CRISIL SME tracker: The margin game

CRISIL has analysed the trends in profitability 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 service-sector MSMEs have held on to their operating margin much more tenaciously than their counterparts in the manufacturing and trading sectors.

The operating profit before depreciation, interest, and tax (OPBDIT) margin of service enterprises actually improved to 11.34 per cent in 2011-12 from 10.84 per cent in 2010-11 and 11.04 per cent in 2009-10. In comparison, MSME profitability in the manufacturing sector declined from 8.51 per cent in 2009-10 to 8.13 per cent in 2010-11, and stagnated thereafter. Operating profit in the trading sector too remained low at 3.32 per cent in 2009-10 and 2010-11, and declined to 3.28 per cent in 2011-12.

Manufacturing enterprises have been battling slowdown in demand while simultaneously trying to cope with poor infrastructure and availability of power in many parts of the country. Higher sunk investment on fixed assets poses a serious challenge to these enterprises, whereas MSMEs in the service sector are leaner in terms of investment and are also able to customise their offerings quickly as per changing client needs and the rapidly evolving economic environment. Service-sector enterprises also face lesser challenges in terms of managing the required inventory levels and accompanying costs.

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.