According to CRISIL Ratings on Monday, the heavily export-focused Indian handicraft sector would see a 6–8% decrease to $3.3 billion this fiscal year, after a 20% loss the previous year, as a result of a downturn in discretionary spending in important worldwide markets. Having said that, a sound balance sheet and a little amount of capital expenditure (capex) debt will maintain the industry’s credit profile. An examination of 10 CRISIL Ratings-rated firms, which together generate 10% of the market’s sales, supports this conclusion.
Says Rahul Guha, Director, CRISIL Ratings, “Amid the slowdown in key export markets, Indian handicraft exporters will face increased competition from their Chinese counterparts post easing of Covid-19 curbs in China. Handicraft exporters will rely on lower pricing and extended credit to counter subdued demand, which may pull down operating profitability by 200-250 basis points to 12 percent.”
The extended lending terms might also lengthen working capital cycles, which typically range from 90 to more than 120 days. This can indicate increased borrowing for working capital.
Says Nitin Kansal, Director, CRISIL Ratings, “Despite the likely increase in working capital borrowings, healthy balance sheets should keep debt metrics comfortable. Also, with demand expected to remain sluggish, the capex outlay will be negligible and will be funded through cash accrual. Hence, credit profiles of handicraft exporters will remain stable.”
Exporters of handmade goods reduced their balance sheet’s leverage from 0.9 times as of March 31, 2019, to 0.5 times as of March 31, 2022, using cash accretions. Furthermore, over 85% of the debt is short-term and is mostly for working capital. As a result, CRISIL Ratings anticipates that its rated portfolio will have gearing and interest coverage of 0.7 times and 8 times, respectively, till fiscal 2024, up from 0.6 times and 10 times, respectively, on average during the previous three years. All things considered, it will be important to monitor global currency fluctuations and inflationary pressure.
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