Consumer durable retailers remain resilient despite macro headwinds – Fitch
View(s):Rising interest rates, an increase in indirect taxes and currency depreciation which affect the prices of products sold by Sri Lankan retailers could make consumer durables less affordable, Fitch Ratings says.
Value Added Tax (VAT) was raised from 11 per cent to 15 per cent recently which would not only increase the prices of consumer durables but also affect purchasing power, as certain products and services which had previously been tax-exempt-will be taxed at higher rates, Fitch says in a media statement. Fitch estimates that some 60 to 70 per cent of the consumer-durable revenue of Fitch-rated entities – Singer (Sri Lanka) PLC and Abans PLC could be subject to the increase in VAT.
But Fitch believes the long-term fundamentals drives demand for the sector to remain intact amidst a rise in per capita income and a growing middle class. “Most consumer-durable products are imported, exposing companies to significant foreign-currency risks. Fitch expects the Sri Lankan rupee to depreciate by a further 3 per cent by end-2017 as government takes steps to strengthen its external finances. Similarly, prices of plastic – the major raw material for consumer durables – could go up in 2017 amidst a recovery in oil prices. The discretionary nature of consumer durables means that attempts to pass on these cost escalations could weaken demand” the Fitch report said.
Most retailers sell consumer durables through hire-purchase schemes (HP), which makes high-ticket items more affordable to consumers, and HP sales will underpin demand for consumer durables to an extent as installment schemes can veil the rise in prices. Interest rates – which have a direct impact on HP sales – have been on the rise, but Fitch does not expect rates to rise to the peak prior to 2014, it added.
“Fitch expects leverage of the two Fitch-rated entities to remain at current levels in 2017 as weak earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs (EBITDAR) generation will be offset by lower investment and capital expenditure. We do not expect significant deleveraging, due to the weak operating environment.”
While saying that a rise in interest rates to the peaks prior to 2014 and a continuous slide in the currency which causes a further of the weak demand environment, could have negative rating implications for the sector, the report added that sustained improvement in the country’s external finances leading to an improvement in interest rates and currency stabilisation which in turn can revive demand for consumer durables – could prompt the sector outlook to be revised to positive.