Consumer durables market expected to pick up with adjustment to higher costs

Sri Lanka’s consumer durables market, which is currently undergoing a cycle of tepid consumer demand, is expected to pick up in the medium term as consumers adjust to higher costs, according to Fitch Ratings. 

The demand for consumer durables has remained sluggish since 2017, which challenged the good fortunes of the consumer durables retailers as the economy shifted from a low rate, low tax regime to a high rate, high tax regime from 2016. 

Making matters worse, the prolonged drought and intermittent floods since 2016 wrecked havoc in the main cultivating regions, hitting the incomes of the agricultural community. 

The agricultural community accounts for the bulk of the sales of consumer durables retailers. 

“We expect demand for consumer durables to pick up in the medium term as consumers adjust to higher costs, supported by an earning recovery in the agricultural sector, continued low personal taxes and stable interest rates,” Fitch Ratings said last week. 

However, it remains uncertain as to what extent the retailers would be able to pass on the rising cost to consumers if the rupee continues to crash as it has in the last couple of weeks. 

So far the rupee’s value has dwindled by almost 10 percent this year against the US dollar. Sri Lanka’s higher foreign debt and import dependency make the rupee depreciating a nightmare, although some of the world currencies have crashed much higher against the US dollar. At the same time, a weaker rupee and higher interest rates and taxes make a toxic combination, eroding the disposable incomes of the people.  Consumer durables are more susceptible to disposable incomes and sentiments compared to other industries. 

Fitch has assigned ‘A-’ rating on the planned Rs.1.5 billion senior debt issue by Singer Sri Lanka PLC, Sri Lanka’s largest consumer durables retailer. 

The performance of Singer Sri Lanka remained subdued in recent quarters amid the challenging operating environment, said its Chief Executive Officer Asoka Pieris.

“An improved harvest was noted in most areas with an improvement in the rural economy, especially in April and May. Consumer income levels and sentiments in urban areas were lower due to higher fuel costs, personal taxes and interest rates continuing to be at high levels,” Pieris said in an earnings release in August. 

Singer Sri Lanka’s consumer electronics and home appliance revenue growth slowed to 1.0 percent in 2017 on weak demand, after two years of double-digit growth, Fitch Ratings’ data showed.  However, the rating agency believes that Singer Sri Lanka is able to better respond to the weak demand compared with peers due to its defensive product portfolio and strong brand presence. 

After many quarters of poor profits, for the April-June quarter Singer Sri Lanka reported earnings of Rs.1.1 a share, compared to Rs.1.03 a share in the corresponding quarter, last year, on revenues of Rs.15.1 billion, up 16 percent. 

The performance was mainly supported by the rebound in the rural economy due to improved harvest. 

Fitch expects Singer Sri Lanka’s EBITDAR (earnings before interest tax depreciation amortisation and rent) to improve by 50 to 60 basis points from the current level of 9.1 percent to stabilise around 9.5 percent from 2019 on better sales, volume and cost passed through to customers. 

“Singer’s EBITDAR margin contracted by almost 150bp in 2017 due to lower sales as well as higher indirect taxes and sales costs. The margin contraction was seen across most product segments, as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain topline growth,” Fitch noted. Meanwhile, Abans PLC and Softlogic Holdings PLC, which are close competitors to Singer Sri Lanka, have also had some challenging few quarters in the recent past. 

Besides the general sluggish market condition for consumer durables, “Abans’ business profile has also weakened relative to Singer due to its investment in a large real-estate project - Colombo City Centre,” Fitch Ratings said.