Jute sector poised for comeback; sales volumes seen up 15%, margins to improve: Crisil

India's jute industry is poised for a turnaround this fiscal after a revival in domestic demand, improving export prospects and softer raw jute prices are expected to drive a recovery in sales and profitability, Crisil Ratings said on Monday.

Sales volumes of jute manufacturers are expected to grow around 15% this fiscal after declining at an annualised rate of around 10% over the previous two fiscals, the report said, citing an analysis of jute manufacturers.

The domestic market, which accounts for nearly 85% of industry revenue, is expected to be the main driver of the recovery.

Domestic demand is projected to rise around 20% this fiscal, reversing a similar cumulative decline over the previous two years.

The downturn had been triggered largely by a sharp increase in raw jute prices, which was passed on to customers and weakened demand.

It also, consequently, encouraged a shift towards cheaper alternative packaging materials.

With raw material costs now moderating, jute product prices are expected to soften and support a recovery in demand.

"While improving demand will support revenue growth, profitability is likely to receive an even larger boost from easing raw material costs. Better crop output has improved domestic availability of raw jute and led to softer prices despite subdued imports," said Rahul Guha, Senior Director, Crisil Ratings.

"This is significant because raw jute accounts for 60-65% of the industry's operating expenses. Lower fibre costs and improved capacity utilisation should drive up profitability. Consequently, operating margins are projected to expand by ~130 basis points (bps) to nearly 9% this fiscal," he added.

Raw jute prices had risen by more than 10% last fiscal due to supply constraints.

However, higher minimum support prices encouraged farmers to increase acreage under cultivation, resulting in better crop output this year.

Improved capacity utilisation, along with lower fibre costs, is expected to provide an additional boost to margins.

The rationalisation of US tariffs from elevated levels seen last fiscal could also improve the competitiveness of Indian jute products in global markets, Crisil said.

The expected improvement in profitability, coupled with limited debt-funded capital expenditure, is likely to strengthen the industry's credit metrics.

Argha Chanda, Director, Crisil Ratings, said that growing environmental awareness, tighter rules on single-use plastics and rising preference for biodegradable alternatives are creating new opportunities for jute-based products.

However, the recovery remains exposed to risks, including the pace and sustainability of demand revival, particularly in export markets, and the trajectory of raw jute prices.