Softlogic Holdings PLC

ICRA Lanka revises the ratings 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)
Senior, unsecured, non-listed, redeemable, debentures programme1,0001,000Revised to [SL]BBB (Negative) from [SL]BBB+ (Negative)

Rating action

ICRA Lanka Limited, has revised the issuer rating of Softlogic Holdings PLC (SHL or the Company) to [SL]BBB (pronounced SL triple B) with Negative outlook from [SL]BBB+ (pronounced SL triple B plus), with Negative outlook. ICRA Lanka has also revised the issue rating assigned to the LKR 1,000 Mn senior, unsecured, unlisted redeemable debentures programme to [SL]BBB (pronounced SL triple B) with Negative outlook from [SL]BBB+ (pronounced SL triple B plus), with Negative outlook.  

Rationale

The rating revisions factor in the challenging business outlook for the key sectors of the Group, including retail and leisure, increasing debt levels and gearing indicators at the holding company level,  delays in anticipated equity fundraising initiatives (including disposal of non-core assets) at various sector levels, in the light of current macro conditions in the country. As of December 2020, the combined retail and leisure sectors accounted for about 54% of group turnover, while these two sectors accounted for the bulk of group investments over the last 4-5 years. The rating downgrades reflecte the challenging business outlook, especially for these two sectors following the COVID-19 outbreak.

The rating downgrades factor the increase in debt at the standalone holding company level that is largely attributable to the financial support provided for the retail and leisure sectors by the holding company. ICRA Lanka also notes that planned capital raising and asset disposals at various segments of the group got delayed due to the macro uncertaininty that prevailed in the aftermath of the pandemic. The ratings also factor the increased debt servicing requirement at the holding company level, especially over the short term.  Short term refinancing risk which stems from non-bank Commercial paper maturitities have generally been offset by the Group’s capacity to access short term funding sources from banks and institutions which have surplus liquidity.

Going forward, SHL’s ability to complete the planned equity fundraising exercises within a reasonable timeline, dispose of non-core assets,  reduce the debt at the holding company level, and improve the overall earnings profile of the retail sector will be crucial from a rating point of view.

Outlook: Negative

The outlook may be revised to “Stable” based on SHL’s ability to reduce the Holding company debt level, improve liquidity profile, and if there is a notable performance improvements in core sectors, including retail.  The ratings may be downgraded in case of a further increase in debt levels, further delay in envisagd support from funding partners and deterioration in group performance.

Key rating drivers

Credit strengths

Holding company of diversified conglomerate with strong presence in fast-growing sectors such as  healthcare, financial services and retail: 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 accounting for about 40% market share (based on number of beds) among the leading hospital chains, the group’s position as the second largest consumer durables retailer in the country and the leader in fashion retailing. In addition, the group has strong presence in the life insurance sector, with Softlogic Life, the 3rd largest life insurance provider in the market. ICRA Lanka takes note of the long-term growth potential of these segments, although they remain vulnerable to economic cycles, forex volatility, interest rate movements, and changes in government policies. Apart from the core sectors, the Group also has presence in several other sectors including leisure, restaurants, and automobile dealerships.

Experienced and professional management team: The promoter/group chairman who is one of the Company’s founders is actively involved in business operations and provides strategic guidance to the Group, while each of the core sectors is led by a professional management team. Over the last few years, the Group has inducted experienced industry professionals under key business segments, which is a positive.

Access to funding with good relationships with banks and other funding partners: SHL group has demonstrated a good track record of raising both debt and equity funding through its strong relationships with leading banks and other global funding partners. The ratings factor the presence of several international institutional investors at various group companies and at the holding company level. In addition, the banks have demonstrated their willingness to extend support to the Group during challenging business cycles, as witnessed over the last two years.

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 about 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. ICRA Lanka notes that segments of retail and leisure sectors have primarily contributed to the group losses in FY2020 and the 9M ended December 2020. ICRA Lanka also notes that the challenges in the retail and leisure sectors have affected the capitalization profile of the holding company, as the parent company has continued to extend financial support for these group companies. However, ICRA Lanka takes cognizance of the long term prospects of the retail sector and  interest among the international investors in the sector.

