Multiple Headwinds at Exports India

Indian exports may face
Further challenges!

India Ratings and Research (Ind-Ra) believes the ability of export-oriented domestic manufacturers to keep up merchandise goods supply will remain key to navigating the path to recovery in exports. While domestic exporters are facing vulnerability in form of geography and commodity concentration, overall demand prospects for merchandise goods from importing countries could improve, creating a potential demand-supply mismatch for Indian exports.

A prolonged disruption due to Covid-19 could materially impact the credit and liquidity profile of companies in some of the export-heavy sectors such as textiles, gems and jewellery and auto ancillaries. With the latest developments between India and China, Indian exports may face further challenges.

Since January 2020, Ind-Ra has taken 25 negative rating actions, 13 positive rating actions and revised the rating Outlook down for another 16 issuers meaningfully exposed exports.

India’s exports have dual concentration – in terms of geography as well as the category of goods, though the former is common for many exporting countries. The top 10 export partner countries constitute more than 50% of the total merchandise exports and a substantial portion of which comprises discretionary goods such as gems and jewellery, textiles, automobiles and parts.

In light of Covid-19, the agency analysed the exports of top 35 commodities bucketed across four categories essential to discretionary and the importing countries into three zones viz. Red, Amber and Yellow. Ind-Ra notes that exports are largely concentrated in the red zone countries (over 500 cases per million) which could inherently a take longer time to return to normalcy, delaying domestic exports.

China saw a revival of exports in April 2020 as its operations resumed and pending orders were cleared. Additionally, stable or increasing Chinese exports would suggest a smoothening of exports environment globally and may also place Indian exports in a favourable spot in 2QFY21, until geopolitical condition remains conducive. 

Domestic companies are likely to face supply-side challenges, ranging from the issues related to the factors of production such as capital and labour to nuanced operational issues such as physical distancing and logistic related hurdles. The reverse migration of labourers may increase the cost of production; and under capacity utilisation will deter the production till end-2QFY21.

Furthermore, export-oriented micro, small and medium enterprises are likely to be more impacted than large corporates due to lesser resilience to withstand the Covid-19 related financial damage. A prolonged impact on the ability of domestic exporters to meet exports demand could also result in India losing its market share to competing exporting countries for some commodities.

Weak Exports could Disproportionately Impact Credit & Liquidity Conditions! Ind-Ra expects the exogenous shock from COVID-19 could accentuate the pressure on credit profiles of export-oriented entities, should the recovery in exports get prolonged. Pre-Covid, sectors such as pharma, petrochemicals and textiles reported healthy FY19 revenue growth; however, auto ancillaries and gems and jewellery posted lower growth.

Export-oriented units will most likely have to cope with weak asset turnover levels as a meaningful recovery in global growth continues to be at least six quarters away. Consequently, cash flows pressures could exacerbate, leading to a potential drop in liquidity score.

Near-term foreign currency cash flow mismatches for exporters would weaken the natural hedge against foreign currency debt or payments. In such cases, companies could opt for an active hedge which will increase hedging cost or they could borrow in rupee-denominated loans.

However, in the latter case, the debt service coverage ratio is likely to get impacted due to currency depreciation and conversion cost. Ind-Ra further believes that the onus on the policy makers to safeguard rupee would be critical for exports. While a stronger rupee does not auger well for exports amid the weak global demand, a weakening rupee could affect the payments of foreign currency debt.


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