Fitch affirms Sri Lanka’s Sierra Cables at ‘A+(lka)’; Outlook stable

Fitch Ratings – Singapore: Fitch Ratings has affirmed Sierra Cables PLC’s National Long-Term Rating at ‘A+(lka)’ with a Stable Outlook.

The National Long-Term Rating reflects Sierra’s Standalone Credit Profile (SCP) of ‘a+(lka)’, which is similar to that of its parent, LOLC Holdings PLC, in our view. The rating reflects our expectation of earnings growth, which are balanced against our forecasts for narrowing margins and rising leverage, alongside Sierra’s small operating scale and exposure to cyclical end markets and commodity price risk.

The rating also takes into account Sierra’s leading domestic position and growing export volumes. Limited liquidity headroom leaves Sierra reliant on lenders’ willingness to roll over working-capital facilities, while rising related-party transactions have further weakened its credit profile.

Key Rating Drivers
Domestic, Export Sales Boost Revenue: We expect Sierra’s leading position in the projects segment and cost advantage versus peers to support order wins and drive revenue growth. Sierra’s revenue rose 73% in the financial year ended 31st March 2026 (FY26) to LKR16.0 billion, driven by domestic and export sales growth.

Domestic sales growth is aided by Sierra’s efforts to strengthen its sales platform via dealer network expansion, promotions and a reinforced sales force. Revenue from tenders, Sierra’s highest-margin channel, fell in 4Q26 and 1Q27 due to Ceylon Electricity Board’s restructuring, but management expects activity to recover, with Sierra regaining momentum in recent bids.

Export Push Pressures Margins: Fitch expects export margins to remain thin, as Sierra prioritizes volume over pricing amid rising costs and competition. Export sales of about LKR5.0 billion in FY26 drove revenue growth. Shipments were mostly to the US. The company plans to invest about LKR2.0 billion to expand capacity dedicated to exports. Rising copper and aluminum prices add pressure on margins, while high competition from domestic rivals and imported cables curbs Sierra’s ability to pass through cost increases, limiting margin recovery.

High Working-Capital Intensity: Fitch expects the working-capital cycle to improve modestly but remain stretched at around 240 days over the next 12 months, versus 250 days in FY26. Sierra’s shift from cash to credit sales has increased working-capital intensity, with over 95% of sales now made on credit. Receivable days rose to 112 in FY26 from 64 in FY25, and Fitch expects these to be around 130-140 days over FY27-FY28. Inventory days have risen above 150 with recent sales growth, but should fall to about 130 days while payable days remain stable.

Debt-Funded Growth Lifts Leverage: Fitch expects leverage to remain high at close to 4.0x over the medium term as we expect the company to rely on debt to support growth. Sierra has funded its working capital and expansion capex mainly through debt over the last 24 months. The company has also raised funds via asset-backed securities to finance related-party receivables, mainly loans to LOLC. Leverage more than doubled over the last two financial periods, reaching 3.9x in FY26.

Government Spending Supports Growth: Fitch expects government development initiatives to drive growth in construction and renewable energy generation, benefiting Sierra through higher cable demand and a stronger operating environment. Sri Lanka’s economic recovery remains on track, with the government effectively absorbing shocks from Cyclone Ditwah and the Middle East conflict.

Rated on Standalone Basis: We assess Sierra on a standalone basis given our view that it is similar to that of the parent. However, Sierra’s rating is capped at one-notch above its parent’s consolidated credit profile if we assess the parent to be weaker than Sierra. This is based on our assessment of ‘Open’ ring-fencing and ‘Porous’ access and control by LOLC under our Parent and Subsidiary Linkage Rating Criteria.

Parent’s Credit Profile: Fitch’s assessment of LOLC reflects the conglomerate’s leading position in financial services, alongside interests in plantations, manufacturing, trading, real estate and leisure across 27 countries in Asia and Africa. LOLC generates most of its revenue from Sri Lanka. Fitch expects LOLC’s credit metrics to be stable in the near to medium term. EBITDA net leverage was high at about 10.0x in FY26, with EBITDA interest cover of 3.1x. Fitch de-consolidates LOLC’s finance, insurance and captive finance businesses under its criteria.

Peer Analysis
Sierra’s standalone rating is comparable with that of peers such as Singer (Sri Lanka) PLC (AA-(lka)/Stable), and Vidullanka PLC (A+(lka)/Stable).

Singer, one of the largest consumer durable retailers in Sri Lanka, has a wide branch and dealer network islandwide. Fitch rates Sierra one notch below Singer, reflecting Singer’s larger scale and stronger liquidity, which outweigh Sierra’s better leverage and interest coverage ratio (ICR). Singer’s leverage stands at 6.0x with ICR at 2.8x.

Vidullanka, a Sri Lankan renewable energy producer, is rated at the same level as Sierra, with a similar operational scale and EBITDA of about LKR2.3 billion. Vidullanka’s credit profile is stronger, with leverage around 2.1x and ICR above 6.0x. Sierra’s weaker credit profile is offset by lower counterparty risk, as its revenue is better diversified between private and government customers across products of varying specifications.

Fitch’s Key Rating-Case Assumptions
– Revenue to increase to around LKR19.6 billion in FY27 from LKR16.0 billion in FY26, driven by improved earnings from exports and the dealer network.

– EBITDA margin to decline to 19.1% in FY27 from 20.4% in FY26, due to higher raw material prices and thinner margins on export sales.

– Expansionary capex of LKR0.5 billion in FY27 to set up a new factory dedicated to exports, in addition to annual maintenance capex of LKR0.5 billion.

RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

– EBITDA net leverage over 4.0x for a sustained period.

– EBITDA interest coverage falling below 1.5x on a sustained basis.

– Weakening of Fitch’s assessment of LOLC’s credit profile together with revision of our assessment of LOLC’s ‘Access and Control’ over Sierra to ‘Open’, reflecting diminished minority shareholder influence and therefore a stronger effective control by LOLC over Sierra.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

– We do not expect any positive rating action in the near to medium term given the current largely debt funded expansion plans.

Liquidity and Debt Structure
Sierra reported cash and cash equivalents of LKR440.0 million at FYE26, compared with short-term debt maturities totaling LKR6.6 billion. The bulk of these short-term borrowings are used to fund working-capital requirements. Fitch expects Sierra to successfully roll over its short-term facilities and maintain liquidity at a manageable level.

Issuer Profile
Sierra is the third-largest cable manufacturer in Sri Lanka, with a broad range of products for several end-market uses.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.

External Appeal Committee Outcomes
In accordance with Fitch’s policies the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

Report of Issuer’s Appeal
The issuer appealed the decision of the original rating committee.

In accordance with Fitch Ratings’ policies, the issuer’s request was reviewed by an appeal review panel, which determined that an appeal committee was warranted due to the availability of new information.

Relative to the original rating committee, the appeal committee updated Fitch’s assessment of the following Key Rating Drivers: Parent’s credit profile

The updates were of sufficient magnitude to affect the rating outcome.

The outcome of the appeal committee, as detailed within this rating action commentary, was different to the original rating committee outcome.