Stretched capital structure and coverage indicators at group level: 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. Although SHL witnessed some improvement in the capital structure following the private placement and the rights issue during Q1 FY2019, the debt level of the holding company has increased again during the last two years due to the incremental financial support extended to the retail and leisure sectors to support their expansions. ICRA Lanka notes the sharp increase in net debt at the holding company level, from about LKR 21.1 Bn in March 2019 to about LKR 26.9Bn in March 2020 and LKR 30.3Bn in December 2020. Standalone gearing (Net Debt/ Total Equity) stood at 2.12x as in December 2020 vis-à-vis 1.89x in March 2020 and 1.32x in March 2019. The Easter bombing impacted the Group significantly with lower local and tourist consumer demand and spend. As a result, the leverage (Debt/EBITDA) at the holding company level has increased to about 11.94x as in March 2020, from about 10.32x as in March 2019, however, the same somewhat improved during 9M Dec-20 to about 8.4X, due to dividend income received from group companies. Going forward, ICRA Lanka expects the leverage levels to somewhat improve by March 2021, as there is a higher dividend visibility during the period, especially due to pent up consumer demand that is likely to benefit the retail segments of the group.

The ratings are also affected by the delay in the planned capital raising and asset disposals that were supposed to improve the overall capitalization profile of the group, as well as the holding company. Going forward, it will be crucial for SHL to improve the capitalization profile by bringing in fresh capital and disposing of its non-core assets.

Higher debt servicing requirement over the short term: As in December 2020 at a standalone level, SHL had term loan repayment of LKR 3.7Bn due over the next 12 months and short-term debt (mainly commercial papers) of LKR 19.3 Bn maturing over the same period. While ICRA Lanka expects the banks to roll-over these short-term loan maturities as they have done in the past, there is refinancing risk from the non-bank commercial paper maturities, which is mitigated to some extent by the excess liquidity in the market. Availability of unutilized sanction limits and liquidity buffers within the group is also expected to provide some comfort from a liquidity point of view. In addition, ICRA Lanka expects the Company to leverage on its good banking relationships to secure funding to meet immediate liquidity requirements. This will be a key monitorable going forward.

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, who has controlling stake of the Company. 

On a consolidated basis, for the year ended March 31, 2020, SHL reported a net loss of LKR 3,181Mn on revenue of LKR 76,722 Mn vis-à-vis a PAT of LKR 2,990 Mn on a revenue of LKR 75,143 Mn during the previous financial year. On a standalone basis, for the year ended March 31, 2020, SHL reported a net loss of LKR 1,134 Mn on a total operating income of LKR  2,970 Mn vis-à-vis a loss of LKR 668 Mn on a total income of LKR 2,692 Mn during the previous period fiscal.

On a consolidated basis, for the 9M ended December 31, 2020, SHL reported a net loss of LKR 3,021 Mn on a revenue of LKR 57,907 Mn. On a standalone basis, for the 9M ended December 31, 2019, SHL reported a PAT of LKR 41 Mn on a total operating income of LKR 3,123 Mn.  

Key Financial Indicators (Consolidated)
LKR MnFY19FY209MFY2021*
Operating Income75,14376,72257,907
OPBDITA11,22211,05211,052
PAT2,990-3,181-3,021
Net Debt (Excluding Public Deposits)62,59172,78671,289
Reported Networth24,83921,72619,031
Reported Gearing (x) 2.88 3.35 3.75
Adjusted Gearing1 (x) 4.91 6.16 7.91
OPBDITA/Interest & Finance Charges(x)2.602.182.09
Total Debt/OPBDITA (x) 5.58 6.59 6.45

*-Unaudited Financials

Note 01: Gearing adjusted for deferred tax and revaluation gains

Key Financial Indicators (Standalone)
LKR MnFY19FY209MFY2021*
Operating Income2,6922,9703,123
OPBDITA2,0472,2582,698
PAT-668-1,13441
Total Debt21,12326,96330,258
Networth15,99014,23914,280
Gearing (x) 1.32 1.89 2.12
OPBDITA/Interest & Finance Charges(x) 0.78 0.66 1.03
Total Debt/OPBDITA (x)10.3211.948.41

*-Unaudited Financials

Note 01: PAT of FY2018 includes one-of capital gains from group restructuring

Rating history for the last three years:
Analyst
Rasanga Weliwatte
Head of Finance Sector Ratings
+94-773553564
rasanga@icralanka.com

Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

A Group Company of Moody's Investors Service

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2021 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.

Softlogic Holdings PLC

ICRA Lanka revises the ratings 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)
Senior, unsecured, non-listed, redeemable, debentures programme1,0001,000Revised to [SL]BBB (Negative) from [SL]BBB+ (Negative)

Rating action

ICRA Lanka Limited, has revised the issuer rating of Softlogic Holdings PLC (SHL or the Company) to [SL]BBB (pronounced SL triple B) with Negative outlook from [SL]BBB+ (pronounced SL triple B plus), with Negative outlook. ICRA Lanka has also revised the issue rating assigned to the LKR 1,000 Mn senior, unsecured, unlisted redeemable debentures programme to [SL]BBB (pronounced SL triple B) with Negative outlook from [SL]BBB+ (pronounced SL triple B plus), with Negative outlook.  

