The industry in which an enterprise operates plays a crucial role in the credit risk assessment. It is a key determinant of the level and volatility in earnings of any business. Other factors remaining the same, industry risk determines the Ratings. Some of the factors that are analyzed include:

Demand factors	State of competition
Drivers & potential	Existing & expected capacities
Nature of product - Critically v/s Elasticity	Intensity of competion
Nature of demand - seasonal, cyclical	Entry barriers for new entrants
Bargaining position of customers	Exist barriers
Threat of imports	Threat of sustitutes
Environmental factors	Bargaining position of suppliers
Role of the industry in the ecenomy	Availability of skilled Human Resource
Extent of government regulation	Dependence on a partiular Skilled resource
Government policies current and future direction	Threat of forward integration
	Switching costs

The industry risk also considers economic risk arising from economic instability, and depressed or deterioRating economic conditions within a country.

Decline in a country’s economy, or in one of its particular industries, should raise concerns about whether to grant credit to customers in that sector, and if so, whether to limit the credit exposure to that sector/ industry.

The risks of industry exposure are likely to be greatest when the domestic economy is suffering from a downturn or recession. Also industries, being cyclical in nature, appear to suffer more severely from adverse economic shocks/conditions.

Competition risk coupled with level of technology would define the bargaining power of its players, the intensity of margin pressures and the degree of competitiveness required for the business to exist in the long run.

Favorable industry risk factors may not, however, directly translate into higher Ratings but adverse industry risk parameters may result in capping of the Rating. Further Government policies play a major role in determining the outlook of the industry. Changes in policy framework pertaining to taxation, reservation of products list, patenting, duties and levies on products, withdrawals/introduction of special fiscal incentives, etc that come under the regulatory ambit has a direct bearing on the assessment of the industry and in turn on the MSME within the industry.

Business risk is the possibility of a credit customer failing to pay because of circumstances connected with the customer’s business activities and management. Business risk can impact a company at the enterprise, business unit or business process level. The elements of business risks can be identified under the broad heads of market risk and operational efficiency risk.

a) Market Risk:

Market risk is the exposure of the unit to the forward and backward linkage in the course of conducting its business, and the risk of facing sustained periods of unfavorable trends in such factors as product prices, raw material prices, single product dependence, pricing inflexibility, etc.

Raw material prices risk is linked to the fluctuations in commodities markets (metal, oil, etc) and   their     impact on the profitability of the companies dependent on this market (both for their   revenues and costs). Similarly price fluctuations in the final products are linked to raw material   price fluctuation. Related to this, is the pricing inflexibility implying that the firm is unable to   increase price to pass on the burden of increasing cost. The problem accentuates when the   products have poor brand pull. This renders the units with less pricing power and hence pressure on margin.

Single product dependence implies dependence on single revenue stream, as compared with diversified products range; the diversified product range provides customers with more choices and hence greater chance of success in business. Further, limited geographical reach of market for the products brings common risk during economic downturn.

Market risk also takes into account customer risk. A firm that depends heavily on just one customer or limited customers for most of its business will be commercially vulnerable. The firm could also face supplier risk, due to the financial insatiability of a major supplier. If a supplier were to go out of business, the company would have to pay higher price or accept stricter credit terms from a new supplier. This would increase the bargaining power of the supplier. Further, suppliers with cash flow problem might try to ask for earlier payment than in the past.

All the factors influencing the relative competitive position of the enterprise are examined in detail. Some of these factors include:

1. Positioning of the products - (Luxury V/s Necessity)
2. Perceived quality of products or brand equity - (Cost v/s Quality)
3. Proximity to the markets
4. Distribution network (Owned v/s Rented)
5. Relationship with the customers. (Length - Concentration - Fixed Orders)
6. Relationship with suppliers (Length - Concentration - Availability)
7. Product Range (Single Product v/s Multi product)
8. Nature of work done (OEM v/s Tier I & II v/s Job worker)
9. Diversification

- Operating Efficiency

In markets where competitiveness is largely determined by costs, the market position is determined by the unit’s operational efficiency. The result of these factors is reflected in the ability of the unit to maintain /improve its market share and command differential in pricing. In a competitive market, it is critical for any business unit to control its costs at all levels. This assumes greater importance in commodity or "me too " businesses, where low cost producers almost always have an edge. Cost of production to a large extent is influenced by location of the production unit(s) , access to raw materials , access to human resources, scale of operations, technology, level of integration , experience and the ability of the unit to efficiently use its resources.

