Softlogic 1Q hit by higher finance costs, macroeconomic developments

Diversified conglomerate Softlogic Holding PLC recorded a net loss for the June quarter (1Q23) amid higher finance costs but the group was able to sustain its operational performance despite the unprecedented economic crisis the country is going through.

With interests in retail and telecommunication, healthcare services, financial services, information technology, leisure and property and automobiles, the Softlogic group saw its net losses widening to Rs.2.1 billion during 1Q23, from Rs.617.7 million a year ago.

Total revenues for the quarter under review remained flat at Rs.24.6 billion, while the group was able to reduce its sales cost by 15 percent year-on-year (YoY) to Rs.14.6 billion. As a result, the gross profit rose 36 percent YoY to Rs.9.8 billion. The operating profit also rose 44 percent YoY to Rs.3.2 billion.

However, the gains at operating levels were negated by the finance costs that rose 195 percent YoY to Rs.5.3 billion, due to the higher interest rates in the economy. The net finance cost for the period was Rs.2.5 billion, up 120 percent YoY.

As at June 30, 2022, the group had Rs.17.1 billion as interest-bearing borrowings under the current liabilities, compared to Rs.13.1 billion 12 months ago.

“No doubt, the financial performance has been influenced by the extraordinary crisis, which beset the economy, due to both global and domestic factors. Surging inflation consequent to the depreciation of the rupee and the decision by the CBSL to deploy traditional monetary tools such as interest rate hikes to tame inflation, cast a cloud of uncertainty over the long-term direction of capital flows. This action generally has the effect of discouraging expansion and decompressing the growth momentum,” Softlogic Group Chairman Ashok Pathirage said.

Top contributors to the group’s revenue for 1Q23 were the retail sector (40 percent contribution), healthcare services (22 percent), financial services (24 percent) and IT (7 percent). Leisure and automobile together contributed 7 percent to the group’s top line for the quarter.
The group’s retail sector reported a revenue of Rs.9.7 billion for the quarter, down from Rs.13.5 billion a year ago, due to the standstill on imports of mobile phones.

The group said the primary contributors to the sector’s top line emerged to be consumer electronics followed by fashion, restaurants and supermarkets. 

“While consumer electronics fell, supermarkets expanded and added Rs.2.7 billion to the sector top line, while QSR and ODEL’s local brands added better than expected to the top line,” Pathiarage said.

The sector EBITDA for the quarter under review registered a growth of 209 percent to Rs.2.3 billion while the operating profit increased to Rs.2 billion in 1Q23, from Rs.433 million in 1Q22.  “The retail sector, which recorded a formidable growth during the pandemic, is now facing one of the most challenging times in history. Import restrictions, scarcity of forex and depreciation of local currency, inflationary pressures, power outages, fuel crisis, reduced tourism, increased tax rates and declining household income have added to the industry woes,” Pathirage added.

The group said its Kandy Mall and Colombo 14 projects will be launched in September 2022 and December 2022, respectively while ODEL Mall is progressing and envisaged to open by 2024. The Havelock City mall project, where Softlogic serves as anchor tenants, is expected to open next year.
“Import challenges are not so much a hurdle to cross when we stock the new stores at Havelock City, given the relatively small value of LCs to be established in the overall scheme of things,” Pathirage said. 
“We continue to face increased cost of operations and are finding the right balance of repricing of goods to improve profit margins. Being a near monopolistic player in the luxury retail sector, sales volumes have remained stable, due to the near inelastic nature of demand. However, we foresee supply-side constraints in the upcoming months should forex problem persists,” he added.
Meanwhile, the group’s healthcare sector under the Asiri umbrella rose 14 percent YoY to Rs.5.4 billion during the quarter. The sector EBITDA recorded a strong growth of 9 percent YoY to Rs.1.4 billion and the operating profit increased 7 percent YoY to Rs.1 billion. 
The group’s IT sector revenue grew 40 percent YoY to Rs.1.8 billion during the quarter as B2B hardware and software solutions segment continued its pivotal contribution in delivering financial results primarily led by IT infrastructure projects.  The segment’s operating profit recorded an increase of 84 percent YoY to Rs.244 million for the quarter. Sector EBITDA for the quarter was Rs.272 million, up 69 percent.
The group’s financial services segment recorded a top line growth of 27 percent YoY to Rs.5.9 billion during the quarter. This growth was primarily led by Softlogic Life Insurance and Softlogic Finance. The sector operating profit for the quarter was Rs.564 million.
The group’s automobile sector revenue rose nearly 500 percent YoY to Rs.1.3 billion during the quarter. 
“Ambulance sales, catering state and private healthcare sector, continued to significantly contribute to the sector top line,” the company said. 
Pathirage owns little over 41 percent of the shares of Softlogic Holdings, as the single largest shareholder.