ECONOMYNEXT - Sri Lanka's DSI Samson Group (Pvt) Ltd (DSG) has been downgraded by a notch to BBB(lka) due to its leverage, the rating agency said.
Fitch has re-calibrated the island's rating scale after a sovereign downgrade by notch to 'B'.
"The elevated leverage is due to the weakening domestic sales of pneumatic tyres to
original equipment manufacturers (OEMs) and significant competitive pressures in the footwear
retail segment," Fitch Ratings said.
"We expect operating cash flow from the company's solid tyre exports and value-added
footwear businesses to improve in the medium term, but this is unlikely to be sufficient
to reduce leverage below the level commensurate with a higher rating."
DSG's net leverage increased to 5.2x in the financial year ended March 2018 (FY18) from 4.4x a year earlier due to the weaker operating performance in several of its key domestic segments. Leverage has since fallen to 5.0x by 31 December 2018 due to an improvement in exports and domestic sales of value-added footwear.
"We expect net leverage to drop to 4.9x in FY19 and 4.6x through FY21, buoyed by the company's efforts to further improve cash flow contributions from exports and domestic sales of value-added footwear."
The full statement is reproduced below:
DSI SAMSON GROUP (PRIVATE) LIMITED
The rating downgrade reflects Fitch's expectations that DSG's net leverage - defined as lease adjusted
debt net of cash/operating EBITDAR - is likely to remain above 4.5x over the medium
term.
The elevated leverage is due to the weakening domestic sales of pneumatic tyres to
original equipment manufacturers (OEMs) and significant competitive pressures in the footwear
retail segment. We expect operating cash flow from the company's solid tyre exports and value-added
footwear businesses to improve in the medium term, but this is unlikely to be sufficient
to reduce leverage below the level commensurate with a higher rating.
DSG's rating continues to reflect its leading positions in domestically sold pneumatic tyres to the
replacement market and footwear, which are supported by its well-known brand and
widespread distribution network.
Higher Financial Risk: DSG's net leverage increased to 5.2x in the financial year ended March
2018 (FY18) from 4.4x a year earlier due to the weaker operating performance in several of its
key domestic segments. Leverage has since fallen to 5.0x by 31 December 2018 due to an
improvement in exports and domestic sales of value-added footwear.
We expect net leverage to drop to 4.9x in FY19 and 4.6x through FY21, buoyed by the company's efforts to further improve cash flow contributions from exports and domestic sales of value-added footwear.
Fitch believes the pressure on free cash flow from high interest costs and notable working capital
outflows as well as growth capex will keep net leverage above 4.5x in the medium term.
We expect DSG's FFO fixed-charge coverage to improve to 1.5x in the medium term, compared
with an estimated 1.4x at end-December 2018 and a low of 1.1x at FYE18, supported by a
recovery in profitability. However, coverage will likely remain below the three-year historical
average of 2.2x due to weaker domestic demand and continued pressure from high interest
costs.
Lower EBITDA Margins: Fitch expects DSG's EBITDA margins to recover to 8.5% in FY19, from
7.7% in FY18, after they were diluted by lower domestic footwear and tyre sales volumes,
higher crude oil and rubber prices as well as the company's efforts to liquidate some of its
footwear inventory at discounted prices. The recovery in margins will be supported by greater
contribution from high-margin solid tyre exports and higher-value-added footwear. However,
we expect rising cost pressures due to the depreciating Sri Lankan rupee and intense price
competition in the domestic market to keep EBITDA margins below the three-year historical
average of 9.0%.
Falling Domestic Sales: We expect domestic sales of tyres to remain under pressure due to the
weakening demand for bicycle tyres in Sri Lanka and the tightening of three-wheeler financing
regulations in 2017. The regulator lowered the upper band of loan-to-value ratios associated
with three-wheeler leases to 25% from 70% to curb vehicle imports, which continues to impede
volume growth mainly from the OEM market. However, DSG's significant exposure to the
replacement market mitigates this risk to some extent.
Domestic footwear volumes declined by around 4% in FY18 on rising competition from smallscale
producers in the lower-end of the market. DSG counterbalances this risk by selling valueadded
footwear as the competition is less intense. DSG also compensates for the lost sales to
some extent by supplying raw materials such as rubber sheets and soles to its competitors in the
footwear market.
Leading Market Position: DSG has leading market positions in the domestic footwear market and
the bicycle, motorcycle and three-wheeler tyre industries, supported by its established brand,
and a widespread distribution network.
Nevertheless, we expect the intensifying competition in the footwear industry from small-scale domestic producers and importers that are circumventing the current tariff structure on imports to be a key long-term risk. Domestic sales of motorcycle and three-wheeler tyres also face rising competition from other well-known brands and imported products.
Limited Structural Subordination Risk: DSG is a holding company that depends on dividends paid
by its subsidiaries to service its own obligations. However, the structural subordination of
holding-company creditors is mitigated by DSG's strong control over its operating subsidiaries
that accounted for over 80% of consolidated EBITDA in FY18. This supports a high degree of cash
fungibility within the group and enables the holding company to service its own obligations.
