SME exporters enjoy higher OPM than domestic peers: CRISIL

A CRISIL study on 1,800 small and medium enterprises (SMEs) in India has revealed that SME exporters earn higher operating profit margins (OPM), compared to their peers, which cater only to the domestic market. Key findings of this study indicated that a larger proportion of SME exporters have operating profit margins of more than 10 per cent than their counterparts selling in the domestic markets.

SMEs included by CRISIL belonged to four export-oriented sectors: agricultural and processed foods, engineering, leather, and textiles. CRISIL believes that the main reason behind the variation in margins arises from superior pricing power enjoyed by these SMEs in international markets. SME exporters have been able to leverage on India’s advantages, namely access to raw material, availability of cheap labour in abundance, deepening of expertise and skills in certain key industry clusters and identification and exploitation of niche markets available across the globe for Indian goods. OPMs vary across these sectors, depending on the extent of value addition and technological intensity, involved in the manufacturing process. Of these four sectors, SME exporters in the engineering sector have reported significantly better OPMs in comparison to their peers in the domestic market. Says Sachin Nigam, Senior Director, SME Ratings – CRISIL, "These players have maintained specific focus on select products and markets, driven by the demand situation. Typically, exporters catering to developed regions, such as the US and Europe, focus on primary articles and light engineering goods. Conversely, SMEs exporting goods to developing nations in Africa, Middle East, and South East Asia concentrate on heavy engineering and turnkey projects." The analysis of SMEs in textile sector reveals that exporters have reported OPMs, which are marginally better in comparison to their peers, serving local customers. This variation could be driven by the fact that a sizeable proportion of these exporters are garment manufacturers, who undertake contract manufacturing for global merchandisers/brands and face intense competition on pricing from players in other countries having cheaper labour, such as Bangladesh, China, Sri Lanka, and Vietnam. Similarly, with regard to the other two sectors - agricultural and processed food, and leather - a larger proportion of SME exporters have OPMs of more than 5 per cent in comparison to their peers serving only local markets, most of whom have OPMs of less than 5 per cent. This is because most of the SMEs with domestic focus are engaged in low value added segments such as rice milling, cereal / pulses processing, leather tanning and undertaking job work. Explains Yogesh Dixit, Director, SME Ratings - CRISIL, "Government and policy makers need to focus upon resolving infrastructural bottlenecks, facilitating access to export market for enterprises and developing an export-oriented mindset. These initiatives will make the businesses more efficient and productive, thereby helping SMEs compete better in the international market on the strength of competitive pricing, better quality and timely delivery. The special manufacturing zones being planned in various parts of the country could give fillip to manufacturing activity with an export orientation and promote high-value exports." Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.

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