Consumer durables industry could suffer up to 40% decline in sales volumes in FY23: Fitch

• Erosion in purchasing power, red-hot inflation and taxes expected to shave demand for durables
• But leading players could navigate adversities in FY23 on existing inventory, weak competition and local manufacturing  
• But persistent import restrictions could spell trouble for players as local manufacturing cannot substitute all imports 
• Margins could see a near-term expansion before settling at modest levels over expectations of normalcy in market conditions in FY24  

Although Sri Lanka’s consumer durables retailers may be able to navigate the worst economic conditions stemming from runaway inflation and import restrictions, they could suffer between a 30-40 percent slump in their sales volumes in 2023, potentially continuing through 2024, albeit at much more modest scale in 2024.  

According to Fitch Ratings, which delved deeper into the financial profiles of Singer (Sri Lanka) PLC and Abans PLC, expects the country’s largest two consumer durables retailers to sustain their operations with minimum disruptions in the next 12 to 18 months, despite the partial ban on consumer durable imports, weak demand and rising costs.

The rating agency believes the weakening competition from informal market, increased focus on domestic manufacturing and sourcing and sufficient buffer stocks will help the companies to blunt the impact from the import ban during the said period. 

However, Fitch expects Abans PLC to suffer a 30-35 percent drop in sales volumes in the financial year ending in March 2023 (FY23), followed by another 5 percent fall in FY24. At Singer, the sales slump could go up to 40 percent in FY23, followed by a subdued demand in FY24, as a slew of factors nearly decimated the affordability of consumer durables of the Sri Lankan consumer, which could take at least another 18 months to recover.  

 First, the free fall in the value of the rupee from March onwards more than doubled the rupee prices of everything from consumer staples to discretionary items to durables, sending the prices of technology products, household electrical and electronics products through the roof.

While the higher duties and import controls stoked a further run up in prices of these items, the demand destruction policies such as elevated interest rates and hike in both direct and indirect taxes caused people to lose their affordability even more, throwing a wrench on their aspirations for attaining a high standard of living while reversing their prospects for upward social mobility.  Despite the expected loss of sales volumes, these companies could navigate the near to medium term, as the elevated prices are expected to at least nearly offset the impact coming from the lower demand and rising costs, as higher costs are typically passed down to the end consumer. As a result, the margins of Abans and Singer estimated to see an expansion in FY23 to around 18 percent and 19 percent, respectively, from 11 percent and 12 percent in FY22, before settling around 13 percent from FY24 onwards, due to the expected return to normalcy in the market conditions, with the revival in competition, reduction in premium prices and also due to the sale of higher cost inventory. 

While both companies may be able to ride the near to short-term challenges, despite the prevalent restrictions in imports, due to their sufficient existing inventory and expansive domestic manufacturing, possible extension in the import restrictions could cause troubles in sourcing the products. 

Fitch estimates this to cause 20-25 percent difficulties to Singer in sourcing their products and for Abans up to 30 percent, which cannot be substituted via local manufacturing. 

The government lifted the restrictions on imports of many consumer durables a fortnight ago, further relaxing its controls on nearly 1,500 items banned in August to preserve foreign currency. Fitch further estimates that Singer’s local manufacturing to support up to 40 percent of its sales by FY25 and at Abans, up to 30 percent, as the import bans, which came to a head this year, prompted these companies to ramp up their existing production capacity, while others to set up manufacturing plants.   The rating agency affirmed the rating at Singer at A+ and Abans at AA-, with a negative outlook for both entities.