Fitch has re-calibrated the island's rating scale after a sovereign downgrade by notch to 'B'.
"The elevated leverage is due to the weakening domestic sales of pneumatic tyres to
original equipment manufacturers (OEMs) and significant competitive pressures in the footwear
retail segment," Fitch Ratings said.
"We expect operating cash flow from the company's solid tyre exports and value-added
footwear businesses to improve in the medium term, but this is unlikely to be sufficient
to reduce leverage below the level commensurate with a higher rating."
DSG's net leverage increased to 5.2x in the financial year ended March 2018 (FY18) from 4.4x a year earlier due to the weaker operating performance in several of its key domestic segments. Leverage has since fallen to 5.0x by 31 December 2018 due to an improvement in exports and domestic sales of value-added footwear.
"We expect net leverage to drop to 4.9x in FY19 and 4.6x through FY21, buoyed by the company's efforts to further improve cash flow contributions from exports and domestic sales of value-added footwear."
The full statement is reproduced below:
DSI SAMSON GROUP (PRIVATE) LIMITED
The rating downgrade reflects Fitch's expectations that DSG's net leverage - defined as lease adjusted
debt net of cash/operating EBITDAR - is likely to remain above 4.5x over the medium
term.
The elevated leverage is due to the weakening domestic sales of pneumatic tyres to
original equipment manufacturers (OEMs) and significant competitive pressures in the footwear
retail segment. We expect operating cash flow from the company's solid tyre exports and value-added
footwear businesses to improve in the medium term, but this is unlikely to be sufficient
to reduce leverage below the level commensurate with a higher rating.
DSG's rating continues to reflect its leading positions in domestically sold pneumatic tyres to the
replacement market and footwear, which are supported by its well-known brand and
widespread distribution network.
Higher Financial Risk: DSG's net leverage increased to 5.2x in the financial year ended March
2018 (FY18) from 4.4x a year earlier due to the weaker operating performance in several of its
key domestic segments. Leverage has since fallen to 5.0x by 31 December 2018 due to an
improvement in exports and domestic sales of value-added footwear.
We expect net leverage to drop to 4.9x in FY19 and 4.6x through FY21, buoyed by the company's efforts to further improve cash flow contributions from exports and domestic sales of value-added footwear.
Fitch believes the pressure on free cash flow from high interest costs and notable working capital
outflows as well as growth capex will keep net leverage above 4.5x in the medium term.
We expect DSG's FFO fixed-charge coverage to improve to 1.5x in the medium term, compared
with an estimated 1.4x at end-December 2018 and a low of 1.1x at FYE18, supported by a
recovery in profitability. However, coverage will likely remain below the three-year historical
average of 2.2x due to weaker domestic demand and continued pressure from high interest
costs.
Lower EBITDA Margins: Fitch expects DSG's EBITDA margins to recover to 8.5% in FY19, from
7.7% in FY18, after they were diluted by lower domestic footwear and tyre sales volumes,
higher crude oil and rubber prices as well as the company's efforts to liquidate some of its
footwear inventory at discounted prices. The recovery in margins will be supported by greater
contribution from high-margin solid tyre exports and higher-value-added footwear. However,
we expect rising cost pressures due to the depreciating Sri Lankan rupee and intense price
competition in the domestic market to keep EBITDA margins below the three-year historical
average of 9.0%.
Falling Domestic Sales: We expect domestic sales of tyres to remain under pressure due to the
weakening demand for bicycle tyres in Sri Lanka and the tightening of three-wheeler financing
regulations in 2017. The regulator lowered the upper band of loan-to-value ratios associated
with three-wheeler leases to 25% from 70% to curb vehicle imports, which continues to impede
volume growth mainly from the OEM market. However, DSG's significant exposure to the
replacement market mitigates this risk to some extent.
Domestic footwear volumes declined by around 4% in FY18 on rising competition from smallscale
producers in the lower-end of the market. DSG counterbalances this risk by selling valueadded
footwear as the competition is less intense. DSG also compensates for the lost sales to
some extent by supplying raw materials such as rubber sheets and soles to its competitors in the
footwear market.
Leading Market Position: DSG has leading market positions in the domestic footwear market and
the bicycle, motorcycle and three-wheeler tyre industries, supported by its established brand,
and a widespread distribution network.
Nevertheless, we expect the intensifying competition in the footwear industry from small-scale domestic producers and importers that are circumventing the current tariff structure on imports to be a key long-term risk. Domestic sales of motorcycle and three-wheeler tyres also face rising competition from other well-known brands and imported products.
Limited Structural Subordination Risk: DSG is a holding company that depends on dividends paid
by its subsidiaries to service its own obligations. However, the structural subordination of
holding-company creditors is mitigated by DSG's strong control over its operating subsidiaries
that accounted for over 80% of consolidated EBITDA in FY18. This supports a high degree of cash
fungibility within the group and enables the holding company to service its own obligations.
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