnings Growth in Challenging Landscape

Chief Executive Officer’s Review

Amidst the backdrop of relatively stable operating conditions in the domestic economy, Hemas Holdings PLC (HHL) demonstrated a steady performance in the first nine months of the financial year 2023/24, achieving a cumulative revenue growth of 10.3 percent amounting to Rs. 90.2 billion. Operating profits for the period mirrored the revenue growth, reaching Rs. 8.8 billion, while earnings experienced a 41.2 percent increase, posting a total of Rs. 4.5 billion.

During the quarter, Group revenue witnessed a marginal increase of 4.9 percent standing at Rs. 31.2 billion. However, strong contribution from the Learning Segment due to seasonality effect  and the positive impact of efficiency improvement initiatives resulted in operating profit and earnings registering growth of 19.6 percent and 126.6 percent, reaching Rs. 3.9 billion and Rs. 2.2 billion, respectively.

Operating Environment

Sri Lanka witnessed a gradual economic turnaround, marked by favourable shifts in key indicators. The Gross Domestic Product (GDP) for the third quarter achieved positive growth at 1.6 percent, ending a streak of consecutive negative quarters since the onset of 2022. Throughout the period, the exchange rate remained relatively stable, and the Average Weighted Prime Lending Rate (AWPLR), which was over 28 percent last year, has now reduced to below 12 percent. Furthermore, the external sector of the economy demonstrated optimistic developments, including a rise in tourist arrivals and an improved balance in the Current Account.

Despite the positive developments in the operating environment, consumer spending remained low due to substantial inflationary pressure. Although September 2023 marked a historic low in inflation growth, it is crucial to note that while this percentage denotes the lowest growth in recent history, the calculation is grounded on an already elevated base.  

Consumer Brands

During the third quarter, there was a surge in demand across the industry attributable to the festive season; however, it did not reach the anticipated levels due to increased pressure on purchasing power of the consumers. Despite these challenges, modern trade channels exhibited a higher offtake compared to general trade channels with improved footfall to supermarkets during the period. Prices exhibited a gradual stabilisation characterised by comparatively minimal fluctuations in comparison to the preceding quarters.

With the commencement of the pre-school season in January 2024 and the imminent commencement of the back-to-school season in February 2024, the stationery industry performance remained significantly influenced by seasonal stocking across both essential and non-essential categories. Under relatively lower prices, intense competition unfolded across all three segments: mass, value-for-money and premium. Consumers, amidst inflationary pressure remained price sensitive, resulting in a tendency to strategically phase out their purchases.

The challenges in the economic landscape of Bangladesh were worsened by the prolonged inflationary pressure driven by soaring food inflation, concurrent political turmoil, timed with the parliamentary election held in January 2024.

The Consumer Brands Sector posted a cumulative revenue growth of 17.1 percent to reach Rs. 38.0 billion driven by the increased performance of the businesses amidst relatively stable operating conditions. Further to the revenue growth, improved product mix, cost-saving initiatives and lower finance costs resulted in the operating profit and earnings growing by 54.8 percent and 117.2 percent, reaching Rs. 5.7 billion and Rs. 4.1 billion, respectively.

The revenue for the quarter witnessed a growth of 13.2 percent to reach Rs. 15.4 billion while the operating profits reported a growth of 73.8 percent due to improved performance of the Home and Personal Care Business and the seasonality impact of the Learning Segment. Amidst the increase in operating profits, lower finance costs and the impact of reduced NCI, earnings for the period reached Rs. 2.1 billion posting a growth of 179.2 percent for the quarter.

Home and Personal Care 

During the quarter, the Home and Personal Care business strategically intensified its emphasis on the personal care segment, yielding a notable surge in market share and enhanced performance within the category. The heightened focus on target market segments coupled with increased concentration on value propositions, empowered Hemas to outperform the market resulting in volume-led growth for key categories, including baby soap, oral care, and shampoo. While both the general and modern trade channels experienced volume growth, the modern trade channel exhibited a superior growth trajectory during the quarter. Sustaining ongoing investments in the beauty space, ‘Prasara’ continued to witness significant traction in the market.

