Operating margins of jute manufacturers are expected to shrink by about 50 basis points (bps) this fiscal due to increase in wages amidst subdued demand in the more profitable export markets such as Europe and the US. That will mark the second consecutive year of decline in profitability.

However, their credit profiles will be stable owing to strong procurement by Government agencies, healthy balance sheets and negligible capital expenditure (capex) debt, CRISIL Ratings said based on the analysis of 10 jute companies, which account for about 30 per cent of the sector’s revenues.

Wages of jute mill workers in West Bengal, which produces almost 80 per cent of the country’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, CRISIL said.

The 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 subdued as the end use of jute products is largely discretionary, CRISIL said.

“The impact of wage hike on operating profitability will be limited because of strong demand from Government agencies under the mandatory packaging norms. 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,” said Rahul Guha, Director, CRISIL Ratings in a statement.

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.

Argha Chanda, Director, CRISIL Ratings, said, “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 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.”