Hemas Holdings Boosts Profitability through Efficiency in a Challenging Market Performance review for the Six Months ended 30th September 2024

Hemas Holdings PLC reported a cumulative revenue of Rs. 54.4 billion, with operating profits of Rs. 5.0 billion and earnings of Rs. 2.5 billion. The decrease in revenue compared to same period last year was a result of cautious consumer spending accompanied by several strategic downward price adjustments, particularly in the Consumer Brands segment. However, the Group’s ongoing commitment to efficiency improvements alongside favourable foreign exchange movements, contributed to enhanced profitability margins. Additionally, the initiatives aimed at optimising working capital combined with the advantages of a declining interest rate environment, led to a further reduction in finance costs thereby boosting earnings.

Operating Environment

The country's GDP recorded a growth of 4.7 per cent while the local currency demonstrated resilience, appreciating against the United States Dollar to 299.36. Furthermore, the Average Weighted Prime Lending Rate (AWPLR) closed at 9.3 per cent. The Colombo Consumer Price Index experienced a deflation of 0.5 per cent, primarily due to easing of food inflation. However, despite these positive indicators, people faced considerable pressure on purchasing power due to high direct and indirect taxes, resulting in ongoing affordability challenges.

Consumer Brands

During the quarter, the strengthening of the domestic currency and declining global commodity prices have led to aggressive pricing and promotion strategies among industry players, intensifying competition in key categories. A strong focus on value-for-money (VFM) options continues, reflecting the current constraints on purchasing power.

The stationery market experienced heightened competition as new brands continue to emerge. This influx has prompted some players to reduce prices, often at the cost of compromising quality. As consumers navigate this landscape, their focus remains firmly on affordability, leading to a gradual shift in their purchasing habits. More specifically, there is a notable trend toward VFM offerings, as consumers seek products that deliver both quality and cost-effectiveness.

The Consumer Brands Sector reported a cumulative revenue of Rs. 19.9 billion while the operating profit and earnings Rs. 2.5 billion and Rs. 1.8 billion for the year respectively.

The Sector reported a revenue of Rs. 11.0 billion for the quarter, while the operating profits and earnings increased to Rs. 1.7 billion and Rs, 1.2 billion respectively due to the improved profitability margins compared to the last year. Despite the decline in revenue compared to the same period last year, a combination of margin improvement and cost rationalization initiatives led to overall growth for the businesses.

Home and Personal Care

Although overall industry demand declined, company witnessed improvements in overall market share, consumer reach and product availability this quarter. Increased emphasis on personal and beauty care, along with efficiency enhancements and supply chain optimisations resulted in increased profitability margins.

While competitive pricing and promotions were introduced in key categories, new product launches gained positive momentum, enhancing brand visibility and consumer engagement. This quarter marked the successful re-launch of Vivya, strengthening the brand's presence in the market.

Learning

Despite severe competition in the market, the company has successfully maintained its leading position by adapting to evolving consumer preferences for high quality products at competitive pricing. This quarter, the segment expanded its ‘Homerun’ stationery line to include books, providing an accessible and cost-effective range for consumers.

To mitigate the impact of seasonal fluctuations on turnover, the Learning Segment also launched its first-ever range of educational toys, marking a strategic entry into the educational toys market. This move not only diversifies the product portfolio but also reinforces the brand's commitment to enhancing learning experiences for children.

Consumer Brands International

Amidst ongoing challenges stemming from the increasing strain on disposable incomes and a demanding economic environment in Bangladesh, ‘Kumarika’ increased its market share in the Value-Added Hair Oil (VAHO) market.

Healthcare

During the quarter under review, the pharmaceutical industry experienced volume growth, for the first time since the economic crisis in the year 2022. This increase was largely attributed to local manufacturers and low-cost products, particularly in categories such as diabetic drugs and vitamins. This trend highlights a shift in consumer preference toward more affordable pharmaceutical options.

The sector achieved a cumulative revenue of Rs. 33.6 billion, with operating profits totaling Rs 2.8 billion and earnings of Rs. 1.8 billion. The increase in operating margins was driven mainly by the portfolio mix and initiatives focused on optimsing overhead cost.  Additionally, strategic management of working capital, along with declining interest rates, reduced finance costs and enhanced sector earnings.

