Healthy consumer durables demand to spill over 2016: Fitch

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•  Recovery to continue amidst favourable macroeconomic environment
•  Retailers’ margins to settle in high-single-digit range in medium term
•  Says govt. decision on currency float has heightened currency risk on inventory
•  In-house hire purchase programmes expected to continue driving top-line growth
•  Cautions mix shift towards ICT will adversely impact profitability

By Shabiya Ali Ahlam
The local retailing sphere received early greetings from Fitch Ratings as the agency expects a healthy demand environment to continue for consumer durables despite possible headwinds from depreciation in the rupee against major currencies and higher import tariffs.
The agency affirmed recovery would continue amidst favourable macroeconomic environment.
“Fitch’s outlook for consumer durables retailers is stable. The agency expects the sector margins to improve in 2016, helped by strong operating leverage resulting from top-line growth, expansion in high-margin hire purchase sales and cost-efficiency measures,” it said in a statement released along with the ‘2016 Outlook: Sri Lanka Consumer Durable Retailers’ report.
The strong demand trend is supported by lower energy tariffs, low interest rates, public sector salary increases and reductions in the prices of essential food items introduced by the new government in early 2015.
However, it stated retailers’ margins would broadly settle in the high-single-digit range in the medium term, compared with the low-teens prior to 2013, owing to the shift in product mix towards IT and communication products.
“Improved purchasing power, which spurred revenue growth into the high-teens for top consumer durable retailers in 1H15, ought to be sustained by lower energy tariffs, low interest rates, public sector salary hikes and price cuts on essential food items introduced by the new government in early 2015,” the agency further justified.
Acknowledging currency and tariff headwinds as outlook sensitivities, Fitch highlighted that the government’s decision to float the currency in September 2015 has heightened currency risk on inventory as most products are imported. 
“Retailers had been able to pass on currency-related cost increases to consumers in the past, an inability to do so could hurt margins and cash flow. Certain retailers have local factories, but even their ability to mitigate currency risk is limited as most of their raw materials are imported,” the agency asserted.
The government aims to curb imports to address the widening trade deficit which could lead to higher import tariffs on high value items such as white goods in the November 2015 budget.
With regard to in-house hire purchase (HP) programmes offered by top retailers, it is expected the sector will continue to drive top-line growth but it is unlikely the interest rates would climb to the mid-to-high-teen levels seen prior to 2014 in the medium term, which would support HP sales.
Fitch also expressed confidence in the revenue mix shift towards IT and communication (ITC) products will continue in 2016, but cautioned that the change will have an adverse impact on profitability with ICT products having low margins. 
The earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR) margin upswing in 2015, that emerged from the lows in 2014, is to continue at a gradual pace in 2016. 
The continuity is supported by strong operating leverage resulting from top-line growth, expansion in high-margin HP sales and cost-efficiency measures. The retailers’ margins may broadly settle in the high-single-digit range in the medium term.