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JKSB Quarterly Highlights_Teejay Lanka PLC (TJL)_1QFY18

TJL reported a 13.2% YoY growth in quarterly revenue which was largely driven by the volume growth experienced at TJL’s manufacturing facility in India (OCI) and the YoY depreciation of the Sri Lankan Rupee (vs. USD).

 However, the increase seen at the top line was more than offset by the contraction of the GP margin from 15.2% in 1Q FY17 to 11.2% in 1Q FY18 causing gross profits to decline by 17.0% YoY during the quarter. This GP margin contraction was mainly a result of the escalation of raw material (cotton yarn) prices and the downward pressure on margins stemming from increased competition. In addition to this, the current phase of expansion in India has also caused an increase in overheads through higher depreciation related costs during the quarter.

 Although we expect the challenges faced during the current quarter to persist in 2Q FY18, we expect TJL's financial performance to improve significantly in 2H FY18 with the support of a stronger order book, higher capacity and lower volatility in raw material prices. TJL's latest phase of expansion involves increasing OCI's capacity from 24 MT/day to 33 MT/day and this is expected to become operational in the latter half of the financial year. TJL also anticipates a strong order book in 2H FY18 which will result in high fill rates and an improved sales mix. On the other hand, the cotton price volatility is also expected to ease out in 3Q FY18.

 Considering these factors, we currently project TJL's full year earnings to reach Rs.1.8 bn in FY 2018E, which translates to a forward PE ratio of 16x while TJL's full year DPS of Rs.2.25 for FY2017A translates to a dividend yield of 5.5% at the current trading price.