MSME margins to shrink this fiscal on pandemic-induced loss of demand

CRISIL Research expects the likely contraction of 5 per cent in India’s gross domestic product (GDP) in the current fiscal year to impact micro, small and medium enterprises

(MSMES) especially hard

— and micro units harder than their small and medium peers.

Long constrained for liquidity, MSMES now also have to cope with loss of demand, labour shortage, and heightened risk aversion in the financial system due to the Covid-19 pandemic. All this will stretch their already-strained financials.

CRISIL Research expects MSMES to log a revenue contraction of 17-21 per cent this fiscal. Among key sectors, consumer discretionary and construction are expected to see revenue contraction of more than 20 per cent each.

Given the pandemic-induced demand destruction, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin for MSMES overall is expected to decline from 7 per cent on average in the last four fiscal years to 4-5 per cent this fiscal, despite a slide in commodity prices.

A case in point is transport operators, which face weak freight demand and low capacity utilisation, resulting in margin deterioration despite lower fuel prices.

Despite factoring in the moratorium benefit, interest cover is expected to halve from 2.4 times in the last four fiscal years to 1-1.5 times in the current fiscal, owing to a decline at the operating level. In the absence of the moratorium benefit, interest cover would have slipped significantly below 1.

Our analysis indicates that working capital days tend to stretch by 15-20 per cent in years of low growth, compared with those of normal growth.

The increase in working capital would be the highest for MSME sectors with higher B2B sales and share of exports. Accordingly, gems and jewellery, textiles, readymade garments and EPC real estate would witness the highest impact on working capital in FY21.