Learning Segment

Leveraging seasonal offtake, ‘Atlas’ sustained its market-leading position in the mass market while simultaneously expanding market share in the newly entered premium and value-for-money segments. In line with the brand’s purpose of ‘making learning fun’, multiple digital efforts were undertaken to create a unique and novel Point-of-Difference (POD) in a highly commoditised mass segment, positively contributing to the brand value and the overall performance.

Consumer Brands International

Despite persistent inflation and the contraction in the value-added hair oil (VAHO) market, ‘Kumarika’ increased its market share marginally in the VAHO segment. Recent launches in the value-for-money verticals and the pure coconut oil market gained significant traction during the quarter, contributing over 10 percent to the overall revenue of the Bangladesh Business. The introduction of the personal care brand  ‘Actisef’ a few years ago, as an initiative to mitigate single-brand concentration, has proven to be a substantial contributor to the topline.

During the quarter, ‘Atlas’ continued to focus on the East African market while  increased focus in the Middle Eastern region resulted in repeat orders for 'Kumarika,' leading to a notable revenue contribution from the export segment.

Healthcare

Sri Lanka continued to face a web of interconnected health challenges, ranging from unresolved and persistent drug shortages, substandard medicines, unregulated importation, to the migration of healthcare workers. Amid reduced purchasing power, the pharmaceutical industry continued to witness a market shift towards low-quality, low-price variants, exerting pressure on volumes. Instability within the National Medicines Regulatory Authority (NMRA) resulted in delays in new product registrations and the acceptance of buyback orders by the The Medical Supplies Division (MSD), amplifying challenges for the pharmaceutical industry at large.

The Healthcare Sector posted a cumulative revenue of Rs. 50.9 billion, a growth of 6.1 percent while the operating profit for the period stood at Rs. 3.7 billion with a degrowth of 4.2 percent. Despite the increase in revenue, the decline in operating profit is due to the one-off adverse impact from NMRA price reduction on distributor inventory and  inflationary pressure on overheads. Consequently, earnings decreased by 6.8 percent, reaching Rs. 1.7 billion, despite the increase in revenue and lower net finance costs.

During the quarter, the Sector revenue declined by 2.7 percent, reaching Rs. 15.3 billion, while the operating profit contracted by 25.1 percent, amidst increased overheads to reach Rs 1.0 billion. Attributed to lower finance costs resulting from working capital management initiatives and reduced interest rates, the earnings of Rs. 482.0 million posted a growth of 16.9 percent.

Pharmaceutical 

During the quarter, the Pharmaceutical Distribution Business witnessed volume-led growth outperforming the market in many key therapeutic segments. Multiple working capital initiatives resulted in approximate 50 percent reduction in finance cost for the Business arising from the combined effect of working capital base reduction and interest rate reduction. Over 20 new products were introduced to the market during the quarter in critical spaces including oncology, gastroenterology and cardiology.

The Pharmaceutical Manufacturing Business faced challenges with delayed registration of new products at NMRA for its primary focus area; Morison Branded Generics. Despite the slowdown in new registrations, branded portfolio continued to deliver robust performance, with ‘Empamor’ reclaiming its market-leading position in volume terms. Capacity utilisation levels at the  ‘Homagama' factory were maintained at over 50 percent with improved operational efficiencies.

Hospitals

Hospitals Business delivered strong performance for the period with double-digit growth in surgical revenue and in-patient revenue under elevated occupancy levels at both the hospitals. Increased focus on anchor specialties including nephrology, cardiology gastroenterology and orthopaedic segments yielded significant revenue growth in these areas.

Hemas Ambulatory Surgical Care was introduced during the quarter, a pioneering service designed to transform the way Sri Lankans experience surgical procedures. It adopts a unique patient-centric approach to improve convenience and cost-effectiveness, enabling patients to return home on the same day of the surgery and recover faster, better, and more comfortably.

