Over one-fourth MSMEs lost more than 3% market share in FY22: Crisil

More than a quarter of India's micro, small and medium enterprises (MSMEs) lost market share of over 3% due to the Covid-19 pandemic, according to a report by Crisil.

Half of the MSMEs 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, Crisil Research's SME Report 2022 reveals.

"SMEs in several sectors saw market share loss of over 3% 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," says Pushan Sharma, director at Crisil Research.

"Edible oil SMEs lost market share because an increase in hygiene quotient because of the pandemic meant less buyers for oil sold loose. Pesticides and edible oil SMEs suffered margin contraction of 100 bps and 200 bps, respectively, due to partial pass-through — at less than 60% — of increase in raw material costs," Sharma adds.

Around 40% of the SMEs hardly lost market share because of their "essential" nature, such as pharmaceutical and agricultural millers.

A handful of sectors, such as steel pig iron, gained share where only SMEs could capitalise on revival in infrastructure demand, as large plants captively consumed 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 heavily on sectors that operate in low-margin products and have limited pass-through. Crisil sees sectors such as transport operators, edible oil, and gems and jewellery to be the most vulnerable to EBITDA losses owing to wafer-thin margin of less than 3% and limited input cost pass-through of under 60%.

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%) of rising fuel cost that forms about half of the total cost.

"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 U.S. ban on Xinjiang, China-made items, apart from the China+1 policy. The readymade garment industry, with 70% MSME share, gained from supply constraints in China, and from emerging global opportunities," says Elizabeth Master, associate director at Crisil Research.

"Pharma exports soared on pandemic-related demand, even as the domestic industry was struggling with lower volume demand. Going forward, Tirupur-based MSME garment manufacturers could benefit from export orders diverted from an economically floundering Sri Lanka," Master adds.

Crisil says MSMEs should see revenue increase 9-11% this fiscal to 1.25 times the fiscal 2020 level, though EBITDA margin is likely to remain range-bound at 5-5.5%.

"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 performance is also underwhelming in the context of overall corporate India, which is expected to log a 10-14% increase in revenue and EBITDA margin of 19-20%," the report adds.