The 5% contraction in the Indian economy expected by CRISIL this fiscal - wrought by the Covid-19 pandemic - will significantly hurt micro, small and medium enterprises (MSMEs) across sectors.
"The pain will radiate as India Inc heads towards 15% decline in revenue and 25% fall in earnings before interest, taxes, depreciation and amortisation (Ebitda). For MSMEs, the fall in revenue will be steeper at 17-21%, while Ebitda margin will shrink 200-300 basis points to 4-5% as weak demand gnaws away gains from lower commodity prices," Crisil has stated in a press release.
A sharp decline at the operating level will also impact creditworthiness, aggravating the liquidity stretch these units have been grappling with, particularly on the working capital front, the rating firm has said.
"In the process, average interest service coverage ratio could slide to 1-1.5 times from 2.4 times seen between fiscals 2017 and 2020, even after factoring in the benefit of moratorium on interest payments announced by the Reserve Bank of India (RBI). Sans moratorium, the ratio would have gone below 1.
The challenges would be the hardest for micro enterprises, which account for 32% of the overall MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch," Crisil has stated.
Says Amish Mehta, Chief Operating Officer, CRISIL, "The current facilitations may not have the heft to crank up demand in the near term because fiscal stimulus is limited and only to vulnerable households.
It is critical that the demand curve is yanked steeply northwards, especially in discretionary products and services. A three-pronged strategy is essential now: one, improve the sentiment around job security for formal and informal workers to boost consumption. Two, hasten implementation of the Rs 3 lakh crore Aatmanirbhar scheme to ensure flow of liquidity to MSMEs continues. Three, and most importantly, lenders have to go beyond traditional credit processes because they have to play a seminal role in recovery.
That will mean closer interactions with MSMEs to understand underlying drivers of business, and using innovations such as operational scorecards, digital platforms and alternative data for monitoring and underwriting."
"Revenue growth of MSMEs in the real estate engineering, procurement and construction segment could almost halve with demand sliding even as rising costs, supply chain disruptions and labour issues exert severe pressure on margins. Lower utilisation and partial absorption of BS-VI price hike could erode margins of auto-component MSMEs this fiscal despite lower raw material prices.
Working capital is highest for MSME sectors that have higher B2B clientele or dominant export share, such as gems & jewellery, ready-made garments and real estate contractors," Crisil has stated.