FY23 Budget Extends ECLGS and RAMP to Boost MSMEs: India Ratings and Research

8 Feb 2022 , 03:09 PM

Ind-Ra-Gurugram-8 February 2022: India Ratings and Research (Ind-Ra) believes the FY23 Union Budget has a neutral-to-positive impact on the micro, small and medium enterprise (MSME) sector. The budget has given an incentive for international trade and extended previous schemes to provide the much-needed relief, but MSMEs will have to bide their time to see the outcome. The key highpoints of the budget with respect to the MSME sector are as follows:

Emergency Credit Line Guarantee Scheme (ECLGS) Extended: Ind-Ra expects that the extension in the scope of ECLGS by INR50 billion, making a total of INR5 trillion to be availed by March 2023, will support the liquidity and debt servicing of most MSMEs. As of November 2021, INR2.82 trillion has already has been sanctioned to 13 million MSMEs. MSMEs will be able to free-up their working capital funds and swap their previously availed high interest-bearing term loans with lower cost ECLGS loans. However, the working capital of MSMEs remaining stuck in form of either inventory or debtors will remain a key concern, as it might deplete the newly sanctioned funds in the short term and increase the financial leverage.

INR60 billion Raising and Accelerating MSME Performance (RAMP) Programme to be Rolled Out: The government has allocated INR60 billion for the RAMP program for MSMEs for the coming five years, which is inclusive of the INR37.50 billion RAMP program launched by the World Bank in June 2021. The World Bank had earmarked this significant funding for the period FY22-FY26 under the Credit Linked Capital Subsidy and Technology Upgradation Scheme. Ind-Ra believes that it will nudge MSMEs to scale-up their capacity. Also, the large-scale, cost-effective integration to be implemented under the RAPM scheme will enable the Ministry of MSME and states to improve its monitoring and evaluation capacity which will bridge the information gap and improve the efficiency of the system. Furthermore, the RAMP program will help the MSME sector in scaling up, by providing formal sources of finance, a platform where MSMEs and suppliers can come together and fintech solutions for financial assistance. However, the eligibility criteria are still awaited. Previously, as per the World Bank, a special focus regarding funds allocation was given to the states of Gujarat, Maharashtra, Punjab, Rajasthan and Tamil Nadu as together these five states contain 54% of all registered MSMEs.

Impact on Hospitality Sector: Ind-Ra expects that the INR50 billion earmarked for hospitality sector and related enterprises will provide the much-needed liquidity support. In FY21, the hospitality sector witnessed a major setback on account of a sharp decline in the occupancy and footfall due to the COVID-19 pandemic. As per Ind-Ra’s analysis, the hospitality sector’s total revenue declined 59% yoy in FY21. In FY22, the sector has started to recover mainly on account of the vaccine drive. However, the rate of recovery is low with the annualised revenue growing 31% yoy to INR841.44 million for 1HFY22 (FY21: INR641.07 million; FY20: INR1581.65 million), and the full FY22 year numbers are likely be much below the FY20 levels. Furthermore, the data reflects that the 1HFY22 revenue median only grew by 20% as against the average revenue growth, which reflects that there is a significant portion of companies outperforming their competition.

Also, the average EBITDA margin only recovered to 8.18% in 1HFY22 (FY21: negative 3.16%; FY20: 24.41%), as the sector was giving away bulky discounts to attract visitors and thus sustain the business. The median EBITDA margin was 5.10% in 1HFY22 (FY21: 2.23%; FY20: 18.14%). Thus, the various cost-cutting measures implemented since FY21 are not enough unless the occupancy and footfall levels increase. Furthermore, on PAT level, the industry is still into losses, with annualised average PAT loss of INR174.87 million in 1HFY22 (FY21: negative INR386.95 million; FY20: INR337.79 million), mainly on account of fixed interest obligations. In spite of the government-announced schemes, the industry is still facing a tough time. The median PAT margin was negative 18.99% in 1HFY22 (FY21: negative 27.09%; FY20: 3.74%). The median interest coverage ratio stood at 0.50x in 1HFY22 (FY21: 0.08x; FY20: 1.51x).

Considering the above facts, Ind-Ra expects that the funds made available to the sector will ease out the liquidity stress. However, it is critical for MSMEs to take alternative steps to keep their leverage in check. Most of the companies rated by Ind-Ra have availed the Reserve Bank of India prescribed COVID-19 led debt moratorium and restructured their bank facilities.

Impact on EPC Sector: The infrastructure capital expenditure in the FY23 Union Budget has been enhanced to INR7.5 trillion in 2022-23 from INR5.4 trillion for the major projects including Ken-Betwa Link Project at an estimated cost of INR446.05 billion; Har Ghar Nal Se Jal at an estimated cost of INR600.00 billion and PM Awas Yojana at an estimated cost of INR 480.00 billion to name a few.

As per Ind-Ra’s analysis EPC MSMEs, the annualised average revenue had declined 9% yoy to INR1,266.64 million in FY21, but bounced back at a growth rate of 5.5% yoy to INR1,336.52 million in 1HFY22. The FY21 decline was mainly on account of  delays in bills realisation due to the second covid wave, lockdown-led logistic challenges and manpower mobilisation issues. However, the EPC sector did not take a major hit in the pandemic on account of the continuous efforts being made by the government to focus on the infrastructural development in the country. In 1HFY22, the sector had already crossed 52% of the total revenue booked in FY21, while a major spike in performance in the second half the financial year is a general phenomenon. Furthermore, the data reflects that the 1HFY22 revenue median only grew by 1.4% as against the average revenue growth, which reflects that in EPC sector also there is a small portion of companies outperforming their competition. Looking at the performance in 1HFY22, the relaxation in the nation-wide lockdown and initiative taken by the government, the EPC sector had ought to perform better.

The average EBITDA margins improved to 16.83% in 1HFY22 (FY21: 8.88%; FY20: 6.87%), mainly on account the delays in the realisation of  bills due to the second covid wave along with the completion of a long overdue order, mobilisation of funds due to the efforts taken by the government to provide liquidity in the market and better control exercised over administrative expenses. Although the median EBITDA margin was in line with the previous year’s at 12.29% in 1HFY22 (FY21: 12.22%; FY20: 11.0%), the industry was still into losses with average PAT of INR8.49 million (negative INR18.13 million; negative INR20.95 million), mainly on account of fixed interest obligations.

The interest coverage median in 1HFY22 further improved 3.84x (FY21: 3.42x; FY20: 2.63x), mainly on account of improved absolute EBITDA. The moratorium in repayment of loans, conversion of interest cost into funded interest term loan and offering of guaranteed emergency credit line at a concessional by the government provided the much-needed relief to EPC MSMEs in FY21, which reduced the interest cost despite higher utilisation of debt funds.