Location of production unit(s) - Location of the production unit(s) plays an important role. Enterprises which are situated in close vicinity of their suppliers / customers or are situated in a tax free zone, have a better control over cost than units which are located at remote areas.

Accesses to raw materials - Enterprises with easy proximity to raw material sourcing and having better bargaining terms with suppliers, have better margins.  Availability of quality raw material at a reasonable price in close proximity prima facie results in lower costs and better opeRating margin.

Access to Human resources - Employees and their experience play a crucial role. Enterprises which have better access to skilled employees and professional management with good employee benefit policies and low turnover of employees have a better margin. SMERA evaluates an enterprise taking the above factor into account.

Scale of operations - Adequate infrastructure facilities - electricity, water, fuel etc coupled with good quality of machines and manpower can result in optimum utilization of resources. SMERA looks into underutilization or idle capacity or lack of infrastructural facilities in an enterprise vis-à-vis an enterprise opeRating at optimum capacity and having flexibility in product and price structure.

Technology - Technology risk is the threat that a new product / service or invention poses to an existing product / service whereby demand for existing product will either reduce or be eliminated. Two primary sources of technology risk are rate of obsolescence and difficulties associated with adoption which primarily involves higher cost, and incompatibility problems.

A comparison with the peers is done to determine the relative efficiency of the unit. Some of the indicators for measuring production efficiency are: resource productivity (both assets and manpower), input-output ratios and energy consumption. Collection efficiency is an important indicator of both market position and operational

Management risk refers to the risk of non-payment arising out of a business failure due to the perceived inefficacies of the management. The elements in management risk are, assessing the management quality judged on the basis of the basic educational qualification, professional experience of the entrepreneur, and business attitude that is related to the motivation of carrying out the business and pursuing business strategies.

Majority of the Indian MSMEs are proprietorship firms that are essentially managed by one or two persons. In this scenario, the quality of management personnel becomes critical. In assessing management quality three factors are critical:

Character - relates to the willingness to pay. Apart from the characteristic disposition of honesty and integrity, several aspects are judged in terms of:

a) Track record of previous borrowing and payment  
b) The financial stake of the owners/ directors in the business.

Ability - relates to the ability to pay. Credit worthiness of the entity is assessed, including its financial
strength.

Capacity - refers to the borrower having technical, managerial and financial abilities in order to operate     profitably and succeed in business.

Quality of management would determine level of control, overall organizational capability, willingness to service loan, etc. Absence or inadequacy of these factors would lead to greater risks. Type of organization also adds to the management risk. Although proprietary units are more flexible and agile, it is traditionally being considered more risky than non-proprietary (private limited, public limited, etc.) units.

Past experience of the management in handling similar business, performance of group companies and their track record, vision and mission of the management, organization structure, succession issues, net worth and corporate governance also plays an important role in assessing the management.

Governance and Transparency

Qualities of financial documents are  compared with the best among peers and disclosure and transparency are  evaluated. The issues of disclosure of financial and non-financial information are  judged vis-à-vis normally practiced norms in the MSMEs. The issue of good governance and ethical practices are  evaluated by the quality and consistency of information provided over the period of time of Rating process and management interview at the time of site visit and Rating finalization.

Financial risk analysis involves thorough evaluation of the financials of the MSMEs. Careful analysis of the audited financials, observations of auditors in the auditor’s report and notes to accounts and  consistent treatment of financials. . Compliance to corporate governance issues and tax audit requirements (Form 3 CD) also play an important role in understanding the business funding model of the MSME.

Key ratio analysis, trend ratios, financial disclosures and Off-Balance sheet items and their impact on the profitability are studied and analyzed in depth. The source of financial funding and their impact on the capital employed structure are also analyzed. Availability of liquid investments, unutilized lines of credit, financial strength of group companies, market reputation, relationship with financial institutions and banks, enterprise perceptions and experience of tapping funds from different sources also play an important role in financial analysis.

