Sri Lanka import controls seen hurting finance, retail firms

ECONOMYNEXT – Sri Lanka’s new import restrictions to defend a weakening currency are expected to dent profits at listed companies in motor vehicle imports, electronic retail and leasing which are already challenged by depressed consumer demand and high leverage, market analysts said.

-Retail’s dilemma-

"Those listed companies that have a focus on retail may be in a tight spot to fund their operations, particularly the ones that utilize letters of credit more. Retail companies have already been challenged with the prolonged consumption downturn," said Sumith Perera, Head of Portfolio Management at Guardian Fund Management Ltd.

Last Saturday, the government slapped a 100 percent margin on letters of credit on imported electronic appliances like refrigerators, air-conditioners, televisions, mobile devices and washing machines.

This will impact profitability at listed retail companies like Singer Sri Lanka and Softlogic Holdings which are already struggling with depressed consumer demand.

They had taken on debt to fund expansion hoping for a pick-up in consumption, but the new import rules will dent those hopes.

"When the customer’s disposable income and sentiments decrease, the demand for consumer durables is well below that of the general market and vice versa. We have seen this oscillation over many years," Asoka Pieris, Group Chief Executive Officer at Singer Sri Lanka told shareholders in the June 2018 quarter interim financial report.

Singer’s EBITDAR (earnings before interest, tax, depreciation, amortisation and rent) margin had contracted by almost 150 basis points in 2017 due to lower sales as well as higher indirect taxes and sales costs, according to Fitch Ratings.

"The margin contraction was seen across most product segments, as weak demand compelled the company to absorb a majority of the tax increases and cost escalations to sustain top-line growth," Fitch said in a July 2018 report.

According to Fitch, Singer Sri Lanka had a tight liquidity position, but manageable, to settle long-term debt of about 14 billion rupees maturing in 2018.

Softlogic Holdings is already overextended with debt totalling in 32 billion rupees at end December 2018, which was over 300 percent of its equity capital. The group raised 7 billion rupees via a private placement earlier this year to contain debt but has committed billions of rupees to expand its retail stores which include fashion and electronics.

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Singer Sri Lanka was unchanged at 30 rupees in early trading Tuesday and Softlogic Holdings was up 50 cents to 20.80 rupees.

-Motor vehicle importers-

"The most obvious outcome will be the restrictions on vehicle importation to have a negative impact on listed vehicle importers," Perera said.

Listed motor vehicle importers recovered on Tuesday after falling the previous day on news of the new import restrictions: DIMO was trading 11.30 rupees higher on Tuesday at 348.50 rupees and United Motors was up 1 rupee to 86 rupees.

Last Saturday the government suspended issuing vehicle permits to parliamentarians and state officials.

All vehicle imports other than busses, trucks and ambulances would need 200 percent cash margins to open letters of credit.

A 100 percent margin had been slapped on imported tyres as well.

Banks have also been instructed to lend 50 percent of the value of a hybrid vehicle, down from 70 percent earlier.

Government restrictions on vehicle imports sent down share prices of listed motor vehicle dealerships on Monday.

However, listed vehicle importers have diversified portfolios which include commercial vehicles which are untouched by the new import rules.

DIMO fell 19.70 rupees to 330 rupees on Monday. The company has dealerships for Mercedes-Benz, Jeep and Chrysler.

It also imports and distributes for Tata Motors mostly commercial vehicles like trucks, which have been exempted from the new import rules.

United Motors however was up 2.30 rupees on Monday to 85 rupees. The company has dealerships for cars, SUVs and commercial vehicles under Mitsubishi, Perodua and Zotye.

Sathosa Motors was unchanged at 430 rupees. The company is the dealer for Isuzu which has pickups and SUVs and commercial vehicles like busses and trucks.

CM Holdings Plc, the parent company of Colonial Motors agent for Mazda, Aprilia and Vespa, last traded at 49.30 rupees.

Listed motor vehicle were already struggling with tight import controls and financing costs.

"New vehicle registrations have increased by 12 percent by the end of the June quarter while we expect new registrations to dampen going forward with currency depreciation and low real wage growth hindering demand," LOLC Securities said.

"Further, tax increases on small vehicles which were imposed in August 2018 will also have impeding effects on demand along with the new central bank rule of 100 percent letters of credit margins on vehicle imports," it said.

DIMO revenues fell 2 percent from a year earlier to 9.2 billion rupees in the June 2018 quarter, but reported a loss of 61 million rupees on increased finance and selling costs, down from a profit of 26.7 million rupees a year earlier.

United Motors’ revenues dipped 14 percent to 3.3 billion rupees in the June quarter and profits fell 17 percent to 94 million rupees.

Sathosa Motors revenue grew 11.2 percent to 2 billion rupees in the June quarter, but earnings fell 61 percent to 58 million rupees on higher selling and finance costs.

CM Holdings saw revenues fall 46 percent from a year earlier to 419.5 million rupees in the June quarter, reporting a loss of 128.2 million, down 226 percent from a profit of 101.6 million rupees, a year earlier. The company said it was diversifying into real estate to weather the storm.

-Tight financing-

Share prices of finance companies also fell on the new motor vehicle import restrictions expected to slow-down credit growth amidst rising non-performing loans.

"Credit restrictions through letters of credit and loan-to-value revisions will further curtail leasing companies’ growth and translate negatively on profits," Guardian Fund Management’s Perera said.

Non-bank finance companies are heavily exposed to leasing, accounting for 50 percent of total industry loans of 1 trillion rupees. The share of leasing was 45 percent five years earlier.

According to LOLC Securities, provisioning for bad loans was seen increasing at both banks and finance companies in the June 2018 quarter.

"Currency depreciation and vehicle import taxes will hinder growth 2018 due to its high exposure to vehicle loans," it said.

On Monday, Central Finance was down 2.40 rupees to 88.80 rupees and Commercial Credit and Finance was down 1 rupee to 26 rupees.

Bimputh Finance was down 3.40 rupees to 30.10 rupees and SMB Leasing was down 10 cents to 20 cents.

LOLC Finance was down 10 cents 3.60 rupees.

However, by early trading Tuesday, finance company stocks had a mixed performance.

Central Finance fell by a further 3.50 rupees in early trading Tuesday to 90 rupees and Commercial Credit and Finance was down 40 cents to 26 rupees.

Bimputh Finance recovered by 1.90 rupees to 34.40 rupees on Tuesday and SMB Leasing was up 10 cents to 50 cents.

LOLC Finance was unchanged at 3.60 rupees.

Singer Finance was up 40 cents on Tuesday from 13.40 rupees. (COLOMBO, 02 October 2018)

 

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