The Sector posted a revenue of Rs. 17.4 billion for the quarter, while the operating profits increased to Rs. 1.6 billion. In addition, the benefit of lower finance costs contributed to achieving earnings of Rs. 1.0 billion for the quarter.

Pharmaceuticals

The Distribution business continues to hold its market-leading position this quarter. Both Distribution and Manufacturing divisions focused on optimising overheads, driving margin improvements, and leveraging synergies to enhance overall performance.

Aligned with its mission to make premium healthcare accessible, the Pharmaceutical Manufacturing business of the Group concentrated on expanding the Morison branded portfolio. Recent product launches include BisoMor blister packs for hypertension and SalMor, a Salbutamol Oral Solution for respiratory conditions. Morison's recognition as the “Sector Winner for Pharmaceuticals” in LMD’s Most Respected Entities in Sri Lanka 2024 highlights its strong standing in the industry.

Hospitals

A decline in hospital admissions was reported, primarily due to a reduction in communicable diseases compared to the same period last year. In contrast, there has been an uptick in outpatient volumes, fueled by increased medical screenings. Moreover, the implementation of targeted efficiency initiatives has led to a decline in administrative costs, enhancing the overall operational effectiveness of the hospitals.

Mobility

The maritime sector experienced a positive boost in both volume and freight rates. Market share in the Gulf sector improved despite facing schedule challenges, while volumes to the Far East increased following the resumption of the CEM/E (Europe-China Shuttle) service.

Amidst aggressive competition in the aviation market, cargo volume saw a significant year-on-year increase, primarily driven by the growth of sea-air general cargo movements related to the Red Sea situation and heightened demand for shipments to Europe and the USA. Additionally, cargo yields improved, reflecting increased general cargo volumes to Europe and the USA at higher rates.

The Mobility Sector posted a cumulative revenue of Rs 941.4 million while the earnings were reported at Rs. 378.1 million. Accordingly, the quarter witnessed Rs 476.7 million in revenue and Rs.108.4 million in earnings.

Continuing focus on ESG

During the quarter, the Group continued its work on the Environmental Agenda, focusing responsible consumption of plastic, reducing water usage and increasing the use of renewable energy across its operations. During the year, the Group reduced its water intensity at 1.5 m³ per rupee million in revenue, a 11.8 per cent reduction compared to the previous quarter.  Additionally, the Group made notable progress toward its target of sourcing 25 per cent of its energy from renewable sources, with 10.1 per cent of energy now coming from renewable sources, marking a 119 per cent increase compared to Q2 of FY24.

Ensuring the responsible consumption of plastic remained a priority, with the Group targeting collection of 100 per cent of its plastic waste by 2030. To date, over 830,000 kg of plastic has been collected through various island-wide initiatives. Furthermore, Hemas Consumer Brands accelerated its plastic waste collection efforts by investing in a new baling facility in Galle, aimed at collecting 360,000 kg of plastic over the next three years.

The Group also maintained its focus on empowering families through its purpose initiatives, positively impacting over 107,000 families during the quarter. One significant initiative was the launch of Fio, Sri Lanka's first trilingual period-tracking app, providing credible menstrual health education, cycle tracking, and personalized health advice, supporting Fems' mission to empower women and break the taboo surrounding menstruation.

As part of its commitment to ensuring no child is left behind, the Hemas Outreach Foundation added two new preschools in Galgamuwa and Badulla to the national network, benefitting over 100 children.

Outlook

Looking to the future, the economic landscape in Sri Lanka and globally presents both challenges and opportunities. While signs of recovery are evident locally, consumer disposable income remains pressured. However, policy stability following the recent elections accompanied by anticipated structural reforms may create a more favorable environment for rebounding the economy.

In this context, there is cautious optimism regarding consumption growth. As economic conditions gradually improve, consumer sentiment is expected to strengthen, potentially leading to increased spending.

Moving forward, the Group will continue to prioritise consumer and patient centric approaches that address evolving needs to drive sustainable growth in the upcoming quarters.

Ravi Jayasekera

Acting Chief Executive Officer

November 06, 2024

Colombo