April 22, 2024

Red Sea Crisis May Not Right Away Hit Textile Sector: CRISIL

Players operating in sectors like textiles, chemicals and capital goods may not be immediately impacted because of better ability to pass on higher costs, or because of a weaker trade cycle.

“But a prolonged crisis over the next few quarters can make these sectors also vulnerable as working capital cycles would get stretched with orders put on hold,” according to CRISIL Ratings.

According to CRISIL, 75 percent of home textiles are exported, mainly to Europe, North America, North Africa and the Middle-East and their mid-teen margins can absorb higher freight rates for some time.

Indian companies use the Red Sea route through the Suez Canal to trade with Europe, North America, North Africa and parts of the Middle-East.

These regions accounted for 50 percent of India’s exports worth Rs 18 lakh crore and 30 percent of imports worth Rs 17 lakh crore in the earlier fiscal.

Increasing attacks on ships sailing in the Red Sea region since November 2023 have persuaded shippers to consider the alternative, longer route past the Cape of Good Hope.

This has not only stretched delivery time by 15-20 days, but also increased the transit cost substantially because of incremental freight rates and insurance premium.

“While the immediate impact of the crisis would be low for most of India Inc., a prolonged strife can affect the profitability and working capital cycle of export-oriented industries,” the ratings agency added.

“The extent of this will vary depending on sectoral nuances. Supply chain issues could also intensify, curbing trade volume and renewing inflationary pressures,” CRISIL observed.

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