Fitch downgrades HMGT to 'BBB(lka)'

Fitch Ratings Lanka has yesterday downgraded Hayleys MGT Knitting Mills PLC's (HMGT) National Long-term rating to 'BBB(lka)' from 'BBB+(lka)'. The outlook is negative.

The downgrade primarily reflects HMGT's lower operating margins. The company's inability to increase sales prices in the face of significantly increased cotton prices is a key concern for the rating.

Fitch also notes that HMGT's operations management may require strengthening due to lapses in the debtor and inventory management areas as recently indicated in a company announcement. The non-value adding expenses - provisions for bad debts and for slow moving stock - escalated to sizable proportions in H111 (end-September 2010) and amounted to over US$ 1.25 million, indicating a significant leakage of the company's profits.

The negative outlook indicates that Fitch is concerned for HMGT's ability to improve its margins in the face of high competition and high input costs as well as a possible loss of bargaining power with the local apparel manufacturers, given the recent removal of the Generalised System of Preferences Plus scheme (GSP+) tariff benefit, as the full negative impact may yet to be seen.