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About 46% of the bank loans extended to listed small and medium companies (SMEs) are in significant stress, India Ratings and Research said in a report. Also, at least one out of four such companies may face a challenge in servicing even interest.
The agency has highlighted the SMEs as firms with a revenue size of below Rs 300 crore.
SMEs have been the first casualty of the current cyclical downturn. The revenue growth (median) of small companies has fallen from FY10 and has been in low single digits since FY11… The agency is of the view that SMEs’ median revenue is unlikely to improve in the next 12-18 months.
”Small companies typically have lower bargaining power than BSE 500 corporates’ with the former’s EBITDA margin being 8-10 percentage points lower than the latter’s in comparable industry categories,” India Ratings said in a statement.
It added that the working capital cycle (median) sharply deteriorated for SMEs to 104 days in FY12 from 85-87 days in FY11. This to an extent explains their pitiable below 1% cash flow from operations margin since then. Further, working capital cycle deterioration may virtually wipe out a large number of SMEs.
Thus, large corporates were forced to take a hit in their working capital post FY11 as SMEs were in no position to be squeezed further.
Though the working capital days of large corporates may come down significantly to below 50, that of SMEs is unlikely to improve. It would require the economic activity to reach the level last observed in FY11-FY12. This is unlikely to happen in the next 12 to 18 months, the agency said.
SMEs’ portfolio majorly includes companies from chemical, textiles, power, real estate, steel and construction sectors. India Ratings has a negative outlook for all these sectors, except a stable outlook for real estate.
Sectors, already under stress, have the highest number of SME corporates with potential issues in servicing even the interest component. The construction sector has the highest number of SMEs (36.5%), followed by real estate (33.8%), power (30.6%), textiles (28.5%) and chemicals (20.5%).
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