RAM assigns BBB-/P3 Corporate Credit Ratings to Softlogic Retail
Friday, 21 March 2014 05:00
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RAM Ratings Lanka has assigned respective long- and short-term corporate credit ratings of BBB- and P3 to Softlogic Retail Ltd.; the long-term ratings carry a stable outlook. SRL is an electronic and clothing retailer, which is involved in the import and distribution of home electrical appliances, office automation items, and apparels.
The Company is also an authorised agent for a number of automobile brands in Sri Lanka. SRL and its subsidiaries are collectively referred to as the Group.
The ratings are upheld by the Company’s strong competitive position backed by its diversified target markets and a retail branding strategy which caters to the various niches of the local retailing industry. SRL has devised a retail branding operation, which caters to the various niches of the local retailing industry.
The Company’s ‘Softlogic Max’ branded showrooms cater to the high-end market segment, whilst the ‘Softlogic’ branded showrooms cater to the countries mass market as a whole, even encompassing the rural populace of the country. Furthermore, SRL also remains as the market leader in the branded apparel market segment, and has grown exponentially in this segment over the past few years by introducing many international brands such as Mango, Nike, Giordano, DKNY, Levis, and Charles & Keith exclusively under its retail wing.
The ratings are also upheld by the robust improvements in the Company’s financial performance in recent times. SRL’s revenue has charted an uptrend in the recent years, demonstrating a compounded annual growth rate (CAGR) of 60.52% from FY Mar 2009 to FY Mar 2013. The Group’s growth was recorded at 10.55% in FY Mar 2013, from the higher growth levels of FY Mar 2012 and FY Mar 2011 on the back of adverse economic and market conditions encountered by the entire retail industry.
Nevertheless, SRL’s revenue continued to grow in Q3 FY Mar 2014, increasing by 23.52% y-o-y (Annualised) on the back of an increase in demand for consumer electronics and branded apparels in the country. The Group’s operating profit before depreciation, interest and tax (OPBDIT) margin, which declined to 8.97% in FY Mar 2013 from 9.48% in FY Mar 2012, also rebounded marginally in Q3 FY Mar 2014, increasing to 9.01% amidst a rise in demand for consumer electronics and branded apparels on the back of an improved economic and financial climate.
However, the Group’s bottom-line growth remained fairly stagnant on the back of higher finance costs coupled with fixed costs pertaining to the opening of new outlets.
Furthermore, the outlook for the retail sector of Sri Lanka is also expected to progress, driven by improved market balances, favourable economic conditions and an increase in the overall consumer spending levels.
The preceding positives are, however, moderated by the Company’s weak debt protection metrics coupled with SRL’s exposure to foreign exchange and supplier/ vendor concentration risks. The Group’s total borrowings, which were largely raised for expansion purposes, more than doubled to Rs. 3.47 billion in FY Mar 2012 from Rs. 1.66 billion in FY Mar 2011. Consequently, SRL’s gearing ratio increased to 3.57 times (2.94 times excluding borrowings due to related parties) in FY Mar 2012 from 1.95 times (1.64 times excluding borrowings due to related parties) in FY Mar 2011.
Nonetheless, SRL gearing levels showed marginal improvement in FY Mar 2013, improving to 3.37 times (2.75 times excluding borrowings due to related parties) and improved further to 2.49 times (2.02 times excluding borrowings due to related parties) in Q3 FY Mar 2014 on the back of equity inflows amounting to LKR 398 million through a capital infusion in 2QFY 2014.
RAM Ratings Lanka also notes that a bulk of SRL’s borrowings consist of working capital loans related to hire purchases. Thus, SRL’s gearing ratio excluding working capital loans related to hire purchases was at 1.31 times as at end-FY Mar 2013 and 0.82 times as at end- FY Dec 2013. Furthermore, SRL’s FFO debt coverage ratio continued to remain weak at 0.22 times in FY Mar 2013 (0.47 times excluding borrowings related to working capital loans related to hire purchases), regardless of the Company’s improved performance, due to the Group’s existing debt levels.
RAM Ratings Lanka also notes that SRL has short-term borrowings consists of loans due to related parties amounting to Rs. 1 billion as at end-3Q FY Mar 2014 (Rs. 64.80 million as at end-FY Mar 2013). Its ratings hinge upon the capitalisation of Rs. 400 million worth of related company loans on or before end-1Q FY Mar 2015 (June 2014), which is expected to further improve the Company’s gearing levels.
RAM Ratings Lanka notes that the non-capitalisation of this related company loan will trigger a negative rating action on the company.
