According to a report released by CRISIL on Thursday, exporters in sectors such as agricultural commodities and marine foods have been severely impacted by the ongoing Red Sea crisis. The perishable nature of their goods, coupled with tight profit margins, has limited their ability to absorb the risks arising from the surging freight costs.
The report also highlights the potential impact on players in the capital goods sector, which could face disruptions in trade routes due to delayed deliveries. This, in turn, can lead to inventory build-up and a slowdown in order conversions for engineering, procurement, and construction companies.
Indian firms heavily rely on the Red Sea route through the Suez Canal for trade with Europe, North America, North Africa, and parts of the Middle East. These regions accounted for around 50% of India’s exports worth Rs 18 lakh crore and 30% of imports worth Rs 17 lakh crore last fiscal year.
Increased attacks on ships sailing in the Red Sea region have forced shippers to consider the longer alternative route past the Cape of Good Hope. This has resulted in a delivery time increase of 15-20 days and a substantial rise in transit costs due to higher freight rates and insurance premiums.
While some sectors, such as textiles, chemicals, and capital goods, may not feel an immediate impact, a prolonged crisis could make them vulnerable as working capital cycles are stretched with orders being put on hold, warns the CRISIL report.
On the other hand, certain sectors like shipping, pharmaceuticals, and metals may actually benefit from the rising freight rates, as companies in these industries have healthy profitability and can absorb the higher costs.
The rating agency concludes that although the immediate impact on most of India Inc. may be low, a prolonged Red Sea crisis could significantly affect the profitability and working capital cycle of export-oriented industries.
