Fitch affirms DSI Holdings at ‘A-(lka)’

Fitch Ratings Lanka has affirmed Sri Lanka based DSI Holdings Limited’s (DSIHL) National Long-Term rating at ‘A-(lka)’ with Stable Outlook. Its senior unsecured notes have also been affirmed at ‘A-(lka)’.

The rating reflects DSIHL’s leading market position in Sri Lanka’s footwear industry, and the resilience of its business to economic cycles, which has largely allowed the company to sustain its sales and profit margins. DSIHL also benefits from a lack of strong competition in the footwear market, helped by high import duties since 2005. The rating is constrained by a lack of clarity on the credit profile of its 100% parent D Samson Group (DSG), of which DSIHL accounted for 66% of revenue and 50% of profits at end-March 2010, due to delays in producing consolidated financial statements of the group.

DSIHL’s revenues and EBITDAR grew 23% and 28% respectively in the financial year ended March 2011, largely on account of a sharp increase in average prices across its footwear business. Footwear volumes grew 5% despite the sharp price increase, reflecting inelastic demand for DSIHL’s products. EBITDAR growth was also helped by cost curtailment measures implemented during the period.

Fitch expects DSIHL’s financial leverage (defined as net adjusted debt / EBITDAR) to increase in FY12 on higher expansionary capex and investments expected across most business lines.

However, capex is likely to normalize post-FY12 and Fitch expects DSIHL’s financial leverage to remain within the 3.0x guideline for its current rating, helped by expectations of strong operating cash flow generation.