Yagnesh Kansara - 06 July 2020

For the investor, the best way to judge the impact of the government’s `3 lakh crore stimulus package for Micro, Small and Medium Enterprises (MSMEs) is to look at the movement of the stock market and the effect on mutual funds.

These industries have a major role to play in not just generating huge employment but also as a major exporter and a supportive ancillary sector for big industry. The new push towards self-reliance and reduction of import dependence under the Atmanirbhar Bharat Abhiyan has given them an entirely new role.

If the strategy works, there is no reason why the stock market particularly the small and mid-cap shares, which represent the MSME sector, won’t cross the past levels. But business models and management strategies are bound to see some remarkable transformation in the COVID-hit universe, and this would have a wide-ranging impact on both profitability and investor returns.

But there are many challenges that require greater attention than the government’s liquidity led revival program. Industrial revival requires sharp up gradation in technology, wide-ranging infrastructure development and a strong drive for skill development among workers. These issues remain to be addressed. If handled well, they will do good for the investors and the economy as a whole.

For more than 18 years, since he became the Gujarat Chief Minister for the first time, a key element of Narendra Modi’s ‘Model of Growth’ was to woo large Indian and foreign firms. He believed that if Ratan Tata, Mukesh Ambani, Bill Gates, and Jeff Bezos funnel billions of dollars into mega projects, the economic waves would help to lift the lives of millions of people. It worked in Gujarat. His experiments with ‘Make in India’ during his tenure as the Prime Minister were steps in the same direction.

COVID-19 changed the blueprint. There is a new strategic roadmap to pull the country out of the current malaise. Apart from its focus on ‘Big Business’, it aims to encourage local manufacturing, especially among the MSMEs (micro, small and medium enterprises). This explains why a sizeable portion of the `2,000,000 crore stimulus package targets the smaller firms. Under the Atmanirbhar Bharat Abhigyan and self-reliance philosophy, the objective of the short-term spur is to inject liquidity in the system to benefit 4.5 million MSMEs. There’s no denying the fact that this segment constitutes the backbone of Indian manufacturing. There is a sober realisation that more needs to be done to help it become stronger, quality-conscious, and more competitive. But there is also a feeling among experts that if India continues her journey on this new path for a few years, it can transform the face of MSMEs as well as the economy. The combo-cocktail – encourage large and small firms – can inject adrenalin in the hitherto lackadaisical system. “We believe infrastructure development and manufacturing-led growth is the only sustainable model for India’s development in medium to long term. Gradual import substitution, growing domestic market and market share gains in global exports could help boost GDP growth trajectory and make development model more balanced,” says Varun Lohchab, Head Institutional Research, HDFC Securities.

However, it’s a long winded and arduous path, which would test the patience of entrepreneurs and investors. If executed well, multiple sectors could emerge winners over next five years, like speciality chemicals, pharma, Agri-processing, consumer durables, defence, autos and capital goods, he adds.  

For us, as retail investors, the focus on the long term isn’t enough. For us, who have seen the worth of our savings plummet, and then recover a bit, during the COVID period, it is crucial to know if the stock market and other asset categories will recuperate in the shorter run. We want to understand if Modi’s new shift will boost market sentiments. More importantly, we wish to figure out whether MSMEs can become the new flavour of the season. Should you look more seriously at these stocks in the near future?

The existing policies will enhance the attractiveness of the 300-odd SME stocks listed on the BSE platform over the past 12 months. In the near future, more SMEs will seek to raise equity funds. Some of them, like in the recent case of Billwin Industries, may even offer their shares at premiums. Although shares of smaller firms are generally shunned by investors, this may be an opportune time to look afresh, and spot profitable opportunities. Of course, you will need to be careful. Here’s a sense of how things will change over the next few months.

 Indian financial system is awash with liquidity. Hence, it was just extreme risk aversion approach particularly of the Public Sector Banks (PSBs) that was freezing the credit market. This has compelled MSMEs to look at Non-Banking Finance Companies (NBFCs) for their funding requirement. This resulted in increased cost of funds as NBFCs were charging higher interest rates, making MSMEs uncompetitive among Asian peers.

Satish Kumar, Head of Equity, Equirus Securities says, “We believe the government has incentivised risk taking by guaranteeing `3 lakh crore of incremental credit and `20,000 crore as subordinate debt to MSMEs, and the first 20 per cent losses on `45,000 crore lending to NBFCs, HFCs and MFIs. We should see incremental lending to MSMEs accelerate.”

