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.
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