Ease of doing business for MSMEs: The raw material price rise in the country is taking a toll on MSMEs’ growth as 43 per cent of the enterprises by value are expected to see their FY23 earnings before interest, tax, depreciation and amortisation (EBITDA) margin remain below the pre-Covid or FY20 levels. According to a Crisil report on Wednesday, the lower MSME margin this fiscal will be due to the inability of MSMEs to completely pass on the high prices in some commodities as well as an unfavourable exchange rate.
The EBITDA margin had dropped from an estimated 7.1 per cent in FY19 to 5.7 per cent in FY20 before plunging to 4.9 per cent in FY21 and beginning recovery to 5.5 per cent in FY22. For FY23, the margin is likely to remain at 5.5-5.7 per cent before jumping to the forecasted 6-6.5 per cent in FY24, the report showed. The research was based on a common sample of 15,000 entities up till FY19 and 4,000 entities for FY20 & FY21.
Importantly, crude prices have risen significantly this fiscal, averaging $104 per barrel between April and October compared with $61 before Covid. The crude and crude derivatives are used as input for many sectors where MSME is present such as chemicals, dyes and pigments and construction roads, Crisil
Sectors such as chemicals and construction roads are expected to witness EBITDA margin contraction to the tune of 250-300 basis points (bps) and 200-250 bps respectively this fiscal compared with the pre-pandemic levels on account of the rise in crude prices, the report noted. Also, agriculture-based sectors such as milk and dairy and packaged foods are also expected to witness EBITDA margin contraction of 50-100 bps on account of rising milk prices.
“Around 30 per cent of MSMEs out of the 43 per cent in sectors such as chemicals, milk & dairy, and packaged foods, will not reach the pre-pandemic margin level due to high prices of commodities such as crude oil and milk. The remaining 13 per cent in sectors such as pharma-bulk drugs and gems & jewellery will fall short of the mark due to rupee depreciation (Rs 82.3/$ in October 2022 compared with Rs 70.9/$ pre-pandemic) and other factors,” said Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics.
A few other sectors such as air freight and courier services and travel agents, which have lagged because of inherent structural issues, are yet to reach the pre-pandemic level in terms of revenue. “These structural issues, for example, the shift towards online travel aggregators have changed the dynamics of the travel industry, impacting SMEs and similarly, digitalisation has impacted courier SMEs,” the report said.
Nonetheless, revenues for almost all MSMEs are expected to cross the pre-pandemic level this fiscal. “The overall MSME sector is expected to bounce back to 1.27 times the pre-Covid level in terms of revenue this fiscal,” said Sharma. According to the report, the estimated MSME revenue stood at minus 2.4 per cent and minus 6.8 per cent in FY20 and FY21 respectively in comparison to 7.8 per cent between FY17 and FY19. The revenue growth further recovered steeply to 18-20 per cent in FY22. However, it is expected to moderate to 11-13 per cent in FY23 and further to 8-10 per cent in FY24.
While both EBITDA and revenue reflect a company’s financial performance, the two are different. Revenue, on one hand, is measured by adding up income from various business operations, EBITDA on the other hand is calculated by taking the revenue and subtracting expenses to know the profit.
Also read: Can’t blame e-commerce for slow growth of retail MSMEs as claimed by traders: IIFT report