Softlogic group feels tougher market conditions as 2Q profit narrows

Weakening consumer demand and the chal lenging economic conditions such as rising interest rates and weaker rupee appear to have posed diff i c u l t i e s to the diver s i f ied conglomerate, Softlogic Holdings PLC as the group net profit narrowed by 19 percent to Rs.93.8 million or 12 cents a share from a year ago, the interim results showed. The giant retailer, which has interests in IT, leisure, healthcare, financial services and auto saw the group top line rising by 18 percent to Rs.15.1 billion from a year ago.

Both gross profit and operating margins squeezed as the cost of sales rose by a faster 22 percent year-on-year (yoy) to Rs.10.4 billion. The cost of sales may have risen due to higher costs incurred on imports as the rupee weakened against the US dollar during the period. The group finance cost also rose by a sharp 57 percent to Rs.1.2 billion due to higher interest rates prevailed during the period. IT and retail segments, which together account for two thirds of revenues could be impacted by the higher Value Added tax (VAT) and higher interest rates going forward as such could dampen the disposable income and thus the consumer demand. Despite the top lines of both segments registering increases of 25 percent and 11 percent during the quarter under review to Rs.4.68 billion and Rs.4.86 billion, respectively, the group has seen some challenges in the electronic and consumer durables sectors during the period. Fitch Rating Lanka this week painted a gloomy picture on the consumer durables market in 2017. The margins of the retailers could come under pressure as the contribution from low margin IT and mobile segments could see a greater contribution to the revenue than from the high valued white-goods. Softlogic’s retail segment increased the net profit by a modest 8.3 percent yoy to Rs.164. 1 million but the ICT unit saw its net profit contracting by 41 percent yoy to Rs.72.6 million. Meanwhile, the healthcare sector which contributed 18 percent to the group revenue saw its top line for the quarter rising by 12 percent to Rs.2.68 billion. However, the net profit fell by 8.0 percent yoy to Rs.289.3 million. In future this sector also could get affected due to the increase in VAT as the healthcare was made liable and thus could become expensive to the public. The leisure segment of the group increased its revenues by 13 percent yoy to Rs.238.6 million and the losses were narrowed to Rs.37.1 million from Rs.46.8 million a year ago. Softlogic’s Ceysand Resorts had an average occupancy level of more than 80 percent, the company said. The company will unveil its 5-star city hotel, Movenpick City Hotel early next year. Meanwhile, the financial services segment of the group which includes its insurance business, a finance company and a stock broking firm, earned a revenue of Rs.2.2 billion, up 19 percent from a year ago. The net profit was increased by 110 percent yoy to Rs. 314.8 million. Softlogic divested the general insurance business of its subsidiary Asian Alliance Insurance PLC to Fairfax group for a consideration of Rs.1.27 billion and the deal was completed on October 3. The company was then re-branded as ‘Softlogic Life’ to fully focus on profitable life business. While the group automotive segment saw its revenues rising by 65 percent yoy to Rs.398. 8 million, the segment’s net losses expanded to Rs.71.8 million from Rs.27. 9 million yoy. The segment’s performance was mainly driven by the volumes in the Ford double cab segment while spare parts and workshop also contributed. However, the future outlook for the automobile sales remains rather dim as the finance conditions have been toughened. For the six months ended September 30, 2016 (1H17) the Softlogic group made a net profit of Rs.195.6 million or 25 cents a share, down by just 2 percent on year. The group made a revenue of Rs.29.4 billion, up 15 percent from a year ago. By the end of 1H17 Softlogic group Chairman Ashok Pathirage held 41.92 percent stake in the company while Employees’ Provident Fund held 0.93 percent stake being 8th largest shareholder.