Sri Lanka’s Softlogic Retail rated ‘BBB-‘ by RAM

Mar 20, 2014 (LBO) – Sri Lanka’s Softlogic Retail (Pvt) Ltd, a consumer durables and apparel retailer has been given a ‘BBB-‘ domestic rating by RAM Ratings Lanka. ” 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,” RAM said in a statement.

“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.”

But RAM the rating was moderated by weak debt protection metrics and exposure to foreign vendor and supplier concentration risks.

The Group’s total borrowings most for expansion had more than doubled to 3.47 billion rupees in March 2012 from 1.66 billion in March 2011.

Its gearing ration increased to 3.57 times from (2.94 times excluding borrowings from related parties) from 1.95 times in 2011

By March 2013 gearing had marginally improved to 3.37 times and to 2.49 times by March 2014 financial year after a 398 million capital infusion.

The full statement is reproduced below:-

RAM Ratings Lanka assigns BBB-/P3 Corporate Credit Ratings to Softlogic Retail
(Private) Limited

RAM Ratings Lanka has assigned respective long- and
short-term corporate credit ratings of BBB- and P3 to
Softlogic Retail (Private) Limited (“SRL” or “the Company”);
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 LKR 3.47 billion in FY Mar 2012 from LKR 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.

We also note 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.

We also note that SRL has short-term borrowings consists
of loans due to related parties amounting to LKR 1.00
billion as at end-3Q FY Mar 2014 (LKR64.80 million as at
end- FY Mar 2013). Our ratings hinge upon the
capitalization of LKR400million 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-capitalization
of this related company loan will trigger a negative rating
action on the company.