The year 2020 brought distress and damage aplenty for the MSME sector. Can the next year herald a new beginning for them?
The year gone by may well have been the worst nightmare that came true for the MSME sector. Already reeling under the impact of delayed payments and slowdown in demand in 2019, the sector had long been facing its share of turmoil.
But absolutely nothing could have prepared it for the eventuality that was to follow. The coming of the virus and the resultant lockdowns that were announced was the final blow for a sector, often referred to as the ‘backbone’ of the Indian economy. And for a good reason. India is home to over 60 million MSMEs, accounting for 30% of India’s GDP and 40% of the overall exports in the country.
Despite such an overwhelming presence, however, the sector has been in dire straits since the start of this fiscal. Q1 was particularly distressing when the reality of shuttered units, no sales, escalating expenses and dead stock played out in the most macabre fashion for MSMEs.
With Work From Home (WFH) being an alien concept and fixed overheads adding strain to the limited cash reserves, the journey even for the more established units had been anything but easy.
Even the economic stimulus package doled out by the government in May had offered little relief, with MSMEs not finding it on a par with expectations. As part of the package, a Rs 3-lakh crore collateral free loan scheme for businesses, Rs 20,000 crore subordinate debt for MSMEs and Rs 50,000 crore equity infusion through MSME Fund of Funds (FoF) were announced by Finance Minister Nirmala Sitharaman earlier this year in May. However, this had left the industry largely unhappy, saying that it did not offer them the direct fund support needed to ward off immediate expenses.
And while the second quarter showed a slow pick up post the various phases of Unlock, Q3 came with mixed sentiments. The MSMEs whom ET Digital reached out to say that while sales have picked up considerably, profitability still seems far in sight.
Profits or the lack of it
For most in the manufacturing sector, a rise in sales has been offset by a corresponding rise in commodity prices. Jayanth Mutha, Director of agri-electrical company Himlite Products, talks about how the raw material prices have risen sharply in this time. “Prices of copper, brass, plastic etc have all gone up by 30-40%. We can’t pass it on to consumers; else there won’t be any buyers. So though sales have been 100% of previous years on volume basis, the profit has just gone. We are facing losses so that sales can continue and we can survive,” he rues.
Mutha adds that though this is a market phenomenon which shows up every few years, they did not expect it to happen at this time. “This will continue for at least 3-4 months. We have seen such similar rallies eight years back too, but did not expect that Covid would lead to it. It came out of the blue,” he avers.
In sync with Mutha’s views, Upkar Singh Ahuja, MD of the New Swan Group, which manufactures agricultural and auto part components, and is the President of the Chamber of Industrial and Commercial Undertakings (CICU), says that the rising steel price in the US is hurting the auto industry. “The steel cartelisation is affecting the industry. Also, the high rate of GST of 28% on our industry needs to be reduced. For us, Q3 was good and almost at par with Q3 last year. The maximum sales were seen for two-wheeler tractors and farm machinery,” he highlights.
The only thing that has been certain about this year is that the pain has been broad-based and has impacted everyone regardless of sector or industry. For apparel players, 2020 has been a year of jugglery with WFH and staying indoors being the order of the day. Fashion lines gave way to loungewear collections and comfort wear, with more consumers looking at apparel that could be relevant to the ‘new normal’.
Shivani Poddar, Cofounder, FabAlley & Indya.Shivani Poddar, Cofounder, FabAlley & Indya says that Q3 has seen a good turnaround for their business. “Q3 has been the best quarter for a lot of businesses this year because of festive shopping, which started in September. Q2 was a slow quarter for our business since offline footfalls were low and people were cutting spends on discretionary products like fashion and lifestyle. Aided by good offers, promotions and introduction of categories such as masks, WFH and loungewear, we have seen fantastic recovery in Q3,” she enthuses.
The momentum also picked up for Saankhya Labs, a wireless communication and semiconductor chipset company in Q3, with investments in new product developments picking up. “The overall mood in the sector has been a lot more positive compared to Q2 and in the beginning of the fiscal, having gone past the first shock wave from the pandemic. But the delivery of hardware products continue to experience delays due to electronics supply chain issues,” states Vishwakumara Kayargadde, COO, Saankhya Labs.
Online gains traction
The digital domain, however, saw a different side of the story, with sentiments being fairly positive and robust for sellers in the online space. Hyderabad-based Chitra Vyas, who has been a seller on Flipkart since 2016 and had the fashion category of footwear previously, quickly pivoted to include dry fruits as part of her portfolio. And this worked wonderfully for her business since these formed a part of the ‘essential products’ allowed during lockdown. “We saw a sudden spike in the category from May. On the first day itself we saw 800 orders. People have been anxious of their health and did not want direct contact of purchase. More consumers shifted focus to online,” she says exuberantly. Vyas plans to expand the food category to include more of regional food and other types of food categories from their manufacturing unit.
Dealing in skin care and hair care products, Kartbin Online Services’ Sanjib Prasad also had a stressful year as orders slipped from 1700 to around 350 per day during the lockdown. However, the demand for sanitisers and masks kept his business afloat during that time, and later the demand for his existing categories saw a steady increase. Prasad sees an uptick in ecommerce sales in the New Year and plans to launch 2-3 more categories in apparel, after the encouraging demand seen in his t-shirt business.
Q3 also saw good demand in some categories with the onset of the marriage season. Rahul Bajaj, Director of Sree Shakti Enterprises, a kitchenware supplier to Walmart India cash and carry stores, says that the spike in marriages and increase in farmer earnings augured well for them. However, he says that they will close the fiscal at the same turnover as last year since Q1 sales were nil in kitchenware and Diwali gifting was also relatively low this time.
Clothing manufacturing facility of Kartbin Online Services.When the clock strikes 12
So with the mixed bag experienced by MSMEs in the latter part of this year, will 2021 herald a new beginning for a sector dubbed as the ‘growth engine’ of the economy? The MSMEs who spoke to ET Digital expressed skepticism about the first half of the year, saying it would continue to be a challenging time. “The profit has just gone due to the steep increase in raw material costs. Profitability will kill more MSMEs than what Covid did. It will be a split. The first six months will be very difficult. After that it will stabilise – the rally cannot sustain more than that,” adds Mutha.
Bajaj foresees things to be comfortable for the sector only after August. He feels that we should reorient the approach in order to come up next year in a better position. “We need to take Covid out of our mind and focus on recent developments. We should be competitive in the world scenario, be it as an MSME or a large player. Contingency balances and other financial aspects which we never thought of earlier should be a part of the plan now,” he explains.
He adds that the next six months could be problematic as savings have saturated and lockdown orders in some states may also continue. But there is a ray of hope too. “The vaccine story is coming up in a good manner. Things won’t get any tougher than what we have already seen. The first half of the year can be difficult, but the second half should be excellent,” sums up Bajaj fervently.