Consumer durables industry likely to experience headwinds as demand slows

Consumer durables industry, which showed some resilience across the country’s economic cycles, is set to experience some headwinds, an international credit rating agency recently said.

According to Fitch Ratings Lanka, the local unit of Fitch Ratings Inc., during the next 6 to 12 months the rising interest rates, higher taxes and depreciating rupee could dent the demand for these goods.

Due to these challenging macro-economic conditions, the prices of consumer durables, particularly those imported to the country are set to rise. 
The higher taxes and higher interest rates likely to weaken the disposable incomes of the people, who could otherwise demand these items much ease, Fitch pointed out.   
Assigning an instrument rating of ‘A-(lka)’ for the proposed Singer Sri Lanka PLC’s (Singer) Rs.4.0 billion senior debenture issue, the rating agency however expressed its confidence in the long term potential of the industry.   
“Fitch believes the long-term fundamentals driving demand for the consumer-durables sector is still strong.” 
Singer Sri Lanka is the market leader in the consumer durables industry and imports majority of its products. Abans PLC and Softlogic Holdings PLC are the other two larger players in the Sri Lankan consumer durable market with extensive retail presence. 
“Fitch expects operating challenges to be mitigated by Singer’s strong market leadership, which is supported by a wide retail presence, its portfolio of well-known brands and extensive local manufacturing capabilities compared with peers,” the rating agency noted.
Sri Lanka’s economic growth was mainly driven by consumption last year, a shift from the construction sector-led growth hitherto prevailed, as the coalition regime gave tax cuts on essential items, reduced interest rates and further offered a massive salary increase to public sector employees.  However, this could not be sustained for too long as the economy overheated and the consumption frenzy created a boom in imports. Before long the authorities had to take corrective actions as the economy plunged into a balance of payment crisis. Fitch however said Singer might be able to withstand these headwinds as its products could be made affordable even under a weak operating environment as Singer had competitively priced its in-house brands compared with its imported products.

The rating agency also said Singer’s “well-managed hire-purchase business make products affordable”. 

Singer expects to use the funds via the three year debenture to refinance existing debt. 
Highlighting another challenge for the company Fitch said margins had, “deteriorated significantly in the last few years, “due to increased focus on low margin IT and digital media products.”  However, the short replacement cycles and the low prices of these products help the company to sustain growth through cycles. 

Since these conditions will put pressure on margins, the company’s earnings before interest, tax, depreciation and amortisation (EBITDA) margins during 2016 - 2019 will remain below the double digit levels seen in the past, Fitch said.  Singer group’s leverage, excluding Singer Finance’s as measured by ‘adjusted net debt/EBITDAR’ is expected to spike in 2016 due to the two acquisitions of affiliates during the year and the sluggish operating environment. 

However the leverage is expected to improve from 2017 onwards with a turnaround in operating environment. 

Due to strong capitalisation level which is above the regulatory minimum, better than peer level asset quality and strong funding profile at Singer Finance Lanka PLC, Fitch does not expect Singer to infuse more capital to the subsidiary during 2016-19.