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.”

Prices of crude oil are expected to be weighed down by a slowdown in major global economies and realignment of global supply chains, but still be high at 1.3 times the pre-Covid-19 average. This will lead to sectors such as dyes & pigments and road construction, which use crude and its derivatives as inputs, witnessing Ebitda margin contraction of 350-400 basis points (bps) and 100-150 bps, respectively, compared with their pre-pandemic levels.

Similarly, prices of steel, which is a major input for SME sectors such as farm equipment and light engineering, are likely to be under pressure from weak global demand and correction in coking coal prices, but still be high at 1.5 times the pre-pandemic level. This will keep the Ebitda margins of sectors such as farm equipment and light engineering 100-150 bps lower than their pre-Covid levels.

In terms of revenue, however, the entire MSME universe has already crossed the pre-pandemic level.

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.”