Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) of Coca-Cola Icecek (CCI)—a company focused on the core markets of Turkey, Uzbekistan, Kazakhstan and Pakistan—to 'BBB' from 'BBB-', with a stable outlook.

“The upgrade reflects CCI's continued strong operating profitability with successful execution of its expansion plan, leading to its revenues and EBITDA almost doubling in 2022 compared with 2021,” said the ratings agency, adding: “This was supported by CCI's leading positions in its core markets, the resilient nature of the soft drinks business and CCI's strong capital structure. CCI's ratings continue to benefit from a single-notch uplift for strategic support from its parent, The Coca-Cola Company (TCCC; A/Stable) in line with Fitch's Parent and Subsidiary Linkage Criteria.”

Fitch added that the rating remained constrained by the weak operating environment in a number of CCI's markets of operations. “Inherent foreign-exchange (FX) risks related to hard-currency-denominated debt and some operating costs are key rating constraints,” it said.

CCI, noted Fitch, has high but manageable FX risks. “As of end-2022, about 92% of CCI's debt and 25% of its production costs were denominated in hard currencies, in contrast with revenue, which is mainly in emerging markets' local currencies. This results in high FX risks, which are managed by CCI via improving geographic diversification towards less volatile countries (2022: 64% of total revenue) and its policy of keeping a major part of its cash in hard currencies,” said Fitch.

Assessing strong revenue growth, Fitch added: “We expect CCI to maintain a positive revenue trend, supported by organic growth across its end markets and a positive FX contribution. We expect revenues to increase by around 68% in 2023 and 32% in 2024 as a result of high single digit volume growth and higher average sales prices. We expect strong top-line growth from international emerging markets with a lower soft drinks market penetration, with more conservative growth projected for Turkiye.”

CCI, Fitch observed, has strong cash flow generation. It said: “Resilient operating profitability and capex forecast at 6%-8% of revenue in 2022-2025 should allow CCI to generate free cash flow (FCF) margins in the mid to high single digits. We continue to assume that CCI will adhere to its maximum dividend pay-out of 50% of net distributable income and to favour cash accumulation and deleveraging, with the aim of building up financial flexibility to maintain a low-risk balance sheet. This flexibility may also be deployed for potential M&A to grow the business in new geographies.”

Fitch also concluded that CCI’s conservative capital structure was intact, saying: “CCI's conservative financial policy targets EBITDA net leverage at below 2x (2022: 0.8x), albeit with tolerance for a temporary breach for value-enhancing M&A opportunities.

“Even with this conservative target, CCI acquired Coca-Cola Bottlers Uzbekistan and Anadolu Etap Icecek with ample leverage headroom and without a breach of the rating sensitivities. We project leverage ratios will remain well below target over the coming years, supported by sufficient FCF generation, resilient EBITDA and cash reserves to cover upcoming debt maturities.”