Low leverage and negligible capex to keep credit profiles stable
A slowdown in discretionary spending in key global markets will drag the largely export-oriented Indian handicraft industry1 6-8% lower to ~$3.3 billion this fiscal, after a decline of ~20% last fiscal.
That said, healthy balance sheet, along with negligible capital expenditure (capex) debt, will keep the industry credit profile stable.
An analysis of 10 companies rated by CRISIL Ratings, which account for 10% of the industry revenue, suggests as much.
The industry derives almost 60% of its sales from the US and EU, which are battling high inflation and recession fears. Together, these two make up a market of more than $500 billion, which is largely catered to by China and where Indian exporters have limited share.
Last fiscal, a favourable rupee-dollar exchange rate cushioned the impact of export sales by as much as 8%. There will be no such respite this fiscal, as the exchange rate is expected to remain largely stable.
Says Rahul Guha, Director, CRISIL Ratings, "Amid the slowdown in key export markets, Indian handicraft exporters will face increased competition from their Chinese counterparts post easing of Covid-19 curbs in China. Handicraft exporters will rely on lower pricing and extended credit to counter subdued demand, which may pull down operating profitability by 200-250 basis points to ~12%."
The longer credit periods may, in turn, stretch working capital cycles - from 90 days to more than 120 days, on average. This could imply higher working capital borrowings.
Says Nitin Kansal, Director, CRISIL Ratings, "Despite the likely increase in working capital borrowings, healthy balance sheets should keep debt metrics comfortable. Also, with demand expected to remain sluggish, the capex outlay will be negligible and will be funded through cash accrual. Hence, credit profiles of handicraft exporters will remain stable."