Hela Clothing was completing a tough restructuring when the global Covid-19 pandemic broke. The shakeup saw the closure of five factories bringing the total factories operated by Hela in Sri Lanka down to seven within a year.
The company operates two factories in Africa, in Ethiopia and Kenya.Hela placed the seven factories in Sri Lanka on double shifts to absorb all the shop floor workers from the five shuttered plants. But Hela let go of underperforming executives at manager level and above across the group.
The tough measures were bearing fruit. After years in the red, the leadership at Hela engineered a turnaround with a profit of Rs1 billion for the year ending March 2020. By then, Covid-19’s global spread shut down borders across the world as countries went into lockdown.
Hela’s seven factories in Sri Lanka, Ethiopia, and Kenya shuttered for most of April.The company differed salaries to conserve cash but unlike others in the industry, Hela did not layoff staff.
Since normalising operations in May, Hela is on a roll! Hela Clothing is coming out of the Covid-19 crisis—and an internal crisis of its own making—faster than anyone expected. Hela is paying full salaries and paid back the deferred wages.
“Whilst we remain cautiously optimistic, the second half of the year is looking much better, and we have healthy orders till mid-2021,” Hela’s Group Chief Executive Dilanka Jinadasa said.
Revenue in the 2020/21 financial year will exceed Hela’s highest revenue of $193 million it made two years earlier for the 2018/19 financial year, he said.
Hela’s revenue of $135 million for the first quarter of the 2020/21 financial year has already reached 70% of that full year high. While margins will likely tighten, Jinadasa is confident that Hela will close the financial year in March 2021 with ‘satisfactory’ profits.
Covid-19 is forcing businesses large and small world over to reimagine and reorder themselves, restructure their balance sheets and renegotiate terms with lenders, suppliers, and employees. It is not just about surviving this pandemic but growing a sustainable business.
According to a report filed by Echelon’s sister news agency, Economy Next, Sri Lanka’s apparel industry expected a $1.5 billion loss in export earnings in the April-June quarter of 2020 due to Covid-19.
Markets in North America which account for 65% of Sri Lankan clothing exports, and the EU with 25%, collapsed due to lockdowns and social distancing to contain the spread of Covid-19. Many fashion stores shuttered in these markets, letting go of staff in their thousands.
Fashion brands requested clothing manufacturers in Sri Lanka for steep discounts, to differ delivery or cancel orders. Brandix and MAS are Sri Lanka’s two largest companies. China going into lockdown hit their supply chains during the early stages of the pandemic.
When China began opening up, Western markets began to shut down as Covid-19 spread. It was a perfect storm, everyone in the industry called it. With revenue disappearing, larger firms will eventually face the challenge of staying above water with 70% of costs being salaries and wages.
Brandix announced pay cuts as high as 60% for executives with board members forgoing compensation.
The DailyMirror newspaper said MAS was planning to shed 4% of its headcount on bleak revenue prospects post-COVID. In Sri Lanka, the apparel industry is without peers accounting for over half of the country’s export income and employing 15% of the workforce. Some of the largest apparel companies are Sri Lanka’s only global companies.
After pioneering lean manufacturing, they have invested heavily in R&D and technology to stay ahead in tough markets.
MAS and Brandix are the largest firms specializing in up-market clothing. They accounted for around 60% of Sri Lanka’s total clothing export earnings of $5 billion in 2018. Being private companies, the revenues they claim could not be verified.
MAS manufactures clothing for a range of brands including lingerie for Victoria’s Secret and sportswear for Nike from over 30 factories in Sri Lanka, Bangladesh, India, Indonesia, Jordan, and Vietnam. It claims $1.8 billion in group revenue annually.
Brandix, with reported annual revenue of $1.2 billion, also has operations in India, Bangladesh, and Cambodia. Hirdaramani has factories in Ethiopia, Bangladesh, and Vietnam. So, when Covid-19 hit them hard, everyone in Sri Lanka started to worry in the early days of the lockdown.
A surge in global demand for personal protective equipment was a lifeline Sri Lanka’s apparel manufacturers grabbed quickly. This helped them keep their heads above water, but beyond that, there was little visibility about clothing demand picking up in the near term.
Clothing manufacturers have to be leaner, postpone R&D investments and regain labour competitiveness to survive the long-drawn pandemic for the leadership at Hela, prospects seem promising. They had already restructured the business to get out of a cash crunch. This has helped them recover from the coronavirus impact much faster than anyone expected.
As at end-August, Hela was finalizing a capital infusion from a global PE fund valued at a 300% premium.
