Operating profitability to decline, but low leverage and nominal capex to keep credit profiles stable
India's jute industry is set to see revenue fall 5-6% this fiscal because of lower exports, marking the second consecutive year of decline. However, domestic demand is expected to be stable.
Operating margin is seen down 200-250 basis points to ~5% as exports, which are more profitable, would be lower. Credit profiles are seen stable on healthy balance sheets, and negligible capital expenditure (capex).
An analysis of jute companies rated by CRISIL Ratings, accounting for ~30% of the sector's revenue, indicates as much.
Exports, which form a third of the sector's revenue of Rs 12,000 crore, are seen 15% lower this fiscal, after falling 8% last fiscal as overseas channel partners continue to destock amid slowdown worries in the US and Europe (key markets accounting for over 60% of the total exports from India). The end-use of jute in these markets is largely discretionary.
In contrast, domestic demand is expected to be stable because of steady orders for storage and transportation bags (made of jute) owing to higher grain procurement by the government.
The domestic market, which accounts for the balance two-third of the sector's revenue, depends on government demand as it procures almost 80% of the jute produced through its nodal agencies. To add, mandatory norms under the Jute Packaging Materials Act 1987, provides 100% reservation for packaging of food grains and 20% reservation for packaging of sugar in jute bags.
This lends stability to demand for jute bags domestically and this trend is unlikely to change over the medium term. But the revenue comes at lower operating margin compared with exports.
Says Nitin Kansal, Director, CRISIL Ratings, "Weak export demand will reduce capacity utilisation of specialised looms and weigh on sales of specialised jute products such as hessian, gift articles and decorative fabrics. Hence, companies may defer capacity addition and only undertake minor maintenance capex. At the same time, companies may woo overseas customers through longer credit period, which may lengthen working capital cycles from 100 days to 140 days, on average, leading to higher reliance on working capital debt."
But healthy balance sheets will ensure comfortable debt metrics, lending stability to credit profiles. Jute companies had used cash accruals from strong operating performance in fiscal 2022 to deleverage their balance sheets.
Adds Argha Chanda, Associate Director, CRISIL Ratings, "Despite lower cash accruals and a likely increase in working capital borrowings, healthy balance sheets should keep debt metrics comfortable. Moreover, the capex outlay will be minimal and will be funded through cash accrual. Hence, credit profiles of jute companies will remain stable."