Rationale

The rating revisions factor in the challenging business outlook for the key sectors of the Group, including retail and leisure, increasing debt levels and gearing indicators at the holding company level,  delays in anticipated equity fundraising initiatives (including disposal of non-core assets) at various sector levels, in the light of current macro conditions in the country. As of December 2020, the combined retail and leisure sectors accounted for about 54% of group turnover, while these two sectors accounted for the bulk of group investments over the last 4-5 years. The rating downgrades reflecte the challenging business outlook, especially for these two sectors following the COVID-19 outbreak.

The rating downgrades factor the increase in debt at the standalone holding company level that is largely attributable to the financial support provided for the retail and leisure sectors by the holding company. ICRA Lanka also notes that planned capital raising and asset disposals at various segments of the group got delayed due to the macro uncertaininty that prevailed in the aftermath of the pandemic. The ratings also factor the increased debt servicing requirement at the holding company level, especially over the short term.  Short term refinancing risk which stems from non-bank Commercial paper maturitities have generally been offset by the Group’s capacity to access short term funding sources from banks and institutions which have surplus liquidity.

Going forward, SHL’s ability to complete the planned equity fundraising exercises within a reasonable timeline, dispose of non-core assets,  reduce the debt at the holding company level, and improve the overall earnings profile of the retail sector will be crucial from a rating point of view.

Outlook: Negative

The outlook may be revised to “Stable” based on SHL’s ability to reduce the Holding company debt level, improve liquidity profile, and if there is a notable performance improvements in core sectors, including retail.  The ratings may be downgraded in case of a further increase in debt levels, further delay in envisagd support from funding partners and deterioration in group performance.

Key rating drivers

Credit strengths

Holding company of diversified conglomerate with strong presence in fast-growing sectors such as  healthcare, financial services and retail: 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 accounting for about 40% market share (based on number of beds) among the leading hospital chains, the group’s position as the second largest consumer durables retailer in the country and the leader in fashion retailing. In addition, the group has strong presence in the life insurance sector, with Softlogic Life, the 3rd largest life insurance provider in the market. ICRA Lanka takes note of the long-term growth potential of these segments, although they remain vulnerable to economic cycles, forex volatility, interest rate movements, and changes in government policies. Apart from the core sectors, the Group also has presence in several other sectors including leisure, restaurants, and automobile dealerships.

Experienced and professional management team: The promoter/group chairman who is one of the Company’s founders is actively involved in business operations and provides strategic guidance to the Group, while each of the core sectors is led by a professional management team. Over the last few years, the Group has inducted experienced industry professionals under key business segments, which is a positive.

Access to funding with good relationships with banks and other funding partners: SHL group has demonstrated a good track record of raising both debt and equity funding through its strong relationships with leading banks and other global funding partners. The ratings factor the presence of several international institutional investors at various group companies and at the holding company level. In addition, the banks have demonstrated their willingness to extend support to the Group during challenging business cycles, as witnessed over the last two years.

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 about 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. ICRA Lanka notes that segments of retail and leisure sectors have primarily contributed to the group losses in FY2020 and the 9M ended December 2020. ICRA Lanka also notes that the challenges in the retail and leisure sectors have affected the capitalization profile of the holding company, as the parent company has continued to extend financial support for these group companies. However, ICRA Lanka takes cognizance of the long term prospects of the retail sector and  interest among the international investors in the sector.

Stretched capital structure and coverage indicators at group level: 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. Although SHL witnessed some improvement in the capital structure following the private placement and the rights issue during Q1 FY2019, the debt level of the holding company has increased again during the last two years due to the incremental financial support extended to the retail and leisure sectors to support their expansions. ICRA Lanka notes the sharp increase in net debt at the holding company level, from about LKR 21.1 Bn in March 2019 to about LKR 26.9Bn in March 2020 and LKR 30.3Bn in December 2020. Standalone gearing (Net Debt/ Total Equity) stood at 2.12x as in December 2020 vis-à-vis 1.89x in March 2020 and 1.32x in March 2019. The Easter bombing impacted the Group significantly with lower local and tourist consumer demand and spend. As a result, the leverage (Debt/EBITDA) at the holding company level has increased to about 11.94x as in March 2020, from about 10.32x as in March 2019, however, the same somewhat improved during 9M Dec-20 to about 8.4X, due to dividend income received from group companies. Going forward, ICRA Lanka expects the leverage levels to somewhat improve by March 2021, as there is a higher dividend visibility during the period, especially due to pent up consumer demand that is likely to benefit the retail segments of the group.

