SMEs mothball expansion, say enquiries halved

Thane-based Satish Chidrawar had ambitious plans for his firm Valvola Corporation a few months back. He wanted to set up an additional unit to double the company’s valve-making capacity with potential revenues of Rs6 crore. But the economic climate in the country got the better of his vision.

“We normally get 80-90 enquiries every month. But in the last two months, it has dropped to 40-50, so we are not going ahead with the expansion,” said Chidrawar, who counts pharmaceutical and chemical companies among his clientele.

Peers concur. Tarit Guha, who runs a packaging unit on the Shahapur-Nashik Road, has been able to meet only 50% of his targeted enquiries this month.

“Our industry is a better indicator of the economy than what you read in newspapers. We are definitely seeing a slowdown in the engineering and consumer goods segments,” he noted. His company, Dipti Corrugating Industries, which supplies to Godrej Industries among others, bought 3 acres in Umargaon, Gujarat 3-4 months back.

“We wanted to double our capacity to 300 tonne per annum by investing about ¤6 crore but now we are not so sure,” he added.
Industry observers have pointed to a slackening of investment demand in the last two quarters, primarily at capital goods firms.

A June 9 report by Enam Securities said the slowdown in capex is corroborated by significant reduction in the growth rate of new project additions, which are down 2% from a year ago to $378 billion, as well as rising pace of projects being shelved, up 22% to $40 billion.

“The major issues impacting capex outlook have been lower utilisation versus previous peak, high interest rates, regulatory hurdles and political inertia due to recent state elections,” wrote Bhavin Vithlani and Akshen Thakkar in the report.

The Index of Industrial Production (IIP) has since October grown at a single-digit pace. It showed a rise of 8.8% and 6.3% in March and April, respectively, compared with 15% and 13% in the same months in 2010.

Many believe this has a direct fallout on micro, small & medium enterprises (MSMEs), which supply several components and services to their bigger counterparts.

As per the All India Census of MSMEs released late last year, there are 2.61 crore MSMEs in the country, of which only 15.5 lakh are registered.

MSMEs account for 90% of India’s employment and over 10% of banking sector loans. They also contribute 45% to the manufacturing output of the country and 40% to exports.

Parag Patki, chief executive of state-owned SME Rating Association of India (Smera), does not yet see a perceptible trend of a slowdown. “Maybe it’s too early. There is usually a six-month lag between a slowdown in investment by big companies and its impact on SMEs.”

But Purushottam Agwan, honorary secretary general of the Chamber of Small Industry Associations (Cosia), is not on the same page as Patki. He believes the ride is certainly bumpy for SMEs. He bought land for ¤30 lakh at Paghda near Thane for a greenfield plant for his engineering firm R K Dutt Concerns but government approvals have not come through, which has been a blessing in disguise.

“I am happy they haven’t approved it because there is not enough demand to support a new facility and the high interest rates are not helping matters,” he said.

The Reserve Bank of India has hiked policy rates — or the rate at which it lends short-term money to banks — ten times or by 250 basis points to 7.50% since March 2010 in a bid to stem inflation, making loans dearer in the process. The apex bank has also indicated more hikes are possible.

“Our good track record does not mean cheaper loans. We were getting working capital loans at 13.4%, now we are paying 14% and it will go up,” said Guha.

Yogesh Dixit, head, SME Ratings at Crisil, said the impact will be felt only in new project sanctions by banks. “We have not seen too much of distress yet. Maybe a lot of it is psychological,” he said.

NA Raghu, managing director of Chennai-based energy audit & engineering services firm Technoplus, has problems of a different kind. A lot of his clients are from the apparel district of Tirupur, where the dyeing units have been ordered shut by a Madras High Court directive till they have proper effluent treatment systems in place.

“Moreover, the huge labour shortage and raw material price fluctuations are just making it impossible for us to work,” Raghu said.

Though the domestic market is tepid, MSMEs are not unhappy with exports. “Despite parts of Europe still being lukewarm, we are making up for the lack of orders in India by focusing on exports especially in Asia,” said Guha, half of whose firm’s revenues are from overseas.

In April India’s exports touched $23.8 billion, up 34.4% from the previous year.