The conducive demand environment for Sri Lanka based consumer durables retailers is likely to continue in the short to medium term despite possible headwinds from depreciation in the Sri Lankan rupee against major currencies and higher import tariffs, Fitch Ratings says in a new report. The strong demand trend is supported by lower energy tariffs, low interest rates, public-sector salary increases and reductions in the prices of essential food items introduced by the new government in early 2015.

Fitch's outlook for consumer durables retailers is stable. The agency expects the sector margins to improve in 2016, helped by strong operating leverage resulting from top-line growth, expansion in high-margin hire purchase sales and cost-efficiency measures. However, Fitch expects retailers' margins to broadly settle in the high-single-digit range in the medium term, compared with the low-teens prior to 2013, owing to the shift in product mix towards IT and communication products.

Fitch expects a further improvement in leverage of the two Fitch-rated entities Singer (Sri Lanka) PLC (A-(lka)/Stable) and Abans PLC (BBB+(lka)/Stable) in 2016, due to improved FCF generation amidst increased profitability and low capex requirements. However, Singer's acquisitions in 2015 may temper the improvement in its leverage.