As much as 43% of India’s micro, small and medium enterprises (MSME) universe by value is expected to remain below the pre-pandemic (fiscal 2020) level in terms of earnings before interest, tax, depreciation and amortisation (Ebitda) margin this fiscal because of inability to completely pass on the high prices in some commodities as well as an unfavourable exchange rate, Crisil MI&A Research’s SME Report 2022 reveals.

Almost all the MSMEs, however, are expected to cross the pre-pandemic level of revenue.

Assessing the pandemic’s impact on MSMEs has been a challenge because of information asymmetry and lack of high-frequency data points in this space.

The Crisil report plugs this hole by covering 69 sectors and 147 clusters that logged aggregate revenue of Rs 56 lakh crore, representing 20-25% of India’s gross domestic product (implying coverage of two-thirds of the MSME universe).

Says Pushan Sharma, Director – Research, Crisil Market Intelligence & Analytics, “The overall MSME sector is expected to bounce back to 1.27 times of the pre-Covid level in terms of revenue this fiscal. While the industry Ebitda margin is expected to touch the pre-pandemic level this fiscal, 43% MSMEs by value will buck the trend. Around 30% out of the 43%, 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%, 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.”

Crude prices have risen significantly this fiscal, averaging $104/ barrel between April and October compared with $61/ barrel pre-pandemic. Crude and crude derivatives are used as input for many SME sectors, including chemicals, dyes and pigments and construction roads. Increase in fodder prices, unavailability of green fodder, and loss of milk production as the insemination rate was affected in fiscal 2021 due to lockdown led to an 11% increase in milk prices in fiscal 2022. Disease outbreak this fiscal is expected to further increase milk prices by 7%.

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 rise in crude prices. Agriculture-based sectors such as milk & dairy and packaged foods are expected to witness Ebitda margin contraction of 50-100 bps on account of rising milk prices.

Notably, a few sectors are yet to reach the pre-pandemic level in terms of revenue. These include air freight & courier services and travel agents, which have lagged because of inherent structural issues. For instance, the shift towards online travel aggregators has changed the dynamics of the travel industry, impacting SMEs. Similarly, digitalisation has impacted courier SMEs.

Says Elizabeth Master, Associate Director – Research, Crisil Market Intelligence & Analytics, “The commodity cycle is turning, with steel and crude prices estimated to decline 9-10% next fiscal. Easing of Russia-Ukraine war, correction in coking coal prices, and weak global demand are expected to bend steel prices. Easing of geopolitical tensions leading to opening up of supply chains globally will lead to a fall in crude prices. Thus, the easing commodity cycle, coupled with rising revenue, will help take Ebitda margin to pre-pandemic level for most of the sectors next fiscal.”