Import controls to hurt consumer durable retailers struggling with weak sales

■ „Fitch says retailers’ operating cash flow is likely to weaken following new government regulations ■ „Cautions of pressure on credit profiles from lower sales volumes and higher working capital needs ■ „Expects prices of most consumer durable electro

Sri Lanka’s consumer durable retailers will feel the pinch from the recent import controls imposed on consumer electronic goods such as televisions, refrigerators, washing machines and mobile phones, according to Fitch Ratings.

The Finance and Mass Media Ministry on September 29 imposed a 100 percent cash margin on most types of consumer durables in an attempt to strengthen the free falling rupee against the US dollar.

Previously, the retailers were able to open letters of credit with banks without any cash margins, Fitch Ratings said.

The recent emerging market rout has wiped out 10 percent of the value of the Sri Lankan rupee against the US dollar so far during the year, as a result of the gradual increase in US treasury yields on the back of the strengthening US economy.

“Sri Lanka-based consumer durable retailers’ operating cash flow is likely to weaken following the new government regulations that impose a 100 percent cash margin on the import of most types of consumer durables,” Fitch Ratings said.

The rating agency cautioned of the pressure on the credit profiles of consumer durable retailers such as Singer Sri Lanka and Abans from lower sales volumes and higher working capital needs, “particularly if the rules remain in place for an extended period”.

“We expect the prices of most consumer durables to increase amid local currency depreciation and higher funding costs from the new margin requirement, depressing sales volume.”

The measures to curb the nonessential consumption imports came at a time when the consumer durable retailers were recovering from a weak demand and pressing margins caused by two years of extreme weather and tight monetary policy, which discouraged consumption.

“The consumer durables industry, where Singer is present, is more susceptible to market conditions than other industries.

When the customer’s disposable income and sentiments decrease, the demand for consumer durables is well below that of the general market and vice versa. We have seen this oscillation over many years,” Singer Sri Lanka Group Chief Executive Officer Asoka Pieris said in the company’s June earnings release.

Singer Sri Lanka is the market leader in Sri Lanka’s consumer durables sector.

Despite the rising prices, Fitch is of the belief that the retailers could absorb part of the rising cost to remain competitive and defend volume in the weak demand environment.

But that could eat into their already weakening operating margins, Fitch noted.

“We estimate that Singer and Abans import around 80-85 percent of the products they sell and believe the regulated items will account for almost 50-60 percent of such products.

Singer’s comparatively larger localassembly operation for refrigerators and washing machines should help mitigate the impact, as the new margins only apply to finished goods.”

Fitch maintains ‘A –’ rating on Singer Sri Lanka and ‘BBB +’ on Abans, with Stable outlooks.

However, Fitch believes the need for additional working capital to fulfil the margin requirement could reverse recent improvements seen in consumer durable retailers’ leverage.

“Singer’s net leverage, as defined by lease adjusted net debt/last 12 months trailing EBITDAR, improved to 5.1x as of June 30, 2018, from 5.5x as at March 31, 2018, while Abans’ net leverage improved to 6.8x, from 7.2x, over the same period.

Abans’ rating is likely to be more affected than Singer’s, since Abans’ leverage is already high for its rating,” Fitch added.