New Delhi: Headwinds stemming from the ongoing conflict in West Asia will hit micro, small and medium enterprises (MSMEs) in India hard this fiscal year, impacting both revenue and profitability, with clusters like Morbi, Firozabad, Surat, Vadodara seen most hit, Crisil stated on Tuesday.

According to projections in Crisil Intelligence's latest MSME Report, revenue growth will moderate to 7.5-8.5 percent, down 100 basis points (bps) compared with FY26, while earnings before interest, tax, depreciation and amortisation (Ebitda) margin will decline 50-100 bps to 5-5.5 percent.

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The report, a twice-a-year publication that covers 69 sectors and 147 clusters representing aggregate revenue of Rs 75 trillion -- approximately 20-25 percent of India's GDP and two-thirds of the MSME universe -- paints a sobering picture.

The forecasts would have been more subdued but for the domestic gems and jewellery market, which is experiencing a value-led expansion, driven by a surge in gold prices, Crisil stated.

However, it observed that such impact is not unprecedented.

Amid the Covid-19 pandemic, large players had seen revenue decline by up to 1 percent in FY20 and FY21, while MSMEs experienced a 3-5 percent drop. The EBITDA margin of MSMEs had also declined 80 bps to 4.7 percent in FY21.

The West Asia crisis is following a similar pattern, with small businesses bearing a disproportionate burden, Crisil stated.

However, it pointed out that MSMEs face a dual challenge this time round: first, production cuts and revenue losses due to reduced availability of raw material such as gas and, second, margin compression stemming from trade disruptions and limited pricing power to pass on increasing commodity and energy costs.

Based on impact, MSMEs can be classified into three buckets: those dependent on energy-related raw materials such as gas, those reliant on energy-linked derivatives, and those vulnerable to trade disruptions.

Units heavily reliant on energy inputs, particularly those in clusters with limited access to gas or lower ability to switch to alternative fuels, will be hit hardest, according to Crisil.

The Morbi cluster, which accounts for over 80 percent of India's ceramic tile production, is a case in point. With 80-85 percent of its production gas-based, MSMEs, which generate over 85 percent of the cluster's ceramic sector revenue, will see revenue growth plummet from 9-11 percent in FY26 to 1-3 percent in FY27.

This is largely due to export-oriented production (80-90 percent of output), with 20-25 percent of exports directed to the Middle East.

Accordingly, their EBITDA margin is expected to decline 300-400 bps to 4-6 percent in FY27.

Similarly, Firozabad's glass sector has seen a 40 percent production reduction, with MSMEs likely to experience only 1-3 percent revenue growth.

Next to be impacted are sectors that use energy-linked derivatives as raw material.

Pushan Sharma, Director, Crisil Intelligence, said, "The chemical sector, which imports more than 90 percent of its key inputs, such as methanol, from the Middle East, has seen raw material prices surge by 1.2-1.4 times with partial pass-on. Thus, chemical MSMEs in Vadodara are expected to witness a margin decline of 150-250 bps to 3-5 percent in fiscal 2027".

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Further, rising diesel prices are likely to impact MSMEs in sectors such as road construction, where fuel costs account for 8-10 percent of the total cost. We expect their margin to decline 50-100 bps to 8-10 percent in FY27.

Similarly, increasing packaging costs will put pressure margins in packaged foods, where packaging accounts for 10-15 percent of overall cost. As a result, the margin of MSMEs in this sector is expected to decline 50-100 bps to 6-6.5 percent in FY27, Crisil added.

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