Footwear sales to drive recovery of DSI Samson Group: Fitch

• Fitch expects defensive demand for footwear in post COVID-19
• Says DSI’s tyre sales will recover gradually, starting 2HFY21 

Fitch Ratings forecasts a faster recovery for Sri Lanka’s DSI Samson Group’s (DSG) footwear segment, from the disruption caused by the slowdown in economic activity precipitated by the COVID-19 pandemic, while its tyre segment will have to brace for a long and painful path to recovery. 

“Fitch expects DSG’s footwear revenue to recover earlier than its tyre sales, owing to more defensive demand, a strong brand and an extensive retail and distribution network. 

We expect the tyre sales to recover gradually, starting 2HFY21, on demand from the replacement market, which accounts for the majority of tyre sales,” the rating agency stated revising the outlook on the group to Stable, from Positive and affirming its National Long-Term Rating at ‘BBB (lka)’.

DSG’s revenue for the financial year 2021 is expected to drop by around 20 percent, with the economic impact due to the social-distancing measures to contain the pandemic, which were implemented in March 2020 and the unprecedented weakening in global and domestic economic activity.

However, Fitch cautioned that the continuation of the social-distancing measures beyond May poses a risk to the current expectations.

DSG is the market leader in the country’s tyre business, with a combined market share of 70 percent in the bicycle, motorcycle and three-wheeler tyre segments.  It also maintained a leading market share of 28 percent in the fragmented and competitive footwear retailing sector in FY19, backed by a strong islandwide retail network of over 200 stores.

“This positions the company to capitalise on a market recovery. DSG passed on the savings from lower indirect taxes in early 2020 to end customers, which may spur sales. However, we expect the domestic footwear industry to face continued competition, which is a key risk for DSG,” Fitch noted.

Further, the group’s EBITDA margin is forecasted to come down to 8 percent in FY21, against the estimated 12 percent in FY20, due to its limited ability to cut costs in line with the falling revenue.

Despite DSG’s tight liquidity levels, Fitch predicts the liquidity levels to remain at manageable levels. 

DSG was estimated to have around Rs.800 million of unrestricted cash and over Rs.6 billion worth of undrawn, uncommitted bank lines, as of FYE20, against Rs.10 billion of debt maturities in the next 12 months, mainly comprising of short-term working capital loans. Fitch expects the group’s lenders to roll over the working capital and its bankers to stand by the uncommitted credit lines in light of DSG’s leading domestic market position in the local footwear and tyre industries. The lenders have already offered to extend principal repayments of Rs.700 million of term loans due in the next 12 months by a further three months.

However, Fitch expects DSG’s near-term liquidity to be sufficient, even without such extensions.