Softlogic Holdings PLC

ICRA Lanka revises the issuer rating of Softlogic Holdings PLC

InstrumentRated Amount (LKR Mn)Outstanding Amount (LKR MN)Rating Action
Issuer ratingN/ AN/ARevised to [SL]BBB- (Negative) from  [SL]BBB (Negative)
Commercial Paper program2,0002,000[SL]A3; reaffirmed

Rating action

ICRA Lanka Limited has revised the issuer rating of Softlogic Holdings PLC (SHL or the Company) from  [SL]BBB (pronounced SL triple B), to [SL]BBB- (pronounced SL triple B minus) the outlook remains Negative. ICRA Lanka has reaffirmed the issue rating of [SL]A3 (pronounced as S L A 3) for the existing LKR 2,000 Mn Commercial Paper Programme of Softlogic Holdings PLC (“SHL”/”the Company”)

Rationale

The rating downgrade factors in the weakening coverage indicators of the company, amidst the sharp increase in systemic interest rates and lower than expected dividend inflows from the group companies, particularly that in the retail sector. The challenging operating environment is expected to adversely affect some of the key subsidiaries of SHL, thereby affecting the dividend flow for the holding company during FY23.

The rating revision also factors in the elevated refinancing risk for SHL, with the tighter domestic liquidity conditions, compared to CY2021. ICRA Lanka notes that as of Dec-21, about 60% of SHL’s stand-alone debt constitutes short-term debt, mainly in the form of commercial papers. While these short-term commercial papers are repriced at much higher rates, the sharp increase in the treasury rates has resulted in institutional funds moving to government securities.

ICRA Lanka continues to factor in the elevated debt levels of the holding company, as the planned capital augmentation initiatives are affected by the adverse macro-outlook. ICRA Lanka notes that the higher debt levels of the holding company are largely attributable to financial support extended to the retail and leisure sectors of the group. Weak operating conditions faced by these sectors are likely to exert further pressure on the holding company’s balance sheet although we expect its core sectors – Healthcare and Financial services (mainly life insurance) to maintain momentum.

Outlook: Negative

The outlook may be revised to “Stable” in case of a significant reduction in SHL’s standalone debt levels and improvement of overall coverage and leverage indicators. The rating may be downgraded further in case of a further increase in debt levels and a weakening of the overall liquidity profile.  

Credit strengths

Holding company of diversified conglomerate with strong presence in fast-growing sectors such as retail, healthcare and financial services: Softlogic group is a conglomerate in Sri Lanka and has leading presence across several sectors such as healthcare (Asiri group), financial services (Softlogic Life Insurance and Softlogic Finance) and retail (Softlogic Retail, Softlogic Supermarkets, Softlogic Restuarants and Odel PLC). The ratings take note of the group’s dominant position in the private healthcare sector, with Asiri Hospitals Holdings occupying the market leadership among the leading hospital chains, and the group’s position as the second-largest consumer durables retailer in the country and the near monopoly status in branded fashion industry as the only company with distribution rights to over 100 brands. In addition, the group has strong presence in the life insurance sector, with Softlogic Life as the 3rd largest life insurance provided in the market.

Experienced and professional management team: The promoter/group chairman who is one of the Company’s founders is actively involved in the business operations and provides strategic guidance to the Group, while each of the core sectors is led by professional management teams. Group Chairman is also the Executive Chairman of Sri Lankan Airlines, where under his leadership the financial -performance of the national airline has significantly improved recently. He also sits on the Sub-Committee of the Monetary Board of CBSL. Over the last few years, the Group has inducted experienced industry professionals under key business segments, which is a positive.

