West Asia crisis a double burden for Indian MSMEs, says Crisil

The prolonged West Asia crisis is a double burden for Indian MSMEs, chopping 100 bps off their revenue this fiscal. A Crisil report highlights dual challenges of production cuts, revenue losses, and margin compression from trade disruptions.

While COVID-19 impacted both large and small players, the burden of the prolonged West Asia crisis is double for Indian small and medium enterprises (MSMEs). The geopolitical turmoil will chop 100 bps off MSME revenue this fiscal, says Crisil.

Dual Challenges for MSMEs

Indian MSMEs are facing dual challenges amid the West Asia crisis - "production cuts and revenue losses due to reduced availability of raw material such as gas and, second, margin compression stemming from trade disruptions and limited pricing power to pass on increasing commodity and energy costs," the report said.

"Amid the Covid-19 pandemic, large players had seen revenue decline by 0-1% in fiscals 2020 and 2021, while MSMEs experienced a 3-5% drop. The Ebitda margin of MSMEs had also declined 80 bps to 4.7% in fiscal 2021," Crisil said.

Crisil further noted, "units heavily reliant on energy inputs, particularly those in clusters with limited access to gas or lower ability to switch to alternative fuels, will be hit hardest."

Crisil Report: Fiscal Forecasts

As per Crisil Intelligence's latest MSME Report, "revenue growth will moderate to 7.5-8.5%, down 100 basis points (bps) compared with fiscal 2026, while earnings before interest, tax, depreciation and amortisation (Ebitda) margin will decline 50-100 bps to 5-5.5%."

Exception: Gems and Jewellery Market

As per the report, "forecasts would have been more subdued but for the domestic gems and jewellery market, which is experiencing a value-led expansion, driven by a surge in gold prices."

Sector-Specific Impacts

Ceramic Sector Hit Hardest

Crisil further noted, "Morbi cluster, which accounts for over 80% of India's ceramic tile production, is a case in point. With 80-85% of its production gas-based, MSMEs which generate over 85% of the cluster's ceramic sector revenue will see revenue growth plummet from 9-11% in fiscal 2026 to 1-3% in fiscal 2027. This is largely due to export-oriented production (80-90% of output), with 20-25% of exports directed to the Middle East. Accordingly, their Ebitda margin is expected to decline 300-400 bps to 4-6% in fiscal 2027."

Road Construction and Fuel Costs

The increasing diesel prices will likely "impact MSMEs in sectors such as road construction, where fuel costs account for 8-10% of the total cost. We expect their margin to decline 50-100 bps to 8-10% in fiscal 2027," the report said.

Pressure on Packaged Foods

Additionally, "increasing packaging costs will pressure margins in packaged foods, where packaging accounts for 10-15% of overall cost. As a result, the margin of MSMEs in this sector are expected to decline 50-100 bps to 6-6.5% in fiscal 2027," said Crisil. (ANI)

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