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Packaging
CRISIL’s analysis of more than 140 manufacturers in the SME sector reveals 11.58 per cent growth in turnover during 2009-10. About 60 per cent of enterprises in the sample, manufacture corrugated boxes and enjoy a higher operating margin (9.73 per cent in 2009-10). The remaining enterprises are engaged in production of packaging films, rolls, tapes, and plastic bags. The plastic bag manufacturers have the lowest margins, of 4.94 per cent, indicating intense competition and low flexibility to pass on raw material price increases to the customers in this segment. About 58 per cent of enterprises in the sample have undertaken branding initiatives in one form or another. However, there is no indication that they have a higher operating margin. The study reveals that most of the players are small, with an average turnover of Rs 88 million, average employee base of 59, and relatively high gearing of 1.96 times as on March 31, 2010. However, larger entities (with net worth of more than Rs 200 million) had a higher debt-to-equity ratio of 3.55 times during the same period due to significant investments in expansion and upgradation.
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Wood & Wood products
CRISIL’s analysis of more than 120 wood product (veneer, saw timber, plywood, and craft) manufacturers in the small and medium enterprise (SME) sector highlights the segment’s strong compound annual growth rate (CAGR) of 35.30 per cent between 2007-08 (refers to financial year, April 1 to March 31) and 2009-10, driven by healthy growth in real estate construction. However, increased competition has resulted in a marginal decline in operating margin (to 5.09 per cent during 2009-10 from 6.46 per cent during 2007-08) for these enterprises. Changes in consumer tastes is forcing this industry to modernise and invest in new technology, and in the bargain, to shed its unorganised status. The modernisation has also resulted in improved efficiency, resulting in growth in average sale per employee to `3.6 million in 2009-10 from Rs 1.5 million in 2007-08.
The shift towards an organised set-up is reflected in the large number of corporates in the sample (48 per cent). CRISIL’s analysis reveals that, compared to partnership and proprietorship firms, companies, on an average, undertake more capital-intensive manufacturing, as reflected in their higher investments in fixed assets. Working capital management will be a key challenge for the industry over the medium term.
The analysis reveals average inventory holding periods in excess of 200 days, and receivables of around 60 days. These are largely funded through debt, resulting in significant levels of interest for these enterprises. Consequently, the enterprises have registered low profit after tax (PAT) margins (0.50 per cent in 2009-10).
Civil Construction Industry
CRISIL’s analysis of more than 300 SMEs in the civil/project construction space reveals the long-standing presence of most of the enterprises in the industry and moderate gearing. However, compared to other industries covered, the enterprises in this sector face significant risks relating to customer and geographical concentration and high dependence on tender-based projects.
Most of the enterprises in the CRISIL SME sample are small sub-contractors with 69 per cent of them having a net worth of less than Rs 50 million. These enterprises benefit from the promoters’ local knowledge, which enables them to complete projects with minimal time and cost overruns. Thus, in comparison with the overall sample, the smaller enterprises have a higher operating margin (12.63 per cent vis-à -vis 11.35 per cent for overall sample) and lower gearing (less than 0.6 times vis-à -vis 1.25 times for the overall sample). A similar analysis based on legal status revealed that proprietorships and partnerships performed better than companies.
CRISIL’s analysis reveals that client and geographical concentration is an important challenge for enterprises in this sector and more so for small-sized entities. Thus, enterprises with net worth of less than Rs 50 million registered negative growth in turnover during 2009-10 vis-à -vis overall growth of 8.61 per cent registered by the sample during this period. The CRISIL sample is evenly distributed across key states if one excludes Maharashtra, Gujarat and AP (accounted for 49 per cent of the sample). More than 80 per cent of enterprises are highly dependent on tender-based projects from few entities/state government departments within the same state or in an adjoining state. CRISIL believes that this can not only pose a challenge of concentration but also expose these enterprises to risks related to tender-based nature of their businesses. Any slowdown/delay in commencement of major projects in a particular state could impact the performance of enterprises with such high concentration.
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