Despite facing a challenging global economic environment, subdued demand from key markets like Europe and the US, underutilized capacity, currency fluctuations, and increased competition, Hayleys Fabric (CSE: MGT) has demonstrated resilience through strategic product innovation and cost management, First Capital Research noted.
With expectations of demand rebounding by the second quarter of 2025, driven by improved consumer sentiment and easing inflation, Hayleys Fabric can capitalize on growth opportunities. The company’s commitment to sustainability and performance-driven fabrics will likely continue to attract global brands. With improved capacity utilization, Hayleys Fabric could see a return to stronger profitability. The outlook remains cautiously optimistic as the company navigates the ongoing economic challenges and seeks to regain momentum in a recovering market.
Hayleys Fabric reported earnings of Rs661.2 million in the September 2024 quarter, down 28.9% from a year ago and 16.2% from the previous March quarter due to lower demand for its fabrics from subdued clothing demand in Europe and the US, First Capital Research said.
Reduced demand led to underutilized capacity, around 75%. Competitive pressures resulted in price discounts, reducing gross profit margins, which contracted by 58bps quarter-on-quarter to 19.1%, though higher than the previous year. The Sri Lankan Rupee’s 7.8% appreciation against the US dollar also affected earnings growth. However, the cost of sales decreased by 19.6% YoY due to lower yarn prices, First Capital noted.
Hayleys Fabric expects capacity utilization to increase to 90% by March 2025 as demand could recover. While order books remain unfilled due to weak demand from clients like Nike, the company anticipates a gradual recovery.
First Capital says the company recorded an operating profit (EBIT) of Rs1.4 billion, reflecting a 15.1% decline from a year ago but a 4.5% increase quarter-on-quarter. Higher distribution expenses, which rose 5.3%, partly offset the increase in EBIT. Administration expenses dropped 5.3% to Rs914 million, mainly due to a reversal of provisions and the EBIT margin improved by 38bps from a year ago 10.9%. Net financing costs increased 89.5% from a year ago and 100.4% from the previous quarter, driven by exchange rate losses from the rupee’s appreciation, compounding the earnings squeeze.
Hayleys Fabric, founded in 1993, is a Sri Lankan fabric manufacturer that produces a range of knits and fabrics for global brands. After acquiring South Asia Textiles Limited in 2021, the company became Sri Lanka’s largest fabric manufacturer, employing over 3,000 people.
It operates three plants in Sri Lanka with a combined monthly capacity of 1,125MT for knitting, dyeing, finishing, printing, brushing, and suede. The company also has an innovation centre. In 2014, Hayleys Fabric launched its brand Inno, becoming the first fabric mill in Sri Lanka. Inno enables the company to offer fashion-forward, value-added fabrics.
Hayleys Fabric supplies fabrics for global fashion brands, including Victoria’s Secret, Intimissimi, Nike, Decathlon, Calvin Klein, Asics, Pink, Next, Tezenis, and Tommy Hilfiger. It specializes in manufacturing innovative synthetic knitted fabric for activewear, lingerie and casual and loungewear for global apparel brands, focusing on performance, sustainability, and functionality, like Eco Stretch, a fabric designed with an ultra-stretch profile. Made from recyclable materials, Eco Stretch offers flexibility and comfort and is suitable for activewear and casualwear, combining performance with sustainability.
Another product is Moisture Osmosis, a fabric featuring one-way moisture transfer technology. It moves sweat away from the body, keeping the wearer dry during physical activity. This fabric is durable and designed for performance apparel, maintaining its function over time.
Aqua Soft combines cotton with UV protection. It was developed for longer-lasting apparel, providing comfort and sun protection. Aqua Soft is used in outdoor and casualwear, offering durability and extended garment life.
In its 2023/24 annual report, Chief Executive Rohan Goonetileke said that Hayleys Fabric has demonstrated the strength of its business model and strategy despite challenges. The company aims to accelerate growth, leverage innovation and economies of scale, and pursue opportunities for value creation while prioritizing ESG commitments. The goal is to maintain industry leadership and ensure year-on-year value creation.
Hayleys Fabric expected to move past challenges from Sri Lanka’s 2022 economic crisis during the year but encountered global recessionary conditions driven by inflation and geopolitical tensions. Hayleys Fabric faced several challenges that tested its resilience and adaptability, requiring the company to adjust its operations and strategies to mitigate risks and maintain its position in the market.
The global economic environment was marked by rising inflation and economic uncertainty, partly by geopolitical tensions and supply chain disruptions. The widespread impact of the worldwide recession affected consumer demand, with many leading global apparel brands scaling back their orders as they sought to rationalize inventories and reduce risks. The volatility in order volumes created challenges in maintaining stable production schedules and efficiently utilizing manufacturing capacity.
In addition to the broader global recessionary pressures, Hayleys Fabric had to navigate the lingering effects of Sri Lanka’s 2022 economic crisis. While the company hoped the worst crisis was behind it, the ongoing instability presented operational disruptions, logistical issues, and fluctuating currency exchange rates. These factors added complexity to the company’s planning and resource allocation, requiring careful management of costs and production timelines.
Due to reduced customer order volumes, Hayleys Fabric faced underutilized production capacity, compelling the company to make difficult decisions, including temporarily suspending plant operations between production runs. Goonetileke said these shutdowns were sometimes necessary to avoid unnecessary costs but presented challenges in maintaining workforce morale and operational efficiency. The company had to balance production schedules with customer demands, ensuring it could meet deadlines while managing costs.
Global supply chain disruptions, particularly in shipping and raw material availability, added further pressure: shipping delays and the global shortage of key materials such as yarn created uncertainty in production timelines. Goonetileke noted that Hayleys Fabric worked proactively to address these shortages, strengthening relationships with yarn suppliers and leveraging volume advantages to improve supply chain agility. However, despite these efforts, the company still faced challenges in stabilizing the flow of materials and mitigating cost volatility due to supply constraints.
Shipping disruptions, exacerbated by global logistics issues, also caused product delivery delays. To minimize the impact of these delays on customers, Hayleys Fabric prioritized production efficiency and speed, sometimes opting for more expensive air freight options to meet order commitments. These higher costs, while necessary to preserve customer relationships, added pressure to the company’s bottom line.
As global apparel brands scaled back their order books, Hayleys Fabric faced difficulties securing firm commitments from top-tier customers. This uncertainty meant the company had to manage fluctuating demand carefully, balancing between securing new orders and ensuring the efficiency of existing production. Despite these challenges, Hayleys Fabric remained focused on maintaining customer trust by prioritizing timely deliveries and maintaining high production quality standards.
In its December 2024 earnings report on Hayley Fabric, First Capital Research said that while inflationary pressures in key markets like the USA and Europe have eased, and markets anticipate upcoming rate cuts, consumers are still reducing discretionary spending, including on apparel. Nike, a tier-1 client of MGT, faced weaker sales driven by poor demand, increased competition, and declining consumer spending, especially in China, the US, and Europe. The company has not seen significant sales growth from recent product launches. However, market participants remain hopeful for a demand recovery, expected to begin in the second quarter of 2025, as discretionary spending improves with the low inflation environment and rate cuts, the First Capital research note says.
In the third quarter of 2024, the global apparel trade increased by 14%, in contrast to the 5% annual decline, primarily driven by stock replenishments. Additionally, the University of Michigan’s Consumer Sentiment Index for November 2024 reached its highest level since April, suggesting the potential for a rapid recovery for the industry and Hayleys Fabric.