Past financial performance

While the focus of Rating exercise is to determine the future cash flow adequacy for servicing debt obligations, a detailed review of the past financial statements is critical for better understanding of the influence of all the business and financial risk factors. Evaluation of the existing financial position is also important for determining the sources of secondary cash flows and claims that may have to be serviced in future.

Accounting Quality

Consistent and fair accounting policies are a pre-requisite for financial evaluation and peer group comparisons. It may be mentioned that accounting quality is also an important indicator of the management quality. Rating analysts review the accounting policies, notes to the accounts and auditor’s comments in detail. Where necessary, Rating analysts adjust the financial statements, to reflect the correct position. Over a period of time the focus of financial analysis  has shifted towards evaluation of cash flow statements, as cash flows to a large extent offset the impact of "financial engineering".

Indicators of financial performance:

Financial indicators over the last three years are analyzed and performance of the enterprise is compared with its peers. Comparison with peers is important for better understanding of the industry trends and determining the relative position of the issuer. Some of the important indicators that are analyzed are presented below:

Profitability:

A traditional indicator of success or failure of any business endeavor has been its ability to add value to its wealth or generate profits. A few important indicators are, trends in:

Gross profit margin
OpeRating profit
Net Profit margin
Return on capital employed
Return on net worth

Higher profitability implies greater cushion to banks, creditors and other shareholders. Profitability also determines the market perception, which has a bearing on the support of shareholders and other lenders. This support can be an important factor during stress. In MSMEs, profits are often understated for tax issues.

Gearing or level of leveraging:

This is an important determinant of the financial risk. Some important indicators are:

1. Total debt as a % of tangible net worth
2. Long term debt as a % of tangible net worth
3. Total outside liabilities as a % of tangible total assets

Gearing or leverage ratios help in analyzing the use of debt finance and assessing the risk arising from owed funds. Generally speaking the lower the debt equity ratio, the better.

Coverage Ratios:

Coverage ratios are of primary importance to the debt holders. The important ratios are:

Interest coverage ratio (OPBDIT/Interest)
Debt service coverage ratio
Net cash accruals as a % of total debt

The level of these ratios reflects the result of business risk drivers and the funding policies. Generally speaking, higher the level of coverage, higher is the Rating. However as mentioned earlier, business with lower level of coverage can get higher Ratings if the earnings are steady (i.e. business with low industry risk).

Liquidity position:

The indicators of liquidity position are the levels of inventory, Receivables and Payables. Current ratio and quick ratio are broad indicators of short term liquidity of the enterprise and is important for judging the short term solvency of the company. The state of competition, units’ market position & policies, relationship with customers and suppliers are the important factors that impact the above levels.  Comparison with peers on these indicators helps to determine the relative position of the issuer in the industry. The funding profile with respect to matching of assets -liability tenures also has an important bearing on the liquidity position.

Cash flow analysis:

Cash is required to service obligations. Thus, any financial evaluation would be incomplete if cash flow analysis is not carried out. Cash flows reflect the sources from which cash is generated and its deployment. As has been mentioned earlier, cash flows also to a very large extent offset the impact of diverse accounting policies and hence facilitate peer comparisons. The coverage ratios enumerated above can be modified to factor the impact of actual cash flows only.

The scale and nature of new projects can significantly influence the risk profile of any enterprise. Unrelated diversifications into new products are invariably assessed in greater detail.

The main risks relating to new projects are time and cost overruns, including non-completion in extreme cases during construction phase, financing tie-up, operational risks and market risks.

Besides clearly establishing the rationale of new projects, the protective factors that are assessed include track record of the management in project implementation, experience and quality of the project implementation team, experience and track record of technology supplier, implementation schedule, status of the project, project cost comparisons, financing arrangements, tie-up of raw material sources, composition of operations team and market outlook and plans.

