A majority of the jute companies have successfully withstood the recently concluded workers? strike in West Bengal and have maintained their credit risk profiles because of their comfortable financial risk profiles, adequate financial flexibility, and limited term debt obligations, says Crisil Ratings.
The jute industry in West Bengal has just emerged from a two-month-long workers? strike that started on December 14, 2009. This was a follow up to strikes in 2007 (for 63 days) and 2008 (18 days). The strike was due to the fallout of wage settlement terms between workers and mill owners agreed upon in 2002. This led to a shutdown of operations in almost all jute mills in West Bengal, which account for more than 90% of the total jute bags and yarn production in the country.
As the jute industry provides employment to nearly 300,000 workers and as jute products are considered environment friendly, the industry receives strong support from the Centre through its procurement policy. The procurement accounts for a significant proportion (around 60%) of the jute industry?s total production. Sustained support from the Centre is critical for the long-term viability of the jute industry.
Anticipating inadequate availability of jute bags due to the workers? strike, the Centre had procured 0.39 million bales to meet its bag requirements from the polypropylene/high-density polyethylene industry instead of the jute industry, Crisil said in a statement.
The reduced offtake due to the strike is a one-time aberration and going forward, the Centre will continue to strongly support the industry, bringing stability to the demand for jute products, it added. In addition, the recent settlement between the workers and the mills will lead to an increase in wages. Crisil estimates the jute mills? wage bills to rise by 15-20%.
However, the Centre?s pricing mechanism for jute bags provides for complete absorption of any rise in input costs and wages. Therefore, Crisil believes that the Centre?s pricing of jute bags will fully factor in this increase in wages, offsetting the impact on the profitability of jute mills.
Nevertheless, cash accruals for 2009-10 are expected to be lower than anticipated for most players.
Says, Gurpreet Chhatwal, director, Crisil Ratings ?Despite the strike, the credit profiles of Crisil-rated players in the jute industry have remained stable because of their comfortable financial risk profiles and adequate financial flexibility.?
Most Crisil-rated players have moderate gearing and debt protection measures. A high proportion of the debt contracted by the players is short term in nature, taken to meet working capital requirements. The suspension of operations in the jute industry had led to reduced working capital requirements and the consequent lower utilisation of bank lines.
Unutilised bank lines provide companies financial flexibility to meet fixed debt obligations and wage payments in case of exigencies. The Crisil-rated players also have limited capital expenditure (capex) plans, in line with the mature and stable nature of the jute industry; this further enhances their financial flexibility and liquidity. Crisil also believes that these players will maintain their liquidity, supported by fund infusions by promoters in case of short-term business exigencies.