Why India’s Micro And Small Enterprises Are Turning Optimistic

Sentiment improved for India’s micro and small enterprises in the quarter ended December and is expected to sustain in the next quarter, according to a survey.

CriSidEx, a survey conducted by rating agency Crisil Ltd. and Small Industries Development Bank of India, measures sentiment of such businesses each quarter. The CriSidEx index—which is based on a scale of 0-200, with 200 being extremely positive outlook—rose to a record 128.

The peak score, according to the survey, was driven by:

• Increase in order book size.
• Employee base for manufacturing MSEs.
• Increase in profit after tax margin.
• Employee base for services MSEs.

The December-ended quarter was driven by favourable macroeconomic factors like the festive season, depreciation in the rupee and the lower crude oil prices. This retained a positive momentum in the manufacturing and services sectors.

That compares with 37 percent of the respondents exhibiting positive outlook in the previous quarter.

In all, 41 percent of MSEs reported an increase in their order book compared with the 27 percent a year ago. In terms of volume of production, nearly 57 percent of manufacturing MSEs expected an increase in production in the January-March quarter.

Size Matters

Larger MSEs, based on annual turnover, continued to remain the most positive about their business. MSEs boasting of a business size between Rs 10 crore to Rs 25 crore have remained consistently confident of their growth.

Optimism among the smaller MSEs, with a turnover of less than than Rs 1 crore, is also rising. Among other trends, such businesses had a better outing in the survey quarter—at 49 percent of those with less than 10 employees compared with 44 percent of those with more than 25 employees.

Lenders See Moderate Growth

Eight out of ten lenders surveyed reported the highest credit growth in the small-ticket segment—the sub-Rs 1 crore exposure segment—and expect this growth to spill over to the next quarter.

Credit to the MSE sector witnessed good growth in December due to the government’s "MSME Support and Outreach Programme" which will run for 100 days covering 100 districts across India, according to a report by State Bank of India last month.

However, few lenders see an improvement in the asset quality going forward, the report noted. Half of the respondents believe that non-performing assets among MSEs will remain unchanged in the next quarter. Based on the size of exposure, the small segment is seen as the most susceptible to an increase in bad asset levels. It's also the most exposed segment.

Export-Oriented MSEs Take Over Domestic Peers

In a first in five quarters, more exporters echoed a good quarter compared with domestic-market focused entities. Nearly half of the MSEs catering to exports reported an increase in orders compared with only 41 percent of their peers supplying to the domestic market.

Importers too have reason to cheer. The share of importers who increased their orders in the December-ended period rose to 25 percent, almost doubling from the previous quarter's 14 percent. This momentum is reflected even in the proportion of importers who anticipate an increase in orders in the March-ended quarter.

Among manufacturers, pharmaceutical and gems and jewellery firms led in terms of order book size and growth trajectory anticipated for the next quarter. Easing pricing pressure in regulated markets, tailwinds due to a weaker rupee and new volume opportunities led to increase in sentiment for the pharma industry in the quarter, CriSidEx said.

MSEs dealing in chemicals, engineering and capital goods limped below the industry average for the volume produced in the surveyed quarter due to a 10 percent sequential dip in crude oil prices. The possibility of inventory loss looms for chemical enterprises owing to a sharp decline in input and final product prices, the report notes.

Not Quite Good News For All

The December-ended period was subdued for a few segments. While 41 percent of the respondents in the services sector were upbeat about the overall business scenario in the surveyed quarter, construction, real-estate and human resources firms didn’t share the sentiment.

The after-effects of the non-banking financial sector crisis and the goods and services tax in under-construction real-estate projects hit sentiment in the realty business. MSEs involved in real-estate and construction remain glum about the next quarter and expect the subdued performance to continue.

In the manufacturing segment, auto component makers lacked industry confidence in the December-ended quarter, with 31 percent upbeat responses, down from 18 percent a quarter ago. That could be attributed to the elevated inventory levels of passenger vehicles and two-wheelers during the October-December period, driven by regulatory changes in insurance, among other factors.