Fitch affirms DSI Holdings' ratings

Fitch Ratings Lanka said it was affirming the National Long-term rating of DSI Holdings Ltd (DSIHL), as well as its senior unsecured debentures at 'BBB+(lka)' with the outlook being ‘Stable’.

The ratings reflect DSIHL's market position as the largest footwear manufacturer in Sri Lanka, its well established brand franchise and its broad distribution network. DSIHL, along with other local footwear manufacturers, currently benefit from a restrictive cess on footwear imports, which was increased in late 2006, to protect the domestic industry, Fitch said. According to the latest financial statements for the 12 months ending March 2007), DSIHL's revenues and operating profits amounted to Rs 5,514 million (up 26% over FY06) and Rs 460 million (up 9% over FY06) respectively. Footwear accounted for around 85% of its revenues and around 78% of operating profits. Revenue growth was primarily driven by price increases ranging from 14% to 23% in the main product categories (i.e. rubber slippers, sandals and children's footwear), against a reported sales volume increase of around 7%. Gross profit margins fell to 28% in FY07 from 30% in FY06 due to increased competition from imports, but improved to 29% in the latter months aided in part by the increased cess on imported footwear, and the relatively inelastic demand for its main product categories.

As at December 2007 DSIHL had total debt of Rs 2,018 million against Rs 2,066 million in the previous period, of which around 66% was due in the short term. Against this, the company had Rs 25 million of cash reserves and unutilised credit lines of around Rs 1 billion.

“The company's high working capital requirement, its capital expenditure programme and dividend payouts are likely to result in a negative free cash flow over the short-to-medium-term, increasing debt levels,” Fitch said.

DSIHL is a fully-owned subsidiary of DSI Samson Group (Pvt) Ltd (DSG) which is a second generation family-owned company, the history of which can be traced back to the 1930s.