India’s GDP contraction to significantly hurt small businesses, says
MUMBAI : The expected contraction in the Indian economy in FY21 due to the coronavirus outbreak, will significantly hurt micro, small and medium enterprises (MSMEs) across sectors, said a report by rating agency Crisil.
The report said that India Inc is headed towards about a 15% decline in revenue and 25% fall in earnings before interest, taxes, depreciation and amortisation (Ebitda). Meanwhile, for small businesses, the fall in revenue will be steeper at 17-21%, while Ebitda margin will shrink 200-300 basis points (bps) to 4-5% as weak demand gnaws away gains from lower commodity prices, said Crisil.
“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,” it said, adding that this is after factoring in the benefit of moratorium on interest payments announced by the Reserve Bank of India (RBI).
Without the moratorium, Crisil said, the ratio would have gone below one.
“The challenges would be the hardest for micro enterprises, which account for 32% of the overall MSME debt, and are facing material stress in terms of revenue growth, Ebitda margins and working capital stretch,” it said.
According to Crisil, 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.
Amish Mehta, chief operating officer, Crisil said that a three-pronged strategy is essential now: one, improve the sentiment around job security for formal and informal workers to boost consumption.
“Two, hasten implementation of the ₹3 trillion Aatmanirbhar scheme to ensure flow of liquidity to MSMEs continues. Three, and most importantly, lenders have to go beyond traditional credit processes because they have to play a seminal role in recovery,” said Mehta.
As for sectors, Crisil sees consumer discretionary, construction, and export-linked ones bearing the brunt. Small real-estate contractors into engineering, procurement, construction (EPC) projects, and ceramics and textiles makers have been significantly impacted so their credit profiles are the most vulnerable, it said.