High Commodity Prices to Crimp MSME Margins this Fiscal: CRISIL Report

Inability to pass on the high commodity prices fully will ensure the earnings before interest, tax, depreciation and amortisation (Ebitda) margin of as much as 10-15% of India’s micro, small and medium enterprise (MSME) universe by value remains below the pre-pandemic (fiscal 2020) level even this fiscal.

Indeed, in sharp contrast to corporate India, which logged a decadal-high Ebitda margin in fiscal 2021, as many as 46% of the MSME sectors lagged the pre-pandemic level in the previous fiscal.

CRISIL MI&A Research's MSME Report indicates as much. The twice-a-year exclusive analysis covers 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) in fiscal 2022.

Assessing the commodity-price impact on MSMEs tends to be a challenge because of information asymmetry and lack of high-frequency data points in this space. The CRISIL MI&A Research report addresses this lacuna through proprietary analytics of its large data pool and primary research.

Says Pushan Sharma, Director – Research, CRISIL Market Intelligence & Analytics, “The commodity cycle is turning, with crude oil and steel prices estimated to correct 13-15% and 3-5%, respectively, this fiscal. This, coupled with rising revenue, will help the MSME industry Ebitda margin cross the pre-pandemic level and reach 5.7-5.9% this fiscal. However, 10-15% MSMEs by value will still be below pre-pandemic level owing to limited pass-through of high commodity prices.”

Says Elizabeth Master, Associate Director – Research, CRISIL Market Intelligence & Analytics, “In fiscal 2022, the MSME industry had crossed the pre-pandemic level of revenue with growth driven by uptick in value. Indeed, value accounted for 75% of the incremental revenue, with commodity upcycle pushing up prices. In contrast, this fiscal, the MSME industry is expected to reach 1.36 times the pre-Covid level in terms of revenue, driven by volume, which will account for 88% of the incremental revenue.”