Fitch assigns ‘AA’ rating to Hela Apparel; cautions power cuts could hamper local operations

Fitch Ratings last week assigned ‘AA’ rating to Hela Apparel Holdings PLC with a ‘Stable’ outlook, but cautioned that the ongoing power crisis could hit the apparel maker’s Sri Lankan operations which account for 50 percent of its revenues.  

The company also has an expansive portfolio in Africa with five out of its twelve factories in Kenya, Ethiopia and Egypt.The operations in Egypt are being further expanded and set to come on line from this year.

Hela Apparel raised Rs.4.0 billion in an initial public offering (IPO) offering 20.5 percent stake or 267.1 million shares of the company at Rs.15 a share, being one of the few largest apparel makers to be listed in the CSE.

Its AA rating reflects the company’s, “over 15-year record as an apparel manufacturer and exporter catering to large global brands, as well as its lower foreign-currency risk and better financing flexibility than lower-rated domestic peers,” Fitch Ratings said. 

However, the rating agency said the firm’s rating is moderated by its small size relative to its peers, the discretionary demand for its products and limited bargaining power with its customers amid high customer concentration. 

According to Fitch’s measurements, the company’s top five customers account for 75 percent of sales in the financial year ended in March 2021. However, the rating agency said that Hela’s focus on basic apparel such as kids’ and activewear are in nature resilient to economic downturns and therefore limits the company’s exposure to excessive demand volatility from the economy and changing fashion trends. 

“Hela’s relationships with its customers also support order visibility in the medium term”, it added. 

“The Stable Outlook on Hela’s rating is underpinned by our expectations that its cash flows will improve in the next 12-24 months. This will stem from recovering global apparel demand and lower capex, improving its leverage,” the rating agency added. 

Meanwhile, Fitch cautioned about the prevailing power cuts and their potential fallout on the company’s operations in Sri Lanka, as despite assurances the apparel sector and the broader manufacturing sector is subjected to power cuts from time-to-time hampering their smooth operations. 

However, Hela’s utilisation of solar power for its operations could for a large part mitigate such risks.  The apparel industry collective last week warned the country’s authorities of the negative consequences it is facing due to the ongoing power crisis as they are scrambling to meet the orders of their clients who are particular about timely deliveries. 

Apparel industry is the largest by merchandise exports revenue, generating about US$ 5.0 billion per annum. In 2021, it generated US$ 5.43 billion with a robust 22.9 percent increase from the previous year. 

In January 2022, the industry generated US$ 516.1 million recording an increase of an equally strong 22 percent over the same period in 2021. 

Commenting on Hela’s foreign currency exposure, Fitch said the company’s exposure is limited as 95 percent of its sales are export based while most of its raw materials, which make up around 60 percent of total cost of sales, are imported. 

“This provides the company with a hedge against a weakening in local exchange rate where its manufacturing facilities are based. Consequently, Hela was able to keep its EBITDA margins steady despite volatility in the local exchange rates of its key production bases,” Fitch Ratings noted.