CRISIL Ratings: Jute makers to see margins drop for the second straight fiscal

Healthy balance sheets and nominal capex to keep credit profiles stable

Operating margins of jute manufacturers are expected to shrink ~50 basis points (bps) this fiscal, owing to wage hikes and subdued demand in the more profitable export markets (refer to chart 1 in annexure). That will mark the second consecutive year of decline in profitability.

Their credit profiles, however, will be stable owing to strong procurement by government agencies, healthy balance sheets and negligible capital expenditure (capex) debt.

An analysis of 10 jute companies rated by CRISIL Ratings, accounting for ~30% of the sector's revenue, indicates as much.

Wages of jute mill workers in West Bengal, which produces almost 80% of India's jute products, have been raised, effective end of last fiscal, following a tripartite agreement between the state government, mill owners and various trade unions. The extent of the wage hikes depends on workers' experience. Overall, the wage bill of manufacturers is likely to increase 5-6% per annum depending on the level of modernisation of the mills.

Demand from the US and Europe (which account for over 60% of exports and a third of the sector's Rs 12,000 crore revenue) will remain subdued as the end use of jute products is largely discretionary.

Says Rahul Guha, Director, CRISIL Ratings, "The impact of wage hike on operating profitability will be limited because of strong demand from government agencies under the mandatory packaging norms [1]. Such demand accounts for two-thirds of the sector's revenue with pricing allowing for cost pass-through. But subdued export demand will weigh on sales of specialised jute products such as hessian, gift articles and decorative fabrics, which offer better margins. The upshot of all this is that operating margins of players rated by CRISIL Ratings would fall ~50 bps this fiscal."

Continued weak export demand will result in low-capacity utilisation of specialised looms and, thus, limit capacity addition. Jute companies will only undertake maintenance capex, primarily through internal accruals.

Says Argha Chanda, Director, CRISIL Ratings, "Minimal capex outlay will mean limited long-term debt addition for the industry. However, reliance on working capital debt will increase as working capital cycles of jute manufacturers will be stretched, nearing 150 days (refer to Chart 2 in Annexure), as they continue to provide extended credit to woo overseas buyers. That said, healthy balance sheets of jute manufacturers will keep debt protection metrics comfortable."

Source : Equity Bulls

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