Ratings agency Fitch has upheld a national long term "A-(lk)" rating, with stable outlook, for dominant Sri Lankan footwear manufacturer/retailer DSI. It also maintained the company's unsecured notes ratings as "A-(lka)."
According to Fitch's Rating Action and Commentary (RAC), these ratings were said to be due to the company'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." Additionally highlighted, the "lack of strong competition in the footwear market, helped by high import duties since 2005."
However, it was also noted that ratings had been "constrained by a lack of clarity on the credit profile of its 100% parent D. Samson Group (DSG), of which [DSI] accounted for 66% of revenue and 50% of profits at end-March 2010, due to delays in producing consolidated financial statements of the group."
Meawhile, the RAC also indicated that DSI's "revenues and [Earnings Before Interest, Taxation, Depreciation and Rent, 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 [DSI's] products. EBITDAR growth was also helped by cost curtailment measures implemented during the period."
Also noted by Fitch, DSI's "financial leverage (defined as net adjusted debt / EBITDAR) to increase in [2012 financial year] on higher expansionary capex and investments expected across most business lines."
In addition, the RAC revealed that the company's liquidity was "sound" and that it had access to "undrawn credit facilities of Rs. 680 million and cash balances of about Rs. 385 million, against Rs. 156 million of long-term debt due within a year and Rs.246 million due within one to two years. Some 79% of [DSI's] Rs. 2.4 billion total borrowings as at FYE11 comprised short term loans and overdrafts that fund working capital. The company enjoys strong access to local banks."
On the other hand, Fitch also pointed out that DSI's ratings were tied to its parent's, DSG's, financial profile, as DSG exercises completely control of DSI's finances and operations, and, as such, Fitch cautions that there is "no contractual ring-fencing of [DSI'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 [DSI] - are mainly derived from exports of bicycle tires, and are more volatile than [DSI's] earnings. Furthermore, DSG's market position in most of its export markets is low."