Fitch affirms DSI Holdings at ‘A’

Fitch Ratings Lanka has affirmed Sri-Lankabased DSI Holdings Limited’s (DSIHL) National Long-Term rating at ‘A-(lka)’ with Stable Outlook. Its senior unsecured notes have also been affirmed at ‘A-(lka)’.

The rating reflects DSIHL’s leading market position in Sri Lanka’s footwear industry, and the resilience of its business to economic cycles, which has largely allowed the company to sustain its sales and profit margins. DSIHL also benefits from a lack of strong competition in the footwear market, helped by high import duties since 2005.

The rating is constrained by a lack of clarity on the credit profile of its 100% parent D Samson Group (DSG), of which DSIHL accounted for 66% of revenue and 50% of profits at end-March 2010, due to delays in producing consolidated financial statements of the group.

DSIHL’s revenues and EBITDAR grew 23% and 28% respectively in the financial year ended March 2011, largely on account of a sharp increase in average prices across its footwear business.

Footwear volumes grew 5% despite the sharp price increase, reflecting inelastic demand for DSIHL’s products. EBITDAR growth was also helped by cost curtailment measures implemented during the period.

Fitch expects DSIHL’s financial leverage (defined as net adjusted debt / EBITDAR) to increase in FY12 on higher expansionary capex and investments expected across most business lines.

However, capex is likely to normalise post-FY12 and Fitch expects DSIHL’s financial leverage to remain within the 3.0x guideline for its current rating, helped by expectations of strong operating cash flow generation.

DSIHL’s liquidity position was sound at FYE11 with undrawn credit facilities of Rs. 680 m and cash balances of about Rs. 385 m, against Rs. 156 m of long-term debt due within a year and Rs. 246 m due within one to two years. Some 79% of DSIHL’s Rs. 2.4 b total borrowings as at FYE11 comprised short term loans and overdrafts that fund working capital. The company enjoys strong access to local banks.

DSIHL’s ratings incorporate the financial profile of DSG, which has complete control over the former’s financial and operating policies. Fitch also notes there is no contractual ring-fencing of DSIHL’s cash flows from DSG, and there is a history of inter-company lending between companies of the group. DSG’s earnings – other than that from DSIHL – are mainly derived from exports of bicycle tires, and are more volatile than DSIHL’s earnings. Furthermore, DSG’s market position in most of its export markets is low.

A sustained increase in DSIHL’s adjusted net debt/operating EBITDAR of over 3.0x may result in negative rating action. This may occur if DSIHL faces increased competition, particularly if the tariffs on imported footwear are lowered, and/or if there are large debt-funded dividend outflows or loans/guarantees provided to related companies of the DSG group.