December 5, 2021

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Why capex pace for small, mid-sized firms might take longer time than large manufacturers to pick up

msme loansmsme loansCrisil noted that the 350 large buyers had deferred Capex last year due to Covid that had led to around 14 per cent contraction in their overall Capex.

Ease of Doing Business for MSMEs: After almost a decade of relatively muted private industrial capital expenditure (capex) cycle, the industrial capex is expected to pick up for large firms ahead on the back of new growth drivers such as production-linked incentives (PLI), pandemic-induced digitisation, commodities upcycle, rising merchandise exports, and more, S&P-owned ratings and research agency Crisil said on Monday. However, it might take a longer time for capex by small and mid-sized businesses to improve.

While large firms included 350 of around 15,000 non-infra listed and unlisted manufacturing companies on the agency’s data and analytics platform Quantix, the remaining around 14,650 firms were small and mid-sized businesses.

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Mid and small firms will take some time to ramp up their current capacity because large players have benefited from capex they have undertaken in the last couple of years. Large players have either benefited from a higher share in exports, or from a higher share in the domestic market, and this phenomenon was also highlighted in the pandemic year as well since they had a better supply chain and hence could garner more market share in comparison to mid and small businesses,” Isha Chaudhary, Director, Crisil Research told Financial Express Online.

Importantly, out of typically Rs 3.2-3.5 lakh crore spent annually by these around 15,000 firms, 62-65 per cent is spent by the large 350 businesses while 20-22 per cent is spent by around 1,400 companies and only 15-18 per cent is spent by another over 13,000 companies. Crisil noted that the 350 large buyers had deferred capex last year due to Covid that had led to around 14 per cent contraction in their overall capex.

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“In general as the economy recovers the confidence of small businesses is lower than large businesses. Their balance sheets are usually smaller and weaker. As recovery takes place there will be a lag as big businesses pick up to when small businesses will start to put money in capex. Ultimately such investments are essential for SMEs as large businesses are increasingly dependent on a strong SME supplier base,” Shashank Tripathi, Partner, PwC India told Financial Express Online.

Even before Covid, between FY2013-2017, the private industrial capex cycle was relatively muted due to weak demand, strong supply, and leveraged balance sheets, the agency said. Though a revival was visible during FY2018-2020, it was mostly on the back of regulatory capex in the oil & gas and automotive space (emission norms compliance) and large metal firms.

“It would also be interesting to see different segments that might require capex that won’t be your classic investments into land and machinery, etc. Businesses will have to invest significantly into technology along with other measures digital measures to boost growth. So, what we might see is a change in the kind of capex SMEs make ahead as the country continues to recover from the Covid impact,” a senior member at a market research firm told Financial Express Online.

On the other hand, large players have been operating at a high utilisation rate between FY16 and FY21 across sectors including steel, cement, pharma, and FMCG, thus making room for capex henceforth.

For instance, in steel, the utilisation rate was over 80 per cent in FY21, over 70 per cent in cement, more than 55 per cent in pharma, and over 80 per cent in FMCG in comparison to utilisation rate of 65 per cent, around 52 per cent, around 53 per cent, and around 69 per cent by small and mid-sized businesses across four sectors during FY21.

Also read: EV fear: Are days numbered for MSMEs making parts of internal combustion engine?

“Large players’ utilisation has increased in comparison to mid and small players. This is not just on account of covid but structurally this has been happening since FY16. So small and mid-size players will have to improve their utilisation of current assets and once that happens, we will see the investment cycle for them picking up. It will take 2-2.5 years across sectors despite government incentives,” added Chaudhary.

For instance, the PLI scheme can generate 2.2 lakh crore of capex in the next 3-4 years but if you look at the scheme across 13 sectors except for the telecom sector, there is no direct benefit for MSMEs or small companies. For example, when a large manufacturer set-up a capacity unit and establish backward or forward parts of the value chain, then the MSME play will come in, Chaudhary said.

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