The ratings are also affected by the delay in the planned capital raising and asset disposals that were supposed to improve the overall capitalization profile of the group, as well as the holding company. Going forward, it will be crucial for SHL to improve the capitalization profile by bringing in fresh capital and disposing of its non-core assets.

Higher debt servicing requirement over the short term: As in December 2020 at a standalone level, SHL had term loan repayment of LKR 3.7Bn due over the next 12 months and short-term debt (mainly commercial papers) of LKR 19.3 Bn maturing over the same period. While ICRA Lanka expects the banks to roll-over these short-term loan maturities as they have done in the past, there is refinancing risk from the non-bank commercial paper maturities, which is mitigated to some extent by the excess liquidity in the market. Availability of unutilized sanction limits and liquidity buffers within the group is also expected to provide some comfort from a liquidity point of view. In addition, ICRA Lanka expects the Company to leverage on its good banking relationships to secure funding to meet immediate liquidity requirements. This will be a key monitorable going forward.

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, who has controlling stake of the Company. 

On a consolidated basis, for the year ended March 31, 2020, SHL reported a net loss of LKR 3,181Mn on revenue of LKR 76,722 Mn vis-à-vis a PAT of LKR 2,990 Mn on a revenue of LKR 75,143 Mn during the previous financial year. On a standalone basis, for the year ended March 31, 2020, SHL reported a net loss of LKR 1,134 Mn on a total operating income of LKR  2,970 Mn vis-à-vis a loss of LKR 668 Mn on a total income of LKR 2,692 Mn during the previous period fiscal.

On a consolidated basis, for the 9M ended December 31, 2020, SHL reported a net loss of LKR 3,021 Mn on a revenue of LKR 57,907 Mn. On a standalone basis, for the 9M ended December 31, 2019, SHL reported a PAT of LKR 41 Mn on a total operating income of LKR 3,123 Mn.  

Key Financial Indicators (Consolidated)
LKR MnFY19FY209MFY2021*
Operating Income75,14376,72257,907
OPBDITA11,22211,05211,052
PAT2,990-3,181-3,021
Net Debt (Excluding Public Deposits)62,59172,78671,289
Reported Networth24,83921,72619,031
Reported Gearing (x) 2.88 3.35 3.75
Adjusted Gearing1 (x) 4.91 6.16 7.91
OPBDITA/Interest & Finance Charges(x)2.602.182.09
Total Debt/OPBDITA (x) 5.58 6.59 6.45

*-Unaudited Financials

Note 01: Gearing adjusted for deferred tax and revaluation gains

Key Financial Indicators (Standalone)
LKR MnFY19FY209MFY2021*
Operating Income2,6922,9703,123
OPBDITA2,0472,2582,698
PAT-668-1,13441
Total Debt21,12326,96330,258
Networth15,99014,23914,280
Gearing (x) 1.32 1.89 2.12
OPBDITA/Interest & Finance Charges(x) 0.78 0.66 1.03
Total Debt/OPBDITA (x)10.3211.948.41

*-Unaudited Financials

Note 01: PAT of FY2018 includes one-of capital gains from group restructuring

Rating history for the last three years:
Analyst
Rasanga Weliwatte
Head of Finance Sector Ratings
+94-773553564
rasanga@icralanka.com

Disclaimer
ICRA Logo

Subsidiary of ICRA Limited

CORPORATE OFFICE
Level10, East Tower, World Trade Center, Colombo 01, Sri Lanka
Tel:+94 11 4339907;Fax:+94112333307 Email:info@icralanka.com; Website:www.icralanka.com

© Copyright, 2021 ICRA Lanka Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA Lanka.

ICRA Lanka ratings should not be treated as recommendations to buy, sell or hold the rated debt instruments. ICRA Lanka ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA Lanka rating is a symbolic indicator of ICRA Lanka’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations, with reference to the instrument rated. Please visit our website www.icralanka.com or contact ICRA Lanka’s office for the latest information on the outstanding ICRA Lanka ratings.

All information contained herein has been obtained by ICRA Lanka from sources believed by it to be accurate and reliable, including the rated issuer. ICRA Lanka however has not conducted any audit of the rated issuer or of the information provided by it. While reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind, and ICRA Lanka in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information.

ICRA Lanka does not take any responsibility for accuracy of material/documents prepared or published by other parties based on this document. All ICRA Lanka official rating rationales are prepared in English and external parties may present or publish translated versions of the same. Readers are henceforth advised to refer to the ICRA Lanka’s official rating rationale in the event of any inconsistency found in such documents.

ICRA Lanka or any of its group companies may have provided services other than rating to the issuer rated. All information contained herein must be construed solely as statements of opinion, and ICRA Lanka shall not be liable for any losses incurred by users from any use of this publication or its contents.