Fitch affirms Hayleys MGT Knitting Mills at ‘BBB+(lka)’
Fitch Ratings Lanka has affirmed Sri Lanka-based Hayleys MGT Knitting
Mills PLC’s (HMGT) National Long-term rating at ‘BBB+(lka)’. The Outlook
The rating reflects HMGT’s strong credit matrix and market position.
However, the rating is currently constrained by a potential withdrawal
of the Generalised System of Preferences Plus (GSP+) scheme by the
European Union (EU), due to HMGT’s significant volume of indirect sales
to the EU.
In addition, a tightening of global demand for garments, higher local
competition in the medium-term and significant cost increases remain
The EU’s decision on re-awarding or withdrawing GSP+ scheme to Sri
Lanka acts as an overhang on the rating, as approximately 70% of HMGT’s
sales in FY08 were indirectly to EU-based brands.
Fitch also views the slowdown in sales of final garment products in
the developed markets (Q109 - Marks & Spencer: clothing down 3.6%; Next
Plc: retail down 5%) and cost increases in input cotton yarn and
utilities as key operational constraints for HMGT.
Over the medium-term, the possible entry of a large Indian knit
manufacturer by 2009 is also expected to increase competition within the
However, HMGT’s encouraging financial and operating performance over
the last three years, with continuous revenue growth (FY06-FY08
compounded annual growth rate: 26%), margin stability within a low
volatility band (Gross Profit:2 4%-26%; Profit After Tax: 9.8%-10.5%),
improved working capital management, and the forecasted leveling-off of
capital expenditure in the short-term are expected to act as a cushion
to the above negative effects.
HMGT’s coverage and leverage ratios (as measured by funds from
operations/gross interest expense and total adjusted debt, net of
cash/operating EBITDAR) have gradually improved over the last three
years to 5.9x and 1.6x respectively (FYE08).
Its lower liquidity and the reduced undrawn credit facilities will
be, to some extent, negated by the expected reduction of capital
expenditure in the short-term, and the possible increase in access to
credit lines due to an enhancement of banks’ “single borrower limits”
subsequent to main shareholder Hayleys’ divestures. HMGT is the
second-largest independent knitted fabric manufacturer in Sri Lanka.