Credit and finance for MSMEs: The MSME sector’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin, which indicates earnings of an enterprise before factoring in non-operating expenses, will grow past the pre-pandemic level (FY20) to reach nearly 6 per cent this fiscal, according to an analysis by credit rating agency Crisil. The twice-a-year analysis covered 69 sectors and 147 clusters that logged aggregate revenue of Rs 56 lakh crore, representing 20-25 per cent of India’s gross domestic product — implying coverage of two-thirds of the MSME sector — in fiscal 2022.
Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics said in a Crisil statement on Tuesday that the turning of the commodity cycle — with crude oil and steel prices estimated to correct 13-15 per cent and 3-5 per cent respectively this fiscal — along with rising revenue will help the MSME industry’s EBITDA margin cross the pre-pandemic level and reach 5.7-5.9 per cent this fiscal.
In terms of revenue, the MSME sector has already crossed the pre-pandemic level in FY22 with growth driven by an uptick in value, said Elizabeth Master, Associate Director – Research, CRISIL Market Intelligence & Analytics.
“The value accounted for 75 per cent of the (sector’s) incremental revenue, with commodity upcycle pushing up prices. In contrast, this fiscal, the revenue is expected to reach 1.36 times the pre-Covid level, driven by volume, which will account for 88 per cent of the incremental revenue,” Master added.
However, the EBITDA margin of 10-15 per cent of the MSME sector by value will still remain below the pre-pandemic level even this fiscal “owing to limited pass-through of high commodity prices,” said Sharma. In comparison, the EBITDA margin for 46 per cent of the MSME sector was below the pre-pandemic level in the previous fiscal.
According to Crisil, while prices of crude oil are likely to be weighed down by a slowdown in major global economies and realignment of global supply chains, but they would still be high at 1.3 times the pre-Covid average.
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As a result, the EBITDA margin will contract by 350-400 basis points (bps) for the dyes & pigments sector and by 100-150 bps for the road construction sector which use crude and its derivatives as raw materials vis-a-vis pre-pandemic levels.
Likewise, while prices of steel, which is another major raw material for SMEs in farm equipment and light engineering, are expected to be under pressure from weak global demand and correction in prices of coking coal, but they would still be high at 1.5 times the pre-Covid level.
Consequently, the EBITDA margins of farm equipment and light engineering segments will be 100-150 bps lower than their pre-Covid level.