Besides, on the assessment of various project risks, assumptions about completion and contribution to/from these projects are incorporated in the issuer’s overall projections. It needs to be emphasized that the impact of the project risk on the Rating depends on the scale of projects in relation to the size of assets and cash flows of the existing operations.

Other parameters

Besides these five broad heads other parameters like applicability of pollution control certificate, impact of subsidies and sales tax deferral loans, impact of changes in accounting policies, unabsorbed depreciation and business loss as per Form 3 CD, impact of non-insurance or inadequate insurance of assets, extraordinary or windfall gains and losses, analysis of bank statements, violations of accounting  standards if any, change in management, impact of the new monetary policies or budget changes or  significant development in the industry are thoroughly assessed on a case to case basis. Legal risks, foreign exchange fluctuation risk and hedging mechanism followed by the enterprise if any, are studied in detail.

The industry in which an enterprise operates plays a crucial role in the credit risk assessment. It is a key determinant of the level and volatility in earnings of any business. Other factors remaining the same, industry risk determines the Ratings. Some of the factors that are analyzed include following factor as in Table 1:

Demand factors	State of competition
Drivers & potential	Existing & expected capacities
Nature of product - Critically v/s Elasticity	Intensity of competion
Nature of demand - seasonal, cyclical	Entry barriers for new entrants
Bargaining position of customers	Exist barriers
Threat of imports	Threat of sustitutes
Environmental factors	Bargaining position of suppliers
Role of the industry in the ecenomy	Availability of skilled Human Resource
Extent of government regulation	Dependence on a partiular Skilled resource
Government policies current and future direction	Threat of forward integration
	Switching costs

The industry risk also considers economic risk arising from economic instability, and depressed or deterioRating economic conditions within a country.

Decline in a country’s economy, or in one of its particular industries, should raise concerns about whether to grant credit to customers in that sector, and if so, whether to limit the credit exposure to that sector/ industry.

The risks of industry exposure are likely to be greatest when the domestic economy is suffering from a downturn or recession. Also industries, being cyclical in nature, appear to suffer more severely from adverse economic shocks/conditions.

Competition risk coupled with level of technology would define the bargaining power of its players, the intensity of margin pressures and the degree of competitiveness required for the business to exist in the long run.

Favorable industry risk factors may not, however, directly translate into higher Ratings but adverse industry risk parameters may result in capping of the Rating. Further, Government policies play a major role in determining the outlook of the industry. Changes in policy framework pertaining to taxation, reservation of products list, patenting, duties and levies on products, withdrawals/introduction of special fiscal incentives, etc that come under the regulatory ambit has a direct bearing on the assessment of the industry and in turn on the MSME within the industry.

Business risk is the possibility of a credit customer failing to pay because of circumstances connected          with the customer’s business activities and management. Business risk can impact a company at the    enterprise, business unit or business process level. The elements of business risks can be identified    under the broad heads of market risk and operational efficiency risk.

I) Market Risk:

Market risk is the exposure of the unit to the forward and backward linkage in the course of conducting its business, and the risk of facing sustained periods of unfavorable trends in such factors as product prices, employee cost, single product dependence, pricing inflexibility, etc.

Single product/service dependence implies uni-product revenue stream as compared with diversified products/services, which also provides customers with more choices and hence greater chance of success in business. Limited geographical extent of market for the products brings common risk during economic downturn.

Market risk would also take into account customer risk. A firm that depends heavily on single customer or limited customers for most of its business will be commercially vulnerable. All the factors influencing the relative competitive position of the enterprise are examined in detail. Some of these factors include,

1. Positioning of the products - (Luxury V/s Necessity)
2. Perceived quality of products or brand equity - (Cost v/s Quality)
3. Proximity to the markets
4. Distribution network (Owned v/s Rented)
5. Relationship with the customers (Length - Concentration - Fixed Orders)
6. Relationship and availability of Human Resource (Concentration - Availability)
7. Product Range (Single Product v/s Multi product)
8. Nature of Service (Dealer/BPO/Agent/Exclusive Channel/Merchandise/Retailer)
9. Diversification

II) OpeRating Efficiency

In markets where competitiveness is largely determined by costs, the market position is determined by the unit’s operational efficiency. The result of these factors is reflected in the ability of the unit to maintain /improve its market share and command a differential in pricing. In a competitive market, it is critical for any business unit to control its costs at all levels. This assumes greater importance in commodity or "me too " businesses, where low cost service providers almost always have an edge. Cost of services to a large extent is influenced by location of the unit(s), access to skilled human resource, scale of operations, technology, and level of integration, experience and the ability of the unit to efficiently use its resources.