Mobility

Despite the marginal recovery observed in merchandise exports towards the latter months of the quarter and the 6.3 percent growth in total throughput witnessed during the nine month period at the Port of Colombo, the Maritime Sector continued to witness challenges in both domestic and international spaces.The increased tensions in the Suez Canal have compelled vessels to redirect their routes around the southern tip of Africa, resulting in an extended journey duration of 10-14 days with many being rerouted via the Port of Colombo. Aviation space continued to witness challenges during the period in both passenger and Cargo verticals. However, both segments witnessed improved volume recovery during the quarter, with increased tonnage uplift for cargo, while the passenger vertical gained traction due to heightened student and labour traffic to Europe and the Middle East, respectively

The Mobility Sector witnessed a marginal decline in cumulative revenue to reach Rs. 1.3 billion, while the cumulative operating profit and earnings stood at Rs. 751.2 million and Rs. 402.6 million respectively, posting a decline of over 35 percent due to the adverse impact of lower freight rates and the appreciation of the domestic currency.

During the quarter, the Sector posted a revenue of Rs. 460.4 million, a growth of 19.8 percent mainly due to increased volume from seasonal cargo. The revenue growth was fully translated to operating profits, recording a growth rate of 20.2 percent at Rs. 279.6 million, while earnings for the period reached Rs. 144.2 million at a growth rate of 53.4 percent with lower tax expenses.

Leading with ESG

Hemas marked 75 years of enriching Sri Lankan families’ lives by investing in the country’s future. The Hemas x Hatch Slingshot, a three year corporate innovation programme supporting 75 startups, is a testament to the Group’s commitment to fostering a new ecosystem in Sri Lanka, with businesses contributing to essential infrastructure, knowledge, and capital. By supporting startups, the Group plays a crucial role in shaping an innovative and thriving future for Sri Lanka while delivering solutions that empower families.

The collaboration with Lanka Sathosa for the introduction of an eco-bag initiative is a part of the Group's commitment to address plastic pollution in Sri Lanka. By encouraging and incentivising consumers to adopt eco-friendly practices, the Group aims to reshape consumption habits and foster a healthier environment.

The Hemas Consumer power brand Baby Cheramy joined forces with Sri Lanka College of Paediatricians to address the pressing issue of child injuries and launched a guide booklet focused on educating parents on prevention of home accidents. In response to the escalating violence against children in recent years, Hemas Outreach Foundation partnered with Sri Lanka College of Paediatricians and the National Secretariat for Early Childhood Development to launch the first-ever nationwide campaign aimed at empowering and educating preschool children to safeguard themselves against abuse. 

In addition, the Group continued to address the needs of the communities through its social initiatives, focusing on empowering families and promoting inclusivity, equality, and diversity. The Group  initiatives impacted over 62,000 families across the island, reinforcing the Group’s commitment to being a catalyst for positive change in the communities it serves.

Outlook

While the broader macro economy has shown a turnaround, the consumer disposable income continues to be hampered amid multiple adjustments to direct and indirectly taxes and inflationary pressure. Revisions to the prices of basic utilities such as electricity tariffs, coupled with recent changes to VAT laws, have exacerbated the situation for the general population. While these modifications have played a key role in the efforts of economic revival, they have simultaneously posed difficulties for the average citizen, creating a complex economic landscape with both promising and challenging aspects. Hemas cognisant of these challenges persisting in the upcoming quarters, remains confident in its capability to navigate the headwinds and sustain resilience.

In line with its purpose, the Group and its subsidiaries will continue to adapt a consumer centric approach in which meeting the ever evolving needs to the consumers would be an integral part. High emphasis will be made on both organic and inorganic growth within our core focus areas to exploit opportunities in Consumer Brands and Healthcare spaces. The Consumer Businesses will focus on championing local ingredients, cultivating purpose-driven brands and expanding in to international spaces. Simultaneously, the Healthcare Sector will prioritise ensuring availability, developing a Sri Lankan pharmaceutical brand and facilitating access to quality healthcare. Fostering a culture that empowers employees, Hemas will persist in nurturing talent across the Group while collaborating with our business partners to create long term value.

As my tenure as the Group Chief Executive Officer concludes on March 31, 2024, I want to express my heartfelt gratitude to the Hemas team for their focused efforts in navigating the pandemic and for standing with me during one of the toughest operating landscapes Sri Lanka has ever witnessed. Furthermore, I extend my deep appreciation to the Board for their unwavering belief in me and for providing continuous support and guidance. I have full confidence in the team's ability to drive the company to greater heights and extend my best wishes for the Group's continued success in the years to come.