Exporters in the small and medium enterprise (SME) space earn higher operating profit margins (OPMs) compared to their peers, which cater only to the domestic market. This was revealed by a CRISIL SME Rating analysis. The key findings of this study indicated that a larger proportion of SME exporters have OPMs of more than 10 per cent than their counterparts selling in the domestic market.
For the study, more than 1,800 SMEs in agricultural and processed foods, engineering, leather, and textiles sector were analysed. The SME exporters chosen for the study derive at least 25 per cent of their turnover from exports and are net exporters.
In all the four sectors (agricultural and processed foods, engineering, leather, and textiles), a larger proportion of SME exporters have OPMs of more than 10 per cent than their counterparts selling in the domestic markets. Similarly, with regard to agricultural and processed food and leather sectors, a larger proportion of SME exporters have OPMs of more than 5 per cent in comparison to their peers serving only local markets, most of whom have OPMs of less than 5 per cent.
Agriculture and food processing
In case of the agricultural and processed food segment, 62 per cent of SME exporters have OPMs of more than 5 per cent vis-à-vis only 53 per cent of players selling in the domestic market . A sizable proportion of domestic agricultural and processed food players in the sample include rice millers, and cereal and pulses processors, resulting in a larger proportion having OPMs below 5 per cent.
Similarly, in case of leather, 85 per cent of the exporters have OPMs of more than 5 per cent, as against 43 per cent for domestic players.
In case of leather, most of the SMEs catering to the domestic market are tanneries or small units undertaking job work.
The analysis of SMEs in the textile sector reveals that exporters have reported OPMs which are marginally better in comparison to their peers, serving local customers. This variation could be driven by the fact that a sizeable proportion of these exporters are garment manufacturers, who undertake contract manufacturing for global merchandisers/brands and face intense competition on pricing from players in other countries having cheaper labour, such as Bangladesh, China, Sri Lanka, and Vietnam.
In the engineering sector, SME exporters have done well by focusing on select products and markets.
For example, SME exporters to developed countries (the US and Europe) focus on primary articles and light engineering goods. Conversely, those exporting to developing countries in Africa, West Asia, and South-East Asia focus on heavy engineering and turnkey projects.
Consequently, SME exporters fare better than their domestic peers in the high operating margin bracket of more than 10 per cent.
However, in the lower bracket of 5-10 per cent, domestic players outnumber exporters because of their focus on products that have high demand but low capital and technology requirements, leading to intense competition.
OPMs of SME exporters can improve further if policy makers help address the core issues facing SMEs — infrastructural bottlenecks, access to export market for enterprises and export-oriented mindset.
The special manufacturing zones being planned in various states in India could play an important role in promoting high-value exports.
The policy actions regarding enhancing contribution of the manufacturing sector to India’s gross domestic product to 25 per cent by 2025 from 16 per cent currently could significantly catalyse manufacturing activity in the country.
In addition, SMEs seeking access to the export market can do better by investing for improving quality, enhancing technology, building brands, and adopting better financial practices for hedging their forex risks and using sophisticated financial services available in the international market for their transaction and funding needs.
(The author is Director – SME Ratings, Crisil. The views are personal.)