Teejay Lanka feels the pinch from uncertainty in global trade from US tariffs

Chairman Ajit Gunewardene

CEO Pubudu  De Silva

Reporting its financial results for the three months ended in June, Teejay Lanka PLC said it felt the softening demand and shifting price sentiments across key export markets.

As a result, the revenue languished, rising by only 2.4 percent year-on-year to Rs.15.77 billion in the April-June quarter.

Gross profit fell by 3.2 percent to Rs.1.25 billion from a year ago, as the cost of sales rose by 3.0 percent, in a sign that the company operates with a higher operating leverage – high level of fixed cost relative to variable costs – as the company said the lower production volume largely affected the gross profit.

The gross profit declined “largely due to lower production volumes during the quarter, as global demand softened across the industry”, the company said in an earnings release.

Reflecting that the company operates with relatively thin margins, its gross margin contracted to 7.9 percent in June, while the operating margin narrowed to 2.9 percent, from 8.4 percent and 2.5 percent, respectively.  

It appears that the uncertainty over global trade, triggered with the announcement of the reciprocal tariffs on April 2 on scores of nations and then paused a week later to provide countries the wiggle room to enter into trade deals with the United States, caused the revenues to languish, as the supply chains practiced a wait-and-see approach until they get more direction from the tariff policy.

As the second deadline to clinch the trade deals for the countries was expiring on August 1, the US set the tariff rate applicable on the Sri Lankan goods bound to the US at 20 percent, from July’s 30 percent and much lower than 44 percent set in April.

The 20 percent tariff places Sri Lanka largely on par with its most of the Asian countries but lower than the 25 percent levied on India, in the absence of a trade deal between the two countries.

Sri Lanka’s textile and apparel makers were at the forefront of facing the brunt of the levy, had it set above the 20 percent level, as they risked losing their competitiveness against their rivals.

The knitted fabric maker with operations also in India said it remains cautiously optimistic on the evolving tariff landscape, as it has the potential to change the Harmonised Tariff Schedule, which could influence both direct and indirect exports from Sri Lanka.

“Teejay’s strong global presence and trusted strategic partnerships with global brands continue to provide the agility and resilience needed to thrive in an evolving landscape,” the company said.

The company also operates with a strong balance sheet and healthy cash pile of Rs.9.4 billion by end-June, reflecting the strong liquidity position.

Against this backdrop, the company reported earnings of 29 cents a share or Rs.207.27 million for the June quarter, compared to 22 cents a share or Rs.158.30 million in the year earlier period. This reflected 30.9 percent growth in the bottom line.

The company’s share climbed 2.32 percent to end the week at Rs.48.60 a piece.

Brandix Lanka Limited and Pacific Textured Jersey Holdings Limited hold 32.47 percent and 27.16 percent stakes in the company.