Sri Lanka’s consumer durable retailers will have better times with a more favourable business environment being created as a result of lower borrowing rates, reduced electricity tariffs and an upcoming cut in the ValueAdded Tax (VAT), according to Fitch Ratings Lanka Limited.
According to t he rating agency, with improvements in the consumer purchasing power, people will be increasingly looking at switching to new, more efficient consumer electronics and household white goods.“Fitch believes that a recovery is likely for t he consumer durables sector in Sri Lanka in 2015,” the rating agency noted in a recent research paper on the sector.
Demand for consumer electronics and white goods tend to be volatile across business cycles due to their non-essential nature and larger price tags.
Nielsen Sri Lanka Managing Director Shaheen Cader was quoted as saying recently that restricted consumer spending power due to high cost of goods and services and the increasing concerns of political activities, particularly the forthcoming election, have a bearing on business confidence.
LMD- Nielsen business confidence index in October fell by 4 basis points to an eight months low of 128. During last three months, the index dipped by a notable 11 points consecutively. Fitch further expects retailers of consumer durables to achieve modest revenue growth supported by increasing consumer purchasing power, following a 25 percent reduction in domestic electricity tariffs from September 2014 and a cut in the VAT rate to 11 percent from 12 percent that will be implemented in 2015.
However, with the massive spending drive leading up to the January 8 polls, it is anybody’s guess whether the government that will be elected would become as generous as already proposed in the budget 2015, having an uphill task of containing the budget deficit to 4.6 percent of GDP.“The consumer durables industry faced a challenging environment in 2013 due to pressure on disposable income and introduction of the VAT, which retailers found difficult to pass on to consumers, leading to a negative impact on margins,” the rating agency stated.
As a result, Fitch-rated retail corporates’ revenue grew only by 2 percent in the financial year ended March 31, 2014 (FY14) against 11 percent in FY13.The sluggish demand also resulted in build-up of inventory, leading to higher working capital requirements. Higher working capital requirements coupled with lower profitability saw leverage of Fitch-rated retail corporates deteriorate in 2014. Retailers usually have high leverage as they borrow to finance their in-house hire purchase operations. Fitch-rated retail corporates’ average net adjusted debt to EBITDAR increased to 6.4x at end-March 2014 from 4.3x at end-March 2013.
Fitch expects the higher sales and better working capital structure to have a positive impact on retailers’ leverage in 2015. The consumer durables industry is characterised by a few key players, like Singer (Sri Lanka) PLC (A-(lka)/ Stable), Abans Limited (BBB+(lka)/Negative) and Softlogic Holdings PLC, dominating the market. These companies have strong brand portfolios and extensive distribution networks, which are hard to replicate given the investment required and brand equity of established players. This protects existing players from competition to a certain extent.