Nike, Uniqlo Vendor in Sri Lanka Gaining From China Slowdown

(Bloomberg) -- Knit fabric manufacturer Teejay Lanka Plc, whose customers include Nike and Uniqlo, is seeing demand pick up as production shifts from China because of Covid lock downs in that country.

The company, which produces about 45 tonnes (1.6 million ounces) of fabric a day in Sri Lanka and an equal amount at its Visakhapatnam, India, facility, plans to scale up operations in the neighboring country by next month, Director Hasitha Premaratne said in a phone interview.

“We are seeing strong demand until July,” due to relocation of fabric manufacturing away from China, Premaratne said. Sri Lanka-based Teejay counts PVH Corp. -- the parent company of fashion brands Tommy Hilfiger and Calvin Klein -- as its top customer, according to its annual report.

Still, Teejay faces challenges in a key market and in its home country. A slowdown in the US economy is expected to impact retail sales of “large apparel companies, and its effects will be seen in the global supply chain, including in Sri Lanka,” later this year, Premaratne said.

In Sri Lanka, suffering its worst economic crisis, inflation accelerated more than expected to a record 39.1% in May amid continuing food, medicine and fuel shortages, while citizens have also had to endure daily power outages of as much as 13 hours.

Teejay is coping by using generators during the electricity cuts to ensure uninterrupted operations.

“Already fuel has gone up, electricity prices are expected to be raised, which will add to cost,” Premaratne said.

For now, the local currency's depreciation is expected to offset the rupee cost increase, thereby “keeping the overheads intact at a dollar level.”

Brokerage First Capital, while retaining a buy on the stock, downgraded earnings for the financial year ending March 2023 to 3.6 billion rupees ($10 million), and for the year after to 5.7 billion rupees, considering higher commodity prices and the resultant impact on margins.

“We expect yarn prices to gradually stabilize by the beginning of FY24 while increased focus towards the high margin synthetic fabric by TJL and enhanced market share through increased volumes to cushion the negative impact stemming from cost pressures,” Hiruni Perera, an analyst at First Capital, wrote in a note.

Teejay Lanka reported a net income of 826.2 million rupees for the fourth quarter, up 8.6% from the year ago period.

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