Rising input prices shrink Rajkot SMEs' profit margins

Small and medium enterprises (SMEs) based in Rajkot have witnessed reduction in profit margins as prices of raw materials have increased consistently in the last six months.

In the last six months, the price of pig iron has increased from Rs 26,000 to Rs 34,000 per tonne, while the cost of steel scrap has gone up from Rs 38,000 to Rs 43,000 per tonne. Over and above this, the prices of fuel and labour have risen nearly 10 per cent in the current calendar year.

"These are bad times for us, as prices of raw material are going up and we cannot pass it on to our buyers as they are not ready to accept it. This has resulted in engineering industries in Rajkot reducing their profit margin to survive," said Gokul Patel, president of the Rajkot Engineering Association (REA).

Under normal circumstances, the profit margin of industries on finished products is about 8-15, but this has fallen to 6-10 per cent since January this year. Patel said, "Unstable prices have affected the foundry industry the most. As a result, the auto components industry, the submersible pumps industry, agriculture equipment manufacturers and the machine tools industry have reported low profit margins."

The poor state of the economy in the last two years has resulted in delayed payments, creating a liquidity crunch in industries.

"Payment for completed orders is still to be cleared, leaving many SMEs in a financial crunch. We have no new big orders right now and if we increase the price of our products, we may lose our clients or buyers may downsize the orders," said Brijesh Dudhagara, director, REA.

With industry struggling for the last two months, many SMEs have reduced the number of working days to five a week. Many industries have also reduced the length of the working day from eight hours to five hours. All are waiting for the Budget to get an idea of the steps the new government will take to revive SMEs.