Assigning people to the right roles was a critical component of Hela’s restructuring. The company appointed Shameen Peiris to head its intimates cluster and Sanath Amaratunga to head the casual wear business.
Shameen Peiris started his career at MAS Slimline in 2003. He quickly moved up the ranks becoming Finance Manager of the Operational Finance Unit and later the General Manager – Finance for the Shared Service Centre.
In 2015 he was promoted to head Commercial and Logistics where he was responsible for negotiating rates for trade lanes for the entire $500 million revenue MAS Intimates cluster including Bodyline at the central bid.
Peiris has a Master’s in Finance from the University of Colombo and is an Associate Member of the Chartered Institute of Management Accountants UK (CIMA), and the Institute of Chartered Ship Brokers UK (ICS). Sanath Amaratunga has a career spanning 27 years.
While working at Star Garments, then a leading clothing manufacturer and exporter in Sri Lanka, he set up the back-office operations which handled global sourcing and distribution for one of its leading buyers Jones New York Intimate.
He was instrumental in setting up one of Sri Lanka’s first seamless operations and served as the Chief Operating Officer at Timex-Wacoal Lingerie, where he set up a bra cup manufacturing facility and digital fabric printing plant.
Amaratunga had a stint in Hong Kong for Must Garments overseeing operations in Bahrain and Bangladesh. Both Peiris and Amaratunga left stable jobs to join Hela, lured by the opportunity to build Sri Lanka’s next global company from the ground up.
Sri Lanka’s larger-than-life Dian Gomes and UK-based millionaire Dominic McVey hatched an audacious strategy to transform Hela Clothing which McVey acquired in 2015, then a dud clothing manufacturing business, into an industry giant like Brandix and MAS. And they wanted to do this fast.
Echelon published a story on this in May 2016 called ‘Dian’s Daring Partnership’. They set a target to double revenue in four years to $300 million by 2020.
They had all the ingredients to replicate the successes of MAS and Brandix, but also to grow much faster. But their plans came apart at the seams.
Hela’s bold plans to boost revenue led to a drawback. By 2017, it was reporting cash flow constraints that were not budgeted for and many new business lines haemorrhaging money. Echelon published a story on this called ‘What Happened at Hela’ in May 2019.
Peiris followed his mentor Gomes and joined Hela Clothing in 2015. “Of course, people asked me if I was risking my career. We were taking something new and vulnerable and building something great, and I wanted to be a part of that,” Peiris said. “I wanted to prove myself and become an integral part of Hela’s growth story”.
Peiris was struck by the Hela’s high debt position but the company’s potential for growth allayed any concerns.
Hela had to make considerable investments in expansion and upgrade factories to attract high-end brands which will give Hela better margins. It had borrowed $16 million from listed private bank Hatton National to finance expansion.
“Unfortunately, the capital expenditure impacted cashflows because revenue was not coming as fast as we had expected,” Peiris said. “This created some panic across the supply chain and affected employee confidence.
we still want to share Hela’s success and wealth with a listing, but our priority is to first build a sustainable company, with a strategic approach to growth”
The early days were also chaotic ones. Mid to top-level managers had come from well-established apparel manufacturing firms like MAS and Brandix. They came with different backgrounds, cultures, different management styles and processes.
“There were multiple structures within Hela. The common thread holding everyone together was the knowledge that there was an opportunity to make a transformational change in the apparel sector,” Peiris said. But realignment issues remained a big problem.
In 2018, Hela quickly developed plans to restructure the business, consolidate standards, centralise processes and realign the culture. “We had to come out of this crisis as one organisation rather than have multiple cultures operating in separate silos,” Amaratunga said.
“Realigning everyone to the same objective is the most important thing we did. The second was investing in quality standards and process so that we can deliver orders on time and exceed customer expectations,” Amaratunga said.
Hela shuttered five unyielding factories in Sri Lanka during this period but absorbed the shop floor workers and machine operators at the remaining seven plants which operate in double shifts.
This is part of a broader strategy. “We are making ourselves leaner but expanding capacity at the same time,” Amaratunga said.
Giving up unyielding brands was another call, a tough call, the company had to make. “Giving up some of our customers was the hardest thing we did. It takes years to build a relationship but we had let go of unyielding brands so we can focus on building the future,” Amaratunga said.
As finances tightened, a consortium of new investors agreed to infuse $10 million in two stages.
The first cash call was in November 2018, and the second in April 2019. The new investors also bought out Gomes’ 17% stake. The cash infusion retired some debt and replenished working capital. The consortium led by Channa Palansuriya, a former chairman at listed Sampath Bank.
