Growth of MSMEs in IT/ITeS constrained by lack of funds

Micro, small and medium enterprises operating in the information technology (IT)/IT enabled services (ITeS) space tend to find growth constrained, mainly due to lack of capital.

An analysis of 4,000 CRISIL-rated MSMEs shows that those focused on IT/ITeS grew by 12 per cent per annum between FY13 and FY15, compared with nearly 20 per cent for their peers in the service sector.

These MSMEs, typically engaged in deploying hardware networks, developing customised apps/software/websites, or providing consulting, need to diversify in order to grow faster.

However, diversification requires continuous investment in reskilling existing manpower or adding new manpower, particularly given rapid changes in technology and business models. And raising capital remains a challenge despite healthy margins of 12-15 per cent and low gearing levels of 0.5-0.7 times.

There are several reasons for the capital crunch: First, while the sector is driven by manpower and intangible assets, banks are yet to move towards a cash flow-based funding model, and this puts the promoters under pressure to arrange collateral. Second, the valuation of IT companies is tricky, with a high probability of failure and negligible cost of winding up business. Third, alternate funds such as venture capital/private equity invest in rapidly scalable business models, something beyond the scope of play of these small players.

Somewhat predictably, IT/ITeS MSMEs with annual turnover of less than '5 crore struggled even more due to limited resources, restricting their ability to source larger projects.