An increase in exports can alone fetch profits for Indian jute industry

Jute exports from India have been heading southwards, for quite some time now. This implies that the country’s jute industry, as a whole, will register a revenue fall of 5-6 per cent this fiscal, marking revenue slump for the second successive year. This is despite the fact that the domestic demand is expected to remain stable. The latest CRISIL report also indicated that the operating margin would be down 200-250 basis points to nearly five per cent as exports, which are more profitable, would be lower. Credit profiles are seen stable on healthy balance sheets, and negligible capital expenditure (capex). It does not require any rocket science to understand that when export demand is low or weak, it is bound to reduce capacity utilisation of specialised looms and weigh on sales of specialised jute products like hessian, gift articles and decorative fabrics. In all likelihood, companies would defer capacity addition and undertake only minor maintenance capex. At the same time, they 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, opine many experts. An analysis of jute companies rated by CRISIL Ratings, accounting for nearly 30 per cent of the sector’s revenue, indicates as much.

Interestingly, the overall revenue of the Indian jute industry stands at Rs 12000 crore and exports contribute one-third of this revenue. Last fiscal it had fallen eight per cent. Ironically, this fiscal, it is apprehended to fall further- nearly 15 per cent. Europe and the US are the two key markets for India’s jute exports as together, they account for more than 60 per cent of the total volume. What is more disturbing is that the overseas channel partners have been continuously de-stocking in the wake of the slow-down worries in these two key markets. The end-use of jute in these markets, according to market analysts, is largely discretionary.

Quite significantly, in sharp contrast to what’s happening on the exports front, domestic demand is expected to be stable, thanks to steady orders for storage and transportation bags that are made of jute, due to higher grain procurement by the government. The domestic market, which accounts for the remaining two-third of the sector’s revenue, depends mostly on government demand as it procures almost 80 per cent of the jute produced through its nodal agencies. Moreover, the mandatory norms under the Jute Packaging Materials Act 1987, provides 100 per cent reservation for packaging of food grains and 20 per cent reservation for packaging of sugar in jute bags. This will lend stability to the demand for jute bags domestically and this trend is unlikely to change over the medium term. But exports volume must pick up-the sooner the better, if Indian jute industry is to remain profitable. The government and the industry must together work out a formula to address this. A way out to enhance profitability through higher exports is by way of tapping new geographies or other means. That’s the bottom line.