The escalation of the tariff war in April will aggravate stress for MSMEs particularly entities in the sectors where the impact of the tariff war is negative, said credit rating and research firm India Ratings and Research in a statement on Tuesday. Analysing 1,898 listed and unlisted MSMEs and 1,055 mid-corporates (MCs), the research firm said MCs have a greater cushion against unanticipated financial shocks with only 11 per cent of them under stress in comparison to MSMEs with 23 per cent of them being stressed.
Any demand slowdown could impact MSMEs more than MCs, although a reduction in interest rates and an improvement in systemic liquidity could provide cushion, the firm said. The polarity in the operating and financial metrics of MCs and MSMEs is stark with the former’s operating performance and return on equity (ROE) improving during FY15-FY24 while for MSMEs there is little-to-no improvement.
According to the data, 50 per cent of the MSMEs analysed continue to operate at below 5 per cent ROE, in comparison to MCs wherein over 50 per cent of the 1,055 companies have ROE exceeding 10 per cent.
Further, MSMEs’ capital expenditure also remains subdued. Data showed median capex as a percentage of revenue of MSMEs remains below 1 per cent with the government support in the form of Interest Subvention Scheme, Credit Linked Capital Subsidy Scheme and other incentives has led to only a slight pickup in capex during the past three years.
Moreover, while CFO/capex ratios of MSMEs remain above 1x, there has been marginal improvement during the past 10 years as potential slowdown in global and domestic demand driven by an escalation in tariff war 2.0 remains a key deterrent to incremental capex by MSMEs, the agency said.
Speaking on the challenge faced by MSMEs, Neermoy Shah, Associate Director, Emerging Corporates, Ind-Ra said capex intensity is usually low as MSMEs grapple more with working capital issues than MCs, and need adequate finance at competitive rates to manage those.
“Additionally, MSMEs – unlike MCs – are largely promoter-driven entities and lack a capable second line of management who have the knowledge and skill sets to bargain with lenders/suppliers/customers.”
On an aggregate basis, the agency noted that 6 per cent of the 1,898 MSMEs are in the high-risk category, holding the total debt outstanding of around Rs 8,100 crore as of FY24, which comprises 16 per cent of the total debt of 1,898 MSMEs. On the other hand, 5 per cent of MCs are in the high-risk category, holding total debt outstanding of around Rs 13,700 crore as of FY24, which comprises 11 per cent of the total debt of 1,055 MCs.
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