Wage hike, decline in export demand may reduce jute manufacturers’ margins: CRISIL report

Operating margins of jute manufacturers are expected to contract by about 50 basis points (bps) this fiscal year due to wage increases amid lower demand in more profitable export markets like Europe and the US. This will be the second consecutive year of declining profitability.

However, their credit profile will remain stable due to strong procurement by government agencies, healthy balance sheets and negligible capital expenditure (capex) debt, Crisil Ratings said based on an analysis of 10 jute companies that account for about 30 per cent of the sector. Revenue.

Wages of jute mill workers in West Bengal, which produces about 80 per cent of the country’s jute products, have been increased at the end of the last financial year, following a tripartite agreement between the state government, mill owners and various trade unions. The extent of wage increase depends on the experience of the workers. Crisil said that overall, the wage bill of manufacturers is likely to increase by 5-6% per year depending on the level of modernization of the mills.

Crisil said demand from the US and Europe (which account for over 60 per cent of exports and a third of the sector’s ₹12,000 crore revenue) will remain low as the end-use of jute products is largely discretionary.

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“The impact of the wage increase on operating profitability will be limited due to strong demand from government agencies under the mandatory packaging norms. Such demand accounts for two-thirds of the sector’s revenues, with pricing allowing it to exceed costs. But weak export demand will impact sales of specialty jute products like hessian, gift articles and decorative fabrics, which offer better margins. The result of all this is that the operating margins of players rated by CRISIL Ratings will fall by 50 bps this financial year,” Rahul Guha, director, CRISIL Ratings, said in a statement.

Continued weak export demand will result in low capacity utilization of specialty looms and thus, capacity addition will be limited.

Jute companies will undertake only maintenance capital expenditure, mainly through internal accruals.

Argha Chanda, director, CRISIL Ratings, said, “Minimum capex outlay will mean limited long-term credit growth for the industry. However, dependence on working capital loans will increase as the working capital cycle of jute manufacturers increases to close to 150 days as they continue to provide extended credit to woo foreign buyers. The healthy balance sheet of jute manufacturers will keep debt security metrics comfortable, he said.