OREANDA-NEWS. Fitch Ratings Indonesia has affirmed Indonesia-based textile manufacturer PT Sri Rejeki Isman Tbk's (Sritex) National Long-Term Rating at 'A(idn)' with a Stable Outlook.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Increased Sales, Stronger Profitability: Sales rose 7.7% in 2014 and 30.4% yoy in 1H15 as Sritex expanded its production facilities. The company's focus on the higher-margin garment business is also proving to be successful, with EBITDA margins improving to about 18% in 1H15, 400bp wider than in 2012. However, receivable days increased to about 80 days in 2014 from 41 days in 2013 because of a higher proportion of domestic sales, where customers receive more favourable terms.

The sales growth supports our view that the competitive environment is improving for Indonesia textile manufacturers. Fitch has revised the positive rating sensitivities to reflect the improved operating environment and competitiveness of the Indonesian textile manufacturers.

Expansion to Meet Growing Demand: Sritex embarked on a debt-funded expansion plan in 2013, which was supported by improving demand as garment buyers looked to diversify their supply bases. This expansion will see the company's leverage, as measured by net debt/EBITDA, peak at around 3.0x-3.5x at end-2015. About 70% of company's medium-term capex is for the expansion, which largely consists of new machinery that can more easily adjust output to match demand. Delays in construction may postpone a recovery in Sritex's leverage.

Vertically Integrated Operations: Sritex's vertically integrated operations are an important advantage in the highly fragmented and competitive textile industry. It provides Sritex with a shorter, more reliable production period, which is important to meet fashion and seasonal trends, and higher quality in meeting made-to-order specifications. The vertical integration also provides Sritex with more sustainable margins compared with other garment manufacturers in Indonesia.

Improving Competitive Dynamics: Fitch believes that Sritex is well-placed to capitalise on the shift in the labour-intensive end-garment manufacturing process from traditional manufacturing bases like China and Bangladesh. This is because of Indonesia's relatively lower-cost labour supply, particularly in Central Java where Sritex's production facilities are, as well the company's satisfactory working conditions for its labour force. The company would also be a beneficiary of the Indonesian government's proposed economic reforms, including planned cuts in fuel and electricity costs.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:
- Sales growth of 15% in 2015, 8% in 2016, and 11% in 2017
- EBITDA margin of around 18% for 2015-2018
- Capex of about USD85m in 2015 and 2016
- Dividend payout of 20%-30% of net income in 2016-2018

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- A reduction in leverage with net debt/EBITDA below 3.0x on a sustained basis
- A sustained increase in operating EBITDA margin above 18%

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A sustained increase in net leverage above 4.0x
- A sustained increase in net working capital days above 130 days
- A sustained decline in operating EBITDA margin below 12%.