Local apparel makers confront liquidity and interest rate risks amid demand slowdown

• Fitch cuts Hela Apparel rating to ‘AA-‘ on weak interest cover and leverage indicators 

The slowdown in demand in major apparel markets and the rising borrowing costs have begun to take toll on the local apparel makers’ financial profiles as they are facing tight liquidity, weak interest coverage and leverage in their balance sheets.  Fitch Ratings last week downgraded Hela Apparel Holdings PLC, the only listed apparel maker in Sri Lanka, which has diversified its operations well into the African continent.   Fitch cut the company’s rating by a notch to ‘AA-‘ from ‘AA’ with the revising outlook to Negative, considering the risks of prolonged weakness in demand for apparel in key markets such as the United States and Europe and potential supply chain issues, which it said could delay improvement in profitability. 

In the three months to December 2022, Hela Apparel reported revenue of Rs.21.8 billion, up by a solid 44.8 percent from the same period in 2021, but posted a net loss of Rs.1.68 billion from a profit of Rs.452.2 million a year ago as borrowing costs surged. 

The finance cost more than tripled to Rs.1.09 billion between the two quarters reflecting the sharp rise in borrowing costs both at home and abroad. 
“The business requires high working capital for growth, while profitability is challenged by weakening global demand. The high interest-rate environment is also pressuring liquidity with high borrowing costs,” Fitch Ratings said. 

Hela has access to diversified funding as it recently raised US$ 14 million from Norway-based Norfund to fund its African operations. 
“This supports Hela’s funding access compared with that of many other Sri Lankan corporates amid the country risk,” Fitch added. 
Hela’s well diversified operations also reduces its operational risk as it has 10 manufacturing facilities spread in Sri Lanka, Kenya, Ethiopia, and its latest in Egypt.