His family once owned a clothing manufacturing business, Orit Apparel. A. R. Rasiah, former Finance Director at listed Nestlé Lanka, replaced Gomes as chairman.
Tom Singh, a partner in McVey’s equity management firm which invested in Hela, increased his stake, as did Dilanka Jinadasa becoming Group Chief Executive. Jinadasa’s family business Foundation Garments merged with Hela in 2016. With that merger, Dilanka Jinadasa, who was paid in cash and equity to merge, entered Hela.
He was appointed to the board and took over executive leadership of Hela Clothing’s Intimates cluster, supplying top brands like Calvin Klein, Warnes, Hanes, Tommy Hilfiger, and Soma. The new leadership have turned the business around and survived the coronavirus’ initial onslaught.
“It was a helluva journey, but we came through that perfect storm,” Peiris said. Hela today employs 15,000 people across seven manufacturing locations in Sri Lanka and one each in Kenya and Ethiopia. It has design centres in Colombo, New York, and London.
“We closed in on a $200 million turnover in 2019/20 and planned to reach $225 million in 2020/21 but then COVID happened,” Peiris said. Hela’s intimates cluster which generates higher margins was impacted by fashion store closures in the US with volumes declining 20-30%. “noted.
We expect second-half revenue to be higher than in the same period a year earlier,” Peiris Amaratunga has had a more positive outcome.
Hela Casuals experienced an uptick in volumes as their customers focused on online sales and captured some market share for brands retailed at supermarkets which stayed open during the early stage lockdowns in Europe and the US.
To scale quickly, Hela Clothing acquired eight factories from Foundation Garments in 2016. In total, it then had 15 factories. Hela also established factories in Kenya and Ethiopia to make use of low-cost labour and duty-free concessions for exports to around 80% of the world’s retail markets.
All these factories were added in a couple of years. Hela Clothing is split into two business units: Hela Intimates and Hela Casuals. Apparel manufacturing is a tight-margins game. Most clothing items like shirts, jeans, dresses, and children’s wear give single-digit margins.
Margins for segments like lingerie and sportswear can reach double digits. As Hela Casuals began to expand, it caused a cash flow crunch on the rest of the group, which was held up by the Intimates business.
When Hela Intimates started investing in its own expansion, the group’s bottom line began to shrink. The cash cow was now struggling.
The plants in Kenya and Ethiopia also experienced a surge of new orders and clients, but instead of being a windfall, it turned into a challenge.
East Africa has some of the best free trade agreements in the region, giving Hela duty-free access to Australia, India, Europe, Canada, Japan, China, and the US. Hela was enjoying up to 32% duty benefits for a synthetic t-shirt or undershirt compared to its competition, which is a huge deal for a global industry operating on tight margins.
East Africa is the last frontier of low-cost manufacturing. Labels rushed in to enjoy cheaper price points, as traditional hubs like China and South Asia became expensive.
When labels noticed how well Hela was doing in Kenya in terms of pricing and quality of finish, they increased orders. But Kenya too began to struggle. Amaratunga was tasked with turning the business around which he did within a year.
In 2015, Gomes convinced McVey to allocate a 10% stake in Hela to be offered to key senior managers. This was a ploy to attract the best talent from established companies like Brandix and MAS.
The three family owned companies have all the best talent within the apparel industry. Over several decades, MAS, Brandix and Hirdaramani Group have evolved from labour-intensive clothing manufacturers to highly sophisticated, technology and innovation-driven apparel companies, investing heavily on talent.
Their top managers are favorite targets for poaching by apparel companies based in Africa and Asia. McVey had already expressed intentions to list Hela on both Colombo’s and London’s stock exchanges.
Stock options give their holders the right to buy a specific number of shares at a future date at a price determined at the time they are awarded, usually the present value of a share.
Assuming that in 10 years Hela Clothing’s revenue and hence its valuation is $1 billion, a one percent stake will be worth $10 million, a windfall for most. Even if a one percent stake is diluted to a quarter of a percent (0.25%), on account of an aggressive series of mergers, the stake will still be worth $2.5 million.
The management at Hela decided to keep the share options a live and use it to reward team members at manager level and upwards and give them a stake in the future success of the company.
In 2020, Hela awarded share options to ten people and hopes to similarly reward high achievers over the next two years.
The previous management had initially wanted to take Hela to a $400 million revenue company followed by a public listing in five years. But Jinadasa has shifted the goal post. “We still want to share Hela’s success and wealth with a listing, but our priority is to first build a sustainable company, with a strategic approach to growth”.