How Covid-19 is hurting MSME bottomlines
The contraction in the Indian economy this fiscal – wrought by the Covid-19 pandemic – will significantly hurt micro, small and medium enterprises (MSMEs) across sectors, with their revenue expected to fall between 17-21 per cent, while Ebitda margin will shrink 200-300 basis points to 4-5 per cent, says a Crisil report. This will happen even as weak demand gnaws away gains from lower commodity prices.
This will radiate as India Inc heads towards nearly 15 per cent decline in revenue and nearly 25 per cent fall in earnings before interest, taxes, depreciation and amortisation (Ebitda). 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. 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 the 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 per cent of the overall MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch.
Previous downturns have shown that micro and small enterprises are unable to manage transient working capital challenges as easily as their large and medium peers. To that extent, the measures announced by the Ministry of Finance and the RBI, nudging banks and other institutions to lend more, will help them tide over tapered cash flows. The bigger issue is demand, which needs to revive for growth to improve sustainably.
“The current facilitations may not have the heft to crank up demand in the near term because the fiscal stimulus is limited and only to vulnerable households,” says Amish Mehta, chief operating officer, Crisil. “It is critical that the demand curve is yanked steeply northwards, especially in discretionary products and services.” A three-pronged strategy is essential: one, improve the sentiment around job security for formal and informal workers to boost consumption. Two, hasten the implementation of the Rs 3 lakh crore aatmanirbhar scheme to ensure the flow of liquidity to MMEs continues. Three, 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 the business, and using innovations such as operational scorecards, digital platforms and alternative data for monitoring and underwriting.
As for sectors, CRISIL sees consumer discretionary, construction, and export-linked ones bearing the brunt. Small real-estate contractors into EPC (engineering, procurement, construction) projects and ceramics and textiles makers have been impacted so their credit profiles are the most vulnerable.
(Courtesy of Mail Today)
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