Fitch assigns Associated Motorways with ‘A(lka)' National Rating

Fitch Ratings Lanka, assigned Associated Motorways Limited (AMW) with an 'A(lka)' National Long-term rating. The rating is a reflection of AMW's position as the country's leading distributor of new passenger automobiles, its dealership franchises for several well-established automobile manufacturers such as Nissan, Maruti and Suzuki and its comprehensive product range. With a sound financial profile supported by the efficient management of its working capital.

Since FY02, the company has consistently reported growth in sales and operating profits. Its portfolio of budget/economy vehicles have enabled it to capitalise on the increased demand for low-engine-capacity vehicles given the increased duties on vehicle imports and higher fuel prices.

AMW accounted for around 31% of total motor-cars registered in FY06 (of which Maruti alone accounted for 28%), compared to little over 8% in 2003. Even though competition in the budget car segment is likely to increase, Fitch believes that AMW could maintain its leadership position over the short to medium term owing to the established market for brands and models marketed by the company.

AMW's strong market position has enabled it to collaborate with several leading banks and financial institutions to provide financing facilities to customers. At present, around 60% of units sold by the company are financed through leasing facilities. The agency also believes that the company's efforts to establish showrooms outside of Colombo will help further strengthen its market position. AMW recently established its own leasing company as a wholly-owned subsidiary; however, Fitch expects the number of vehicles financed through this company to be modest over the short to medium term.

In FY06, total revenues and operating profits of AMW amounted to Rs. 8,983 million and Rs. 967m respectively (revenue up by 67% over FY05). Broadly 65% of revenues and earnings corresponded to the sale of passenger cars (64% and 80% respectively in FY05). Gross profit margins improved marginally from 16.6% in FY05 to 16.9% with the improved profitability of its outboard-motors division outweighing the slip in margins of its passenger car business. Certain increases in taxes/duties, in part, were absorbed by the company particularly in the price sensitive budget category vehicles.

However at FYE06, total debt at AMW amounted to Rs. 2,020m (FYE05: LKR1,106m), of which around 84% comprised of overdrafts and short-term working capital loan facilities. Its liquidity position is fair with un-encumbered cash reserves of Rs. 191m and committed, un-drawn bank credit facilities of LKR3,830m. However, the acquisition of 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 when assessing single borrower exposures of banks.