Weak passenger car sales lead to ‘negative’ outlook at AMW-Fitch

Fitch Ratings Lanka this week affirmed the National Long-term rating on Associated Motorways PLC (AMW - previously known as Associated Motorways Ltd) at 'A(lka)' and revised the outlook to ‘Negative’ saying this was due to the company's weakened sales in the current high interest rate, high inflation macroeconomic environment.

AMW derives around 73% of its revenues from its passenger-car business and increased pressure on vehicle sales will invariably lead to increased pressure on the company's earnings.

Although Fitch acknowledges that a significant amount of vehicle registrations may come from permits issued to state employees, the increase is expected to be 'one off', mostly occurring in the next 12-18 months.

In addition, AMW's Negative Outlook takes into account the high capital expenditure planned over the next 24 months, which is expected to increase leverage and reduce the debt service coverage ratio of the company further, given that most of the investments are unlikely to yield immediate returns, Fitch said.

In first half (H1) 2008, AMW's total revenue and operating profits amounted to Rs 285 million and Rs 451 million, respectively (representing an annualised decline in revenues of 14% from FY07 - broadly 73% of revenues and 80% earnings corresponded to the sale of passenger cars in the same period). Gross profit margins declined to 14.5% (excluding leasing operations) in 1H08 from 15.4% in 1H07, with declining gross profit margins on passenger cars.

As at H108, total debt at AMW amounted to Rs 3,519 million of which around 76% comprised short-term loans reflective of the working capital intensive nature of the business.

Its liquidity position is fair with unencumbered cash reserves of Rs 22 million and committed, undrawn bank credit facilities of almost Rs 3.1 billion. However, the acquisition of a 20% stake in AMW by John Keells Holdings (JKH) in June 2006 may somewhat reduce AMW's financial accessibility to some banks on account of single borrower limit restrictions, as it is considered as a part of the JKH group, Fitch said.

As the company currently finances around 20% of passenger car sales (in unit terms) through its leasing operation, debt levels are also expected to rise on a consolidated basis. Fitch said it also noted the potential addition to earnings by way of a growing lease book, but would only derive comfort post the generation of such earnings, backed by a comfortable level of delinquencies.

The rating reflects AMW's position as the country's leading distributor of new passenger cars, its dealership franchise for the most sought after budget car in the country (Maruti) and its comprehensive product range. The rating assigned is appropriate given the current credit matrix of AMW. However a deterioration of the leverage ratios due to a sustained loss of sales would exert negative pressure on the rating.