Fitch revises Singer Sri Lanka ‘Outlook’ to ‘Negative’

Fitch Ratings Lanka this week affirmed the National Long-term ratings on Singer (Sri Lanka) Limited's (Singer) senior unsecured notes at 'A+(lka)' and also revised the ‘Outlook’ to ‘Negative’.It said the ‘Negative’ assessement primarily reflects the weakened net income levels at Singer amidst increasing debt levels, in large part, due to higher interest payments and lower sales growth.

Fitch said Singer hasn’t been able to fully re-price interest rates charged on its consumer loans to reflect the increased cost of funds, thereby eroding overall profitability of its previously highly profitable consumer financing operation. Interest income on such loans account for nearly 15% of Singer's top-line, with approximately 50% of its total sales financed through such In-house loan schemes.

Singer mainly caters to the low and low-middle income earners of the population who are mostly affected by the high inflationary environment prevailing in the country. Fitch said it doesn’t expect any significant policy changes by the government that would ameliorate the high interest rate regime over the next 12-8 months and points out that sustaining profitability and the quality of its consumer loan book will be important if Singer is to maintain its current ratings. Management intends to re-price its consumer loans over the near-term and control operating costs in order to improve Singer's profitability.

Fitch also notes that competition in the industry has intensified since Singer's ratings were upgraded in April 2005. A further weakening of Singer's credit metrics will lead to a downgrade of the ratings.

In the nine months ended September 2007, Singer reported a revenue growth of only 9% to reach Rs 9,740 million as volumes across most products sold were near flat. At end-September 2007, Singer had a total debt of Rs 6.4 billion (FYE06:Rs 5.7 billion).

The company's high debt levels reflect the high working capital requirement of its retailing business and its consumer financing operations, which is not ring-fenced, but requires a differing capital structure to that of a pure retailing operation. Fitch said Singer's debenture maturities will peak over the next three year period, with notes amounting to approximately Rs 800 million expected to mature each year.