Fitch Ratings has reaffirmed the National Long-Term Rating of Ceat Kelani Holdings Pvt Limited (CKH) at ‘AA+(lka)’, accompanied by a Stable Outlook. This rating underscores CKH’s prominent role in Sri Lanka’s tyre manufacturing industry and its strong financial standing. However, the company’s strengths are tempered by its vulnerability to price fluctuations, cyclical demand, and fierce competition in the market, which contribute to margin instability.
The Stable Outlook indicates Fitch’s belief that CKH will sustain its market position despite rising input costs and growing competition from imported tyres. It also suggests that the company will maintain adequate credit metrics, even during periods of reduced earnings and heightened investment needs.
Key Rating Drivers
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CKH is subject to macroeconomic and sector-specific risks that can affect demand and profit margins due to its reliance on cyclical and price-sensitive markets, as well as its concentration in Sri Lanka. The ongoing geopolitical tensions, particularly the Iran conflict, are anticipated to exert pressure on tyre demand in the short term, despite a significant proportion of demand coming from replacements.
The company’s financial resilience is noteworthy, with Fitch asserting that CKH’s low leverage and strong liquidity will help buffer against the challenges posed by a tough operational landscape. It is projected that CKH’s EBITDA net leverage will remain comfortably below the critical threshold of 1.0x over the next two years, even as Fitch forecasts lower earnings alongside substantial capital expenditures and dividend payouts.
CKH’s EBITDA net leverage is expected to peak at 0.6x for the fiscal year ending March 2028 (FY28), providing a safeguard against sector-related risks before gradually declining.
In the near term, CKH’s gross profit margin is projected to drop below 20% in FY27, down from 24% in FY26, primarily due to escalating costs of both imported and local raw materials, as well as rising energy expenses. This decline reflects CKH’s limited capacity to pass on these cost increases to consumers given the strong competition from imports. Fitch anticipates that the EBITDA margin will remain under 10% but expects a recovery in both volumes and margins beginning in FY28, driven by an eventual stabilization in demand and input costs.
Fitch believes CKH will retain its leadership in the pneumatic tyre sector within Sri Lanka. The company’s established brand reputation and extensive distribution network are expected to support its market share, despite the challenges posed by cyclical markets and competitive pressures. CKH employs flexible pricing strategies to navigate market fluctuations and maintain its position in key segments. Upcoming upgrades to production facilities are likely to improve product quality, especially in radial tyres, further enhancing CKH’s competitive edge.
Peer Comparison
CKH’s rating is positioned one notch below that of Hemas Holdings PLC (AAA(lka)/Stable), which reflects CKH’s smaller operational scale and limited revenue diversification, making it more susceptible to cyclical changes. Hemas benefits from significant exposure to stable sectors such as pharmaceuticals and fast-moving consumer goods, which contribute over 90% of its EBITDA and ensure reliable cash flow. Additionally, Hemas maintains strong positions in pharmaceuticals, personal care, and stationery.
Sunshine Holdings PLC (AA+(lka)/Stable), a mid-sized conglomerate in healthcare and consumer goods, faces cash flow volatility and regulatory risks, while CKH contends with cyclical demand and import competition. Both entities exhibit similar credit metrics, resulting in identical ratings.
CKH’s business risk profile is comparable to that of DSI Samson Group (Private) Limited (AA(lka)/Stable), both companies facing cyclical demand and competitive pressures from imported goods, though CKH enjoys a stronger financial profile, warranting a higher rating.
CKH’s credit profile is rated above that of large domestic banks, non-bank financial institutions, and insurance companies, which have greater exposure to sovereign risks due to their holdings of sovereign securities for regulatory compliance. These financial institutions also have a broader risk exposure across various economic sectors.
Fitch’s Key Rating-Case Assumptions
- Revenue is expected to decline by 0.3% in FY27 due to reduced volumes and a slowdown in land transportation, partially offset by higher average selling prices. A recovery is anticipated from FY28, with a compound annual growth rate (CAGR) of 4.8% projected by FY30.
- EBITDA margins are forecasted to decrease to 9.5% in FY27, attributed to rising costs of goods sold.
- The working capital cycle is expected to stabilize at around 100 days over the next two years.
- Annual maintenance capital expenditure is estimated at LKR700 million for the next four years, with growth capital expenditures of LKR2.5 billion in FY27 and LKR1.5 billion in FY28.
- Dividend payouts are projected at LKR1.5 billion in FY27 and LKR1.0 billion in FY28.
Rating Sensitivities
Factors that may lead to a negative rating action or downgrade include:
- An increase in EBITDA net leverage exceeding 1.0x for an extended duration.
Factors that could contribute to a positive rating action or upgrade include:
- No upgrades are likely in the medium term due to CKH’s exposure to volatile cash flows and its smaller scale compared to higher-rated peers.
Liquidity and Debt Structure
CKH’s liquidity is bolstered by LKR3.3 billion in cash and cash equivalents as of the end of March 2026, adequately covering LKR929 million in debt maturing within the next year. Over 83% of FY27 maturities consist of short-term loans and overdraft facilities utilized for working capital, which the company is expected to refinance.
Free cash flow is anticipated to turn negative over the next 24 months due to increased capital expenditures and shareholder distributions. CKH has already secured bank loans to finance these expenditures, with LKR16.0 billion in uncommitted short-term facilities as of July 2026, of which LKR14.0 billion remains untapped, further enhancing its liquidity position.
Issuer Profile
CKH is a prominent pneumatic tyre manufacturer in Sri Lanka with a wide-ranging distribution network. It operates as a joint venture between India’s Ceat Limited and Sri Lanka’s Kelani Tyres PLC.
For further details regarding the key drivers of the rating, refer to the principal sources of information cited in the Applicable Criteria.
