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More than a quarter of India’s micro, small and medium enterprises (MSMEs) lost a market share of over 3 per cent due to the Covid-19 pandemic, according to CRISIL Research’s SME Report 2022.
Half of them suffered a contraction in their earnings before interest, tax, depreciation and amortisation (EBITDA) margins because of a sharp rise in commodity prices last fiscal, compared with the pre-pandemic (fiscal 2020) level.
The CRISIL report covers 69 sectors and 147 clusters that logged aggregate revenue of ₹47-lakh crore, representing 20-25 per cent of the gross domestic product (implying two-thirds coverage of the MSME universe).
Pushan Sharma, Director, CRISIL Research, observed that SMEs in several sectors saw market share loss of over 3 per cent 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,” he said.
Edible oil SMEs lost market share because an increase in hygiene quotient due to the pandemic meant less buyers for oil sold loose. Sharma assessed that pesticides and edible oil SMEs suffered margin contraction of 100 basis points (bps) and 200 bps, respectively, due to partial pass-through — at less than 60 per cent — of increase in raw material costs.
40% SMEs hardly lost market share
Interestingly, around 40 per cent of the SMEs hardly lost market share because of their ‘essential’ nature, such as pharmaceutical/agricultural millers, or by virtue of commanding a high share, such as the brass industry, as per the report.
CRISIL noted that a handful of sectors, such as steel pig iron, gained a 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 sees sectors such as transport operators, edible oil, gems and jewellery to be the most vulnerable to EBITDA losses owing to a wafer-thin margin of less than 3 per cent and limited input cost pass-through of under 60 per cent.
The rating agency assessed that 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 (around 50 per cent) of rising fuel cost that forms about half of the total cost.
Textiles and pharma: ray of hope for exports
Elizabeth Master, Associate Director, CRISIL Research, noted that 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 per cent 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,” Master said.
Going forward, Tirupur-based MSME garment manufacturers could benefit from export orders diverted from an economically floundering Sri Lanka, she added.
Going forward
In the milieu, CRISIL expects MSMEs to a clock revenue increase of 9-11 per cent this fiscal to 1.25 times the fiscal 2020 level, though EBITDA margin is likely to remain range-bound at 5-5.5 per cent.
While the industry EBITDA margin is expected to touch the pre-pandemic level this fiscal, MSMEs in more than half the sectors will buck the trend, the agency said, adding the performance is also underwhelming in the context of overall corporate India, which is expected to log a 10-14 per cent increase in revenue and EBITDA margin of 19-20 per cent.
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