The purchase of South Asia Textiles Limited by Hayleys Fabric PLC could in the short-term weigh on the combined entity earnings due to decline in margins and the increase in finance cost stemming from the borrowings, which may have been made to fund their April acquisition.
Hayleys Fabric PLC on April 23 paid Rs.3.95 billion to buy 98.84 percent stake in South Asia Textiles from its promoters Ambeon Holdings PLC and a minority shareholder to add capacity to the former, which is into knit-fabric making for global clothing brands.
Despite the short-term pressure on earnings, First Capital Research (FCR) said the combined entity will record double digit growth in the top line from higher capacity and also a sharp depreciation is expected in the rupee against the dollar as almost all revenues at Hayleys Fabric are generated in foreign currency terms.
“ …we expect a short term gloomy outlook on MGT (Hayleys Fabric), as post acquisition profitability is likely to get affected due to possible decline in margins and increase in finance cost in the combined entity,” FCR said in an earnings update issued recently. However, earnings are expected to recover from the financial year beginning April 1, 2022 (FY23) with synergies coming into play after resolving out potential integration issues between the two companies.
The acquisition of South Asia Textiles made Hayleys Fabric the largest fabric manufacturer in Sri Lanka with a capacity of 57 metric tonnes a day. The closest competitors, Ocean Lanka and Teejay Lanka PLC are assumed to have a capacity of 40 metric tonnes a day, according to First Capital.
“SAT is capable of producing 25 metric tonnes a day, predominantly in the cotton fabric segment. We expect the acquisition to satisfy the capacity requirement after certain equipment changes to enable the plant to enter the synthetic fabric segment.
Hayleys Fabric reported elevated performance for the financial year ended March 31, 2021 with revenues of Rs.14.8 billion and earnings of Rs.736.2 million, each recording an increase of 21 percent and 218 percent induced by a pandemic-fuelled demand for specialised fabrics, which the company called, ‘Health Clothing’, which provide protection against viruses and bacteria.
However, there was a decline in margins between the quarters ended in December 2020 and March 2021, which perhaps could persist through the ongoing financial year that ends in March 2022.
However the added capacity, together with the expected depreciation in the rupee against the dollar could provide much heft to Hayleys Fabric to grow its top line by a robust 23 percent in the financial year ending March 2022, FCR estimates.
The research house projects earnings of Rs.682 million for the company in the incumbent financial year, down 7 percent from the previous financial year and Rs.822 million in the next financial year that ends in March 2023, with a 21 percent increase.
FCR does not expect the possible loss of GSP Plus concession to have much bearing on Hayleys Fabric as nearly 65 percent of its fabric is sold to the United States and the company had expressed confidence in increasing volumes to other markets should the concession ends.
