COLOMBO, Nov 21, 2014 (EconomyNext) – Sri Lanka’s retail sector is likely to do better next year with a recovery in demand following reduced borrowing and electricity rates and a cut in value added tax (VAT), a rating report said.
"With improvement in their purchasing power, Sri Lankan consumers are increasingly looking to upgrade to new, more efficient consumer electronics and household white goods," Fitch Ratings said in a report on consumer durable retailers.
"Fitch believes that a recovery is likely for the consumer durables sector in Sri Lanka in 2015."
A few key players like Singer (Sri Lanka), rated A-(lka)/Stable, Abans Limited with a BBB+(lka)/Negative rating and Softlogic Holdings, dominate the market.
"These companies have strong brand portfolios and extensive distribution networks, which are hard to replicate given the investment required and brand equity of established players," said the report.
"This protects the existing players from competition to a certain extent."
Fitch Ratings said lower borrowing rates, reduced electricity tariffs and an upcoming cut in the VAT will create a more favourable environment for retailers of consumer durables in Sri Lanka in 2015.
It noted that demand for consumer electronics and white goods tend to be volatile across business cycles due to their non-essential nature and larger price tags.
"Fitch expects retailers of consumer durables to achieve modest revenue growth supported by increasing consumer purchasing power following a 25 percent reduction in domestic electricity tariffs from September 2014 and a cut in the VAT rate to 11 percent from 12 percent that will be implemented in 2015."
The consumer durables industry faced a challenging environment in 2013 due to pressure on disposable income and introduction of the VAT.
Fitch said retailers found it difficult to pass on higher costs to consumers leading to a negative impact on margins.
As a result, Fitch-rated retail corporates’ revenue grew only by two percent in the financial year ended 31 March 2014 against 11 percent in FY13.
"The sluggish demand also resulted in build-up of inventory, leading to higher working capital requirements," Fitch said.
"Higher working capital requirements coupled with lower profitability saw leverage of Fitch rated retail corporates deteriorate in 2014."
Retailers usually have high leverage as they borrow to finance their in-house hire purchase operations.
Fitch expects higher sales and better working capital structure to have a positive impact on the retailers’ leverage in 2015.