CRISIL SME Tracker: Diversification drives growth for auto component MSMEs

Industry has seen a slowdown in revenue growth over the past 4 financial years due to lacklustre demand from automobile manufacturers

Diversification in terms of customers, geography and products is a differentiator for micro, small and medium enterprises (MSMEs) in the auto component industry, an analysis of 300 such units rated by CRISIL has revealed. The industry has seen a slowdown in revenue growth over the past four financial years due to lacklustre demand from automobile manufacturers. However, diversified MSMEs have been able to sustain revenue growth.

The study found that MSMEs with a diversified product range, customer base and geographical outreach logged a compound annual growth rate (CAGR) of 10 per cent in average sales between 2012-13 and 2014-15, far higher than the three per cent for peers with concentration on these fronts. The revenue base of these MSMEs was also bigger.

Further, of this CRISIL sample, rating downgrades during slowdown were 40 per cent for MSMEs with limited diversification, as against only 15 per cent for those with diversified business profiles. Of the players with diversified business profiles, 74 per cent retained their ratings, while 11 per cent saw rating upgrades. Interestingly, MSMEs that have improved their business profile and rating have started supplying to other sectors such as electrical, electronics, engineering and tooling as well.

This is why diversification of business profile is an important rating parameter for MSMEs in the auto-component industry, and is recognised as a factor that helps them achieve better scalability and maintain healthy revenue growth. 

Says Manish Jaiswal, Business Head-SME Ratings, CRISIL: “Product diversification is more feasible for MSMEs compared with their larger peers, given the less complex nature of their product offerings. We also believe that the rollout of the goods and 

services tax will encourage these players to expand their geographical reach, given simplified tax structures, and reduction in logistics and inventory management costs.