Earnings before interest, tax, depreciation and amortisation (Ebitda) margin of as much as 43% of India's micro, small and medium enterprises (MSME) is expected to remain below the pre-pandemic level in the ongoing fiscal, according to a report by Crisil.

This is due to their inability to completely pass on the high prices in some commodities as well as an unfavourable exchange rate, Crisil Market Intelligence & Analytics Research's SME Report 2022 shows.

"While the industry Ebitda margin is expected to touch the pre-pandemic level this fiscal, 43% MSMEs by value will buck the trend," says Pushan Sharma, director – research, Crisil Market Intelligence & Analytics.

"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 and other factors," Sharma says.

The overall MSME sector is expected to bounce back to 1.27 times of the pre-Covid level in terms of revenue this fiscal, he adds.

Crude prices have risen significantly this fiscal, averaging $104 per barrel between April and October compared with $61 per barrel pre-pandemic. Crude and crude derivatives are used as input for many SME sectors, including chemicals, dyes and pigments and construction roads.

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, says the ratings agency.

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%. 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.

"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," says Elizabeth Master, associate director – research, Crisil Market Intelligence & Analytics.

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