Financial Times

Fitch Ratings Lanka has assigned a National Long-term rating of 'A+(lka)' to Singer Sri Lanka's (SSL) proposed Rs 600 million 2006/2009 and 2006/2010 debenture issue.

At the same time, the agency said in a statement it affirmed the 'A+(lka)' ratings assigned to SSL's outstanding Rs 200 million 2004/2008, Rs 250 million 2004/2008, Rs 300 million 2005/2009, Rs 400 million 2005/2008 & 2009 and Rs 500 million 2005/2009 unsecured debentures.

The proceeds from the issuance are primarily expected to be used for expanding SSL's consumer financing operations, while the remainder will be used to retire part of the bank borrowings that mature in 2006.

The ratings are supported by the company's position as the largest consumer durables retailer in the country, its strong and sustainable sales growth backed by its profitable and well-managed consumer financing operation and good earnings retention.

Over the past several years, SSL has introduced a number of new store formats and broadened the product range to appeal to a wider range of customers.

In FY05, SSL reported total sales of Rs 10,866 million (an increase of 26% over the previous financial year) and operating profits of Rs 3,594 million.

Although profit margins of retailing operations came under pressure due to recent increases in taxes and duties, the interest earned on a larger consumer loan book mitigated the effects of this, enabling the company to maintain gross margins at around 33%. However, EBITDA margins slipped to 10.2% in financial year in 2005 from 12% in its financial year in 2004 reflecting the increases in collection commissions, lease commitments on new retail outlets and increased royalty payments to Singer Asia.

However, the agency believes much of the increased duties and taxes will be translated to higher retail prices in the financial year 2006 to restore the profitability of SSL's retailing operations. The availability of consumer financing to a large extent mitigates the impact of price increases on consumer demand.
Much of the debt of the company is related to its consumer financing operation. At end- Q106 SSL's loan book had expanded to Rs 5.1 billion. Fitch appreciates that such operations require a more levered capital structure than that of a pure retailing operation.