CRISIL SME tracker: Manufacturing MSMEs improve their returns

CRISIL has analysed the profitability trends of 9,200 micro, small, and medium enterprises (MSMEs) in the manufacturing, service, and trading sectors from 2009-10 to 2011-12 (refers to financial year, April 1 to March 31).The analysis reveals that MSMEs in the manufacturing sector were better able to prevent erosion of their return on equity (RoE) as compared to their counterparts in the service and trading sectors.

The RoE (profit after tax divided by tangible net worth) in the manufacturing sector improved from 16.96 per cent in 2009-10 to 17.86per cent in 2010-11 and was able to hold on at 17.63 per cent in 2011-12. In comparison, RoE in the services sector deteriorated continuously from 18.77 per cent in 2009-10 to 15.30 per cent in 2011-12. RoE in the trading sector showed some improvement by increasing to 22.88 per cent in 2010-11 from 21.18 per cent in 2009-10, but declined eventually to 19.72 per cent in 2011-12.

Returns in services and trading appear to have declined as competition in these sectors is much more intense due to their higher RoE and smaller asset bases, as compared to the more capital-intensive manufacturing sector. Another reason for the decreasing trend may be the admittance of higher rate of depreciation on assets like computer hardware and software, which form a major part of the assets in the service sector.

Note: The analysis is based on the latest audited financial statements of CRISIL-rated MSMEs. Most enterprises finalise their audited financials by the end of the second quarter, after the closure of the financial year. CRISIL rates over 45,000 MSMEs in India. This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy.