Revenue to drop 5-6% on weak overseas demand: Report

CRISIL Ratings said domestic demand is expected to be stable, but the operating margin is seen down 200-250 basis points to 5 per cent as more-profitable exports will be lower.

CRISIL analyzed jute companies comprising 30 per cent of the sector’s revenue to predict that credit profiles will be stable due to healthy balance sheets and little capital expenditure (capex).

The report said exports, which form a third of the sector’s revenue of Rs 12,000 crore, were seen 15 per cent lower in FY24, after falling 8 per cent in FY23 with overseas channel partners continuing to destock amid slowdown worries in the US and Europe. (The two markets account for more than 60 per cent of Indian exports.)

The end-use of jute in the export markets is largely discretionary.

Domestic demand will be stable because of steady orders for bags used to store and transport grain procured by the government. The domestic market, which accounts for two-thirds of the sector’s revenue, depends on demand by the government that uses nodal agencies to procure almost 80 per cent of the jute produced.

Mandatory norms under the Jute Packaging Materials Act 1987 provide a 100 per cent reservation for the packaging of food grains and a 20 per cent reservation for the packaging of sugar in jute bags.

The norms lend stability to demand for jute bags domestically and the trend is unlikely to change over the medium term, according to CRISIL. But the revenue comes at a lower operating margin compared to exports.

“Weak export demand will reduce capacity utilization of specialized looms and weigh on sales of specialized jute products such as hessian, gift articles, and decorative fabrics. Hence, companies may defer capacity addition and only undertake minor maintenance capex,” said Nitin Kansal, director at CRISIL Ratings.

Jute companies may woo overseas customers by offering a 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, said Kansal.

Argha Chanda, associate director at CRISIL Ratings, said that despite lower cash accruals and a likely increase in working capital borrowings, healthy balance sheets should keep debt levels comfortable.

“Moreover, the capex outlay will be minimal and will be funded through cash accrual. Hence, credit profiles of jute companies will remain stable.”

CRISIL expected to leverage and interest coverage for its jute companies’ portfolio at 0.55 and 3.7 times, respectively, in FY24, compared with an average of 0.45 times and 8 times, respectively, in the last three financial years.

It said the industry should monitor global recessionary pressures and any dilution in jute packaging reservation norms.