The move to provide bigger relief to industrial sector in general and MSMEs in particular should not only tackle the issue of risk aversion by the banking sector but should also cross another hurdle in the form of rate transmission. This should happen sooner as we move gradually out of lockdown, experts feel. These developments will ultimately help the SME segment of the exchanges. Once the speed of recovery improves, more and more SMEs would be ready to tap the market for further expansion and get listed. The listing provides MSMEs the benefit of equity financing opportunities to grow their business from expansion to acquisition. It lowers debt burden, leading to lower financing cost and healthier balance sheet. It also expands the investor base, which in turn helps in getting secondary equity financing, including private placement. This enhances a company’s credibility and visibility. It further unlocks the value of the company and helps in wealth creation and in creating greater incentive for the employees who can participate in the ownership and benefit from being its shareholders.

Ajay Thakur, Head, SME & Start Up Platform, BSE explains, “The PM’s Atmanirbhar package of `20 lakh crore, a significant part of which is dedicated to the MSME sector will certainly benefit the small and medium companies as it will take care of their working capital requirements. In the time of lockdown, the major problems faced by the companies, irrespective of their size, is the problem of liquidity. It is a must for their survival as in absence of it, they get trapped in a vicious cycle.

They cannot pay salaries to their employees, clear suppliers’ dues, loan servicing also becomes difficult and interest burden piles up resulting in cost escalation for the companies whether they operate in manufacturing or service sector.”

In addition to increase in 20 per cent head room with respect to enhanced working capital limit through this package, the RBI’s interest rate cut will also help the MSMEs to quickly bounce back, making them more competitive, he says. BSE SME & Start Up platform has already 322 SMEs and five startup listings in last one year of operation, of which three SMEs and one startup were listed during the lockdown period. 56 more SMEs and 10 startups’ listings are in pipeline. While Billwin Industries’ fixed price issue closed for subscription on Monday June 22, 2020, it offered 6.60 lakh shares at `37 per share with a premium of `27 per share. These 322 companies, listed on SME platform, have together raised fund to the tune of `3,300 crore and their combined market capitalisation (M-Cap) is worth `16,857 crore. Total five startups got listed on startup platform and have raised `22 crore and their M-Cap is `80 crore, boasts Thakur.

In addition to this relief package, another factor that will help the stock market to recoup its losses, seen in the early parts of the lockdown, is tremendous amount of liquidity floating globally. In the wake of G4, central banks of the US, Japan, Britain and China came together to salvage the situation by pumping in liquidity worth ~$6 trillion. This unparalleled liquidity injection has led to pullback rally across global markets. Sparsh Chhabra, Economist, Centrum Group in his strategy note says, “With the outbreak of COVID-19, global equity markets corrected significantly in March. Since the onset of April, investors again started flocking around risky asset classes (equity and like) and the risk on sentiment witnessed a further uptick in May. This has been highly fuelled by continuous mammoth liquidity injections, signs of COVID-19 cases peaking off in the European Union (EU) region along with the signs of stabilisation seen in the US. In addition to this, resumption of global economic activity also drove the rally.”

However, the recovery in the India is expected to have lagged effect compared to global market. India rightly went in for early lockdown to counter COVID-19, thereby delaying the peak. However, it will also have a much slower recovery. Given last two years of lacklustre growth, the government has limited resources to support demand in the economy. ”We believe the impact of COVID-19 will be profound in India and the recovery will be more ‘U’ or ‘W’ than of ‘V’-shape, expected in some advanced economies,” Chhabra argues.

Whatever be the shape of the recovery one thing is certain that the rural economy will recover faster rate than the urban economy as prospects remain intact The forecast of a normal monsoon, its timely onset coupled with prospects of a bumper crop output along with MSP hike and recently announced rural focussed government programme - all augur well for the rural economy. These developments are likely to cheer farmers and policymakers as they hold potential to diminish the impact of COVID-19. These trends emerge as a silver lining amid an imminent growth contraction in FY21.

Based on this theme, LKP Securities has cherry picked stocks belonging to the MSME sector with an investment horizon of medium to long term (one to three years) that coincides with bounce back time period the Indian economy will take to instill normalcy.

 Lohchab says, “Sectors within our coverage, which could see tailwinds, include chemicals (Navin Fluorine, Alkyl Amines), Pharma (Aurobindo), Autos (Bajaj Auto, Maruti), Durables (Voltas, Havells), Cap goods/defence (L&T), E-Commerce (RIL). Outside our coverage sectors, he sees a range of potential beneficiaries across agrochemicals and fertilisers, solar panels, agri processing, plastics, auto components and steel products. “We recommend investors to closely watch developments in these sectors to see signs of improvement for multi-year investible themes. Consumption and financials might take a back seat as they would revive with a lag,” he concludes.


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