Credit and Finance for MSMEs: Indian handicrafts industry is set to witness a decline of six to eight per cent in demand this year, resulting in a contraction of the sector to $3.3 billion, said analytics company CRISIL.
This drop is in addition to the 20 per cent decline from the previous fiscal year, as the European and American economies, the prominent markets for Indian handicrafts, are experiencing a slowdown in discretionary spending.
Almost 60 per cent of the sector’s sales come from the US and the EU which are both facing the brunt of inflation and recession and are the largest markets for handicrafts globally, with a value of $500 billion.
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Rahul Guha, Director, of CRISIL Ratings said, “Amid the slowdown in key export markets, Indian handicraft exporters will face increased competition from their Chinese counterparts post 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 around 12 per cent.”
However, an analysis of 10 companies rated by CRISIL Ratings, representing ten per cent of the industry’s revenue suggested that the healthy balance sheet and negligible capital expenditure will help the Indian handicrafts industry sail through the rough seas, despite a continuous fall in demand, keeping their credit profiles stable.
The report suggests that handicraft exporters might struggle with liquidity as payment delays might extend to over 120 days, compared to the usual 90-day credit cycle, leading them to opt for working capital loans.
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To deleverage their balance sheets, handicraft manufacturers used cash accretions or simply, took on more working capital debt of which 85 per cent was short-term.
Nitin Kansal, Director, of CRISIL Ratings said, “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 funded through cash accrual. Hence, credit profiles of handicraft exporters will remain stable.”