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Over a fourth of MSMEs lost more than 3% market share last fiscal: Crisil

NEW DELHI: More than a quarter of India’s micro, small and medium enterprises (MSMEs) lost over 3% market share due to the covid pandemic, while half of them saw their earnings before interest, tax, depreciation and amortisation (Ebitda) margins contract because of a sharp rise in commodity prices last fiscal compared with pre-pandemic (fiscal 2020) levels, a CRISIL Research’s SME Report 2022 said.

To be sure, assessing the impact on MSMEs has been a real challenge because of information asymmetry and lack of high-frequency data points.

The CRISIL report covered 69 sectors and 147 clusters that logged aggregate revenue of 47 lakh crore, representing 20-25% of the gross domestic product (implying two-thirds coverage of the MSME universe).

“SMEs in several sectors saw market share loss of over 3% and Ebitda margin erosion compared with fiscal 2020 last fiscal. For instance, the pandemic-induced supply chain disruptions impacted small pesticides manufacturers more. On the other hand, large ones leveraged their global presence to procure raw materials, so could eat up a huge chunk of the SME pie. Edible oil SMEs lost market share because an increase in hygiene quotient because of the pandemic meant less buyers for oil sold loose. Pesticides and edible oil SMEs suffered margin contraction of 100 bps and 200 bps, respectively, due to partial pass-through — at less than 60% — of increase in raw material costs,” said Pushan Sharma, director, CRISIL Research.

Interestingly, 40% of the SMEs hardly lost market share because of their ‘essential’ nature, such as pharmaceuticals, agricultural millers, or by virtue of them commanding a high share, such as the brass industry.

A handful of sectors, such as steel pig iron, gained share where only SMEs could capitalise on revival in infrastructure demand, as large plants captively consume their output. As a majority of tobacco selling points remained closed due to health concerns, tobacco processing SMEs, which largely sell loose tobacco and bidi, gained market share.

Surging input costs weighed heavy on sectors that operate in low-margin products and have limited pass-through. CRISIL expects transport operators, edible oil, gems and jewellery to be the most vulnerable to Ebitda losses owing to wafer thin margin of <3% and limited input cost pass-through of under 60%.

Despite a rise in freight rates, Ebitda margin of small fleet transport operators was impacted by 50 bps in fiscal 2022, over fiscal 2020, due to limited cost pass-through (~50%) of rising fuel cost that forms about half of the total cost.

“Amid the pandemic and ongoing geopolitical crisis, sectors such as textiles and pharmaceuticals have offered a ray of hope for exports. Cotton yarn exports have benefited from the US ban on Xinjiang, China-made items, apart from the China+1 policy. The readymade garment industry, with 70% MSME share, gained from supply constraints in China, and from emerging global opportunities. Pharma exports soared on pandemic-related demand, even as the domestic industry was struggling with lower volume demand. Going forward, Tirupur-based MSME garment manufacturers could benefit from export orders diverted from an economically floundering Sri Lanka,” said Elizabeth Master, associate director, CRISIL Research.

Against this backdrop, MSMEs should see 9-11% revenue increase this fiscal to 1.25 times of levels seen in 2020, even as Ebitda margin is likely to remain rangebound at 5-5.5%.

While the industry Ebitda margin is expected to touch pre-pandemic level this fiscal, MSMEs in more than half the sectors will buck the trend. The performance is also underwhelming in the context of overall corporate India, which is expected to log a 10-14% increase in revenue and Ebitda margin of 19-20%.

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