PRESS RELEASE:Fitch Affirms Sri Lanka\'s Hayleys MGT Mill Ratings

Tag : Polyester Knit
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Fitch Ratings-London/Colombo/Mumbai/Singapor-30 July 2008: FitchRatings Lanka has today affirmed Sri Lanka-based Hayleys MGTKnitting Mills PLC's (HMGT) National Long-term rating at'BBB+(lka)'. The Outlook is Stable.
The rating reflects HMGT's strong credit matrix and marketposition. However, the rating is currently constrained by apotential withdrawal of the Generalised System of Preferences Plus(GSP+) scheme by the European Union (EU), due to HMGT's significantvolume of indirect sales to the EU. In addition, a tightening ofglobal demand for garments, higher local competition in themedium-term and significant cost increases remain challenges.
The EU's decision on re-awarding or withdrawing GSP+ scheme to SriLanka acts as an overhang on the rating, as approximately 70% ofHMGT's sales in FY08 were indirectly to EU-based brands. Fitch alsoviews the slowdown in sales of final garment products in thedeveloped markets (Q109 - Marks & Spencer: clothing down 3.6%;Next Plc: retail down 5%) and cost increases in input cotton yarnand utilities as key operational constraints for HMGT. Over themedium-term, the possible entry of a large Indian knit manufacturerby 2009 is also expected to increase competition within the localindustry.
However, HMGT's encouraging financial and operating performanceover the last three years, with continuous revenue growth(FY06-FY08 compounded annual growth rate: 26%), margin stabilitywithin a low volatility band (Gross Profit:2 4%-26% ; Profit AfterTax: 9.8%-10.5%), improved working capital management, and theforecasted leveling-off of capital expenditure in the short-termare expected to act as a cushion to the above negative effects.
HMGT's coverage and leverage ratios (as measured by funds fromoperations/ gross interest expense and total adjusted debt, net ofcash/operating EBITDAR) have gradually improved over the last threeyears to 5.9x and 1.6x respectively (FYE08). Its lower liquidityand the reduced undrawn credit facilities will be, to some extent,negated by the expected reduction of capital expenditure in theshort-term, and the possible increase in access to credit lines dueto an enhancement of banks' "single borrower limits" subsequent tomain shareholder Hayleys' divestures.
HMGT is the second-largest independent knitted fabric manufacturerin Sri Lanka, with predominantly local sales (transactions in USD)to large garment manufacturers based in Sri Lanka. HMGT remains akey player in the backward integration process for local valueaddition under the GSP+ scheme, and has obtained accreditationsfrom global brands such as M&S, Next, and Bhs. HMGT, with 15years of experience, remains the only factory in Sri Lanka capableof producing 100% polyester fabric, and currently manufactures awide range of products.
Fitch's rating definitions and the terms of use of such ratings areavailable on the agency's public site, www.fitchratings.com .
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