Credit challenges

Challenging macro-outlook affecting some of the key sectors of the group: The retail sector, which primarily consists of consumer durables, mobile devices, supermarkets, and fashion clothing, collectively accounts for over 50% of group revenue. The retail sector, along with the leisure sector got affected by the Easter events in April 2019, followed by the COVID-19 pandemic and its aftermath. While the retail sector has shown strong recovery during the 2HFY22, ICRA Lanka expects the sector to underperform during the next  6 – 12 months. The retail sector is under pressure due to the challenging macro environment, characterized by import restrictions, lower disposable income, and higher cost of consumer finance. Going forward, the holding company would be increasingly reliant on the dividend income from its flagship subsidiary, Asiri Hospitals Holdings, as the healthcare and financial services sectors are expected to be somewhat resilient.

Stretched capital structure and coverage indicators: The holding Company has availed loans to fund acquisitions as well as to extend support to group entities, mainly in the retail and leisure sectors that have put pressure on the gearing and coverage indicators of the holding company. ICRA Lanka expected the stand-alone debt levels to remain elevated, as some of the capital augmentation plans are delayed due to adverse macro conditions. The coverage indicators of SHL somewhat improved during FY21, with interest cover increasing to 1.23x in FY21, from about 0.7x in FY20; the same was reported at 1.02x in 9MFY22. However, ICRA Lanka expects the same to deteriorate in FY23, with the sharp increase in systemic interest rates and lower dividend income from the retail sector subsidiaries. Debt to EBITDA has increased to 10.9x as in Dec-21, from about 7.2 times as in Mar-21.

Elevated refinancing risk due to the tightening market liquidity: As in Dec-21, about 60% of the stand-alone debt of SHL was in the form of short-term funding sources such as commercial papers, thus the company is heavily reliant on rolling over its debt obligations. ICRA Lanka notes that, with the recent sharp increase in treasury rates, institutional investors are increasingly moving to Gsec investments, and the fixed-income funds, one of the key participants of commercials papers, are seeing a sharp decline in AUM. In addition, the steep correction in the equity market would also affect the financial flexibility of the company, as SHL tends to leverage its listed subsidiaries for funding purposes. ICRA Lanka expects the current liquidity condition in the market to exert pressure on the overall funding profile of SHL, in the near term.

Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies, as indicated below.

Links to applicable criteria: ICRA Lanka’s Issuer Credit Rating Methodology

Company Profile:

Softlogic Holdings PLC (SHL /“the Company”) was founded in 1991 and was listed on the Colombo Stock Exchange in June 2011. The Company acts as the primary holding Company for the Softlogic Group of entities with businesses across healthcare, financial services, retail, information and communication technology (ICT), leisure/hotels and automobile dealerships. The Group has strong market positions in segments such as healthcare, financial services and retail. SHL was founded by the prominent Sri Lankan entrepreneur Mr. Ashok Pathirage, along with his promoters, has controlling stake of the Company. 

On a consolidated basis, in FY21, SHL reported a net loss of LKR 3,365 Mn on revenue of LKR 82,621 Mn vis-à-vis a net loss of LKR 3,181 Mn on a revenue of LKR 76,722 Mn during the previous financial year. On a standalone basis, in FY21, SHL reported a net profit of LKR 756 Mn on a total operating income of LKR 4,758 Mn vis-à-vis a loss of LKR 1,134 Mn on a total operating income of LKR 2,970 Mn during the previous financial year.

On a consolidated basis, during 9MFY22, SHL reported a net profit of LKR 3,096 Mn on revenue of LKR 85,166 Mn. On a standalone basis, during 9MFY22, SHL reported a net profit of LKR 42 Mn on a total operating income of LKR 3,016 Mn.

Key Financial Indicators (Standalone)
LKR MnFY20FY219MFY22*
Operating Income2,9704,758 3,016
OPBDITA2,3264,127 1,165
PAT(1,134)756 42
Net Debt26,96334,579 33,318
Networth14,23914,995 15,037
Gearing (x)1.842.31 2.22

*-Unaudited Financials

Rating history for the last three years:
Analysts
Rasanga Waliwatte
Head of Ratings
+94-773553564
rasanga@icralanka.com

Nithya Debaddi
+91-9908912213
nithya.debaddi@icraindia.com

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