Commodity blessing to show in MSME profitability

Micro, small and medium enterprises (MSMEs) in certain sectors are expected to have benefitted significantly from the fall in global commodity prices in the current fiscal year. CRISIL believes the declining trend in prices is likely to keep their raw material costs low, even going into the next fiscal.

CRISIL has analysed over 1,000 MSMEs, rated on the basis of their financials in fiscal year 2014-15, in the agro processing, auto component, engineering and chemical sectors. The analysis reveals that their average raw material cost as a proportion of cost of goods sold (or COGS) is currently in the 70-80 per cent range.

The fall in commodity prices may, therefore, have a positive impact on the MSMEs' profitability, as it brings down their raw material costs. However, they may not be able to pass on the entire benefit to the end-users, as other variable and fixed costs, including administrative, finance and depreciation, will remain unaffected.

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Note: This fortnightly tracker presents to our readers insights on MSMEs, a key element of the Indian economy. CRISIL has rated over 91,000 MSMEs in India.