First Capital Research says listed Teejay Lanka Plc is unlikely to get hurt if the European Union decide to withdraw GSP Plus trade concessions to Sri Lanka due to its capacity expansion strategy, rupee depreciation and product diversification.

Teejay Lanka reported a 40% growth in revenue from a year earlier to Rs9.8 billion in the March 2021 quarter on a resurgence of sales with global fashion retail brands recovering from the worst period of the Covid-19 pandemic.

Teejay Lanka operates three plants (two in Sri Lanka and one in India). Production will continue uninterrupted despite the challenging environment, First Capital Research said. The company will increase daily capacity to 105MT from the current level of 75MT, by outsourcing capacity via a plant within Sri Lanka and investing $25 million to expand its plant in India by the end of the 2022 financial year. It is also exploring potential new opportunities in Bangladesh and Africa, as the management plans to reach $300 million in revenue by 2023.

Moreover, a rupee depreciation of about 12% in 2021 against the U.S. dollar (Rs205-215/$), provided a considerable gain for Teejay Lanka, First Capital Research said. It also contends that a possible withdrawal of GSP Plus was unlikely to hurt Teejay Lanka either because it could handle orders through India, which may continue to enjoy GSP duty concessions. In light of these factors, First Capital Research has upgraded its growth forecasts for Teejay Lanka. It expects revenue to grow 37% year-on-year to Rs43.5 billion in the 2022 financial year and grow a further 24% to Rs54 billion the following year.

Teejay Lanka sustained a gross profit margin of 11.8% in the March 2021 quarter which was below the preceding quarter due to rising yarn prices. However, Teejay Lanka’s increased focus towards the high margin synthetic fabric and increased capacity utilization in plants will preserve margins this year with a slight increase in the following year, First Capital Research said.