OREANDA-NEWS. January 27, 2016. Fitch Ratings has affirmed the 'BBB' foreign and and local currency long-term Issuer Default Ratings (IDRs) of Alicorp S.A.A. (Alicorp) as well as the 'BBB' rating assigned to its senior unsecured notes.

The Rating Outlook is revised to Stable from Negative.

KEY RATING DRIVERS

Stable Outlook

Higher cash flow generation as a result of operational improvements and moderate capex should allow Alicorp to continue reducing its leverage ratios. Net leverage has improved from 5.3x at year-end 2014 to 4.6x as of the September 2015 LTM. Fitch expects the company to continue focusing on debt reduction and organic growth following three years of product and regional expansion.

Net Leverage to Improve

Fitch expects Alicorp to reduce its net debt-to-EBITDA ratio to below 3x by the end of 2015 and 2.5x by year-end (YE) 2016. Excluding the PEN207 million extraordinary derivatives loss in the fourth quarter of 2014, net leverage was 3.3x as of the September 30 LTM. Alicorp did not pay dividends in 2015 and used the cash to pay down debt; total debt declined to PEN2.4 billion in September 2015 from PEN2.7 billion in 2014 and is expected to be around PEN2.1 billion by YE 2015.

Expected Margin Recovery

Alicorp's revenues and EBITDA for 2015 are expected to be about PEN7 billion and PEN714 million, respectively. These figures compare positively to PEN6 billion and PEN487 million reported in 2014, which includes hedging losses of PEN207 million. We expect the EBITDA margin to approach 11% in 2015 after a scenario of depressed raw material prices. The EBITDA margin should remain around 11%-12% during 2016-2018 as a result of efficiencies and synergies from integration, as well as the downsizing of Argentine operations.

Positive Free Cash Flow

Capex is expected to decline to PEN173 million in 2015 and PEN245 million in 2016, from PEN337 million (plus acquisitions of PEN291 million) in 2014. Alicorp's capex in 2015 was focused on launching and revamping new high-value-added products in all of its categories and streamlining operations. As a result of lower capex and working capital improvements (i.e. lower raw material prices and improved conditions with suppliers), we expect positive FCF of around PEN555 million in 2015. For the following years FCF should remain positive given lower capex and higher operational cash flow.

Commodity and Currency Risk Exposure

Commodities, such as wheat and soybean, are around 60% of Alicorp's variable costs. Alicorp typically hedges up to 50% of its inventory and projected cash flow net exposure to foreign currency on a rolling basis. As of Sept. 30, 2015, dollar-denominated (post-hedge) debt was about 6% of total debt, down from 26% in 2014. Alicorp reduced its currency risk by issuing PEN500 million in local bonds and local currency bank loans to buy back the majority of its USD450 million senior unsecured notes. The remaining balance of USD63 million of the notes is hedged for USD50 million (83%).

Strong Market Position

Alicorp's ratings reflect the company's strong market position in the Peruvian consumer products industry as a result of its leading brands, broad product portfolio and extensive distribution network. These factors combine to give the company strong competitive advantages and present formidable barriers to entry. Alicorp is well positioned to benefit from a growing middle class with increasing purchasing power and access to consumer credit. Fitch expects Peru's economic growth to rebound in 2016 and 2017 to 3.8% and 4.3%, respectively.

Diversified Product Mix

Alicorp is further diversifying its product base through its acquisitions and expansions in Peru, Brazil, Ecuador and Chile and by launching new products. Branded consumer products accounted for 56% as of LTM September 2015 consolidated revenues, while industrial flour, bulk oils and other industrial products (B2B) represented 22%, and animal nutrition the remaining 22%. As of LTM September 2015, branded consumer goods and B2B in Peru made up 59% of total revenues, with consumer goods in Brazil at 7% and animal nutrition in Ecuador and Chile at 10% and 8%, respectively.

Strong Equity Holder

While Alicorp's credit quality does not benefit from explicit guarantees, Fitch considers it positive that the company is part of Grupo Romero, one of the largest business groups in Peru. Grupo Romero has a regional presence in Colombia, Ecuador and Bolivia and across 20 other countries.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Alicorp include:
--Revenue growth by 5% in 2015 and around 6%-7% in 2016 onward;
--EBITDA margin at around 11%-12%;
--Capex of PEN173 million for 2015 and PEN245 million for 2016 per Alicorp's guidance and 3% of total revenues for 2017 onwards;
--Restricted dividends for 2015 and between 10%-20% of net income for 2016-2018;
--Minimum cash balance of PEN100 million;
--Net adjusted debt-to-EBITDA trending toward 2.5x and below;
--No large-scale M&A activity.

RATING SENSITIVITIES
A negative rating action could occur if Alicorp resumes debt-funded, large-scale M&A activity, and/or large dividend distributions or operational deterioration result in net leverage above 2.5x on a sustained basis.

A positive rating action is not likely in the short- to medium-term.

LIQUIDITY
The company operates with revolving credit lines for import financing and working capital requirements. Alicorp's liquidity is based on a cash position that typically ranges from USD30 million to USD40 million and available uncommitted credit lines for more than USD800 million. As of Sept. 30, 2015, short-term debt decreased to 7% of total debt from 32% in December 2014. There are no major debt amortizations for the next three years after the repurchase of the majority of its senior unsecured notes.