Location of production Unit(s) - Location of the production unit (s) plays an important role. Enterprises which are situated in close vicinity of their suppliers / customers or are situated in a tax free zone have a better control over cost than units which are located at remote areas.

Access to Human resources - Employees and their experience plays a crucial role. Enterprises which have better access to skilled employees and professional management with good employee benefit policies and low turnover of employees have a better margin. SMERA evaluates an enterprise taking the above factor into account.

Scale of operations - Adequate infrastructure facilities -electricity, water, fuel, transport facility like rail, road and airport etc., coupled with good quality of process ,system , work culture and manpower can result in optimum utilization of resources. SMERA looks into underutilization or idle capacity or lack of infrastructural facilities in an enterprise vis-à-vis an enterprise opeRating at optimum capacity and having flexibility in product and price structure.

Technology - Technology risk is the threat that a new product / service or invention poses to existing product / service whereby demand for existing product will either reduce or be eliminated. Two primary sources of technology risk are rate of obsolescence and difficulties associated with adoption which primarily involves higher cost, and incompatibility problems.

A comparison with the peers is done to determine the relative efficiency of the unit. Some of the indicators for measuring production efficiency are: resource productivity (both assets and manpower), input-output ratios and energy consumption. Collection efficiency is an important indicator of both market position and operational efficiency.

Management risk refers to the risk of non-payment arising out of a business failure due to the perceived inefficacies of the management. The elements in management risk are, assessing the management quality judged on the basis of the basic educational qualification, professional experience of the entrepreneur, and business attitude that is related to the motivation of carrying out the business and pursuing business strategies. Majority of the Indian MSMEs are proprietorship firms that are essentially managed by one or two persons. In this scenario, the quality of management personnel becomes critical. In assessing management quality three factors are critical:

Character - relates to the willingness to pay. Apart from the characteristic disposition of honesty and integrity, several aspects are judged in terms of:

a) Track record of previous borrowing and payment  
b) The financial stake of the owners/ directors in the business.

Ability - relates to the ability to pay. Credit worthiness of the entity is assessed, including its financial strength.

Capacity - refers to the borrower having technical, managerial and financial abilities in order to operate profitably and succeed in business.

Quality of management would determine level of control, overall organizational capability, willingness to service loan, etc. Absence or inadequacy of these factors would lead to greater risks. Type of organization also adds to the management risk. Although proprietary units are more flexible and agile, it is traditionally being considered more risky than non-proprietary (private limited, public limited, etc.) units.

Past experience of the management in handling similar business, performance of group companies and their track record, vision and mission of the management, organization structure, succession issues, net worth and corporate governance also plays an important role in assessing the management.

Governance and Transparency

Qualities of Financial Documents are being compared with the best among peers and disclosure and transparency are being evaluated. The issues of disclosure of financial and non-financial information are being judged vis-à-vis normally practiced norms in the MSMEs. The issue of good Governance and ethical practices are being evaluated by the quality and consistency of information provided over the period of time of Rating process and Management interview at the time of site visit and Rating Finalization.

Financial risk analysis involves thorough evaluation of the financials of the MSMEs. Careful analysis of the audited financials, observations of auditors in the auditor’s report and notes to accounts and consistent treatment of financials play an important role. Compliance to corporate governance issues and tax audit requirements (Form 3 CD) also play an important role in understanding the business funding model of the
MSME.

Key ratio analysis, trend ratios, financial disclosures and Off-Balance sheet items and their impact on the profitability are studied and analyzed in depth. The source of financial funding and their impact on the   capital employed structure are also analyzed. Availability of liquid investments, unutilized lines of credit, financial strength of group companies, market reputation, relationship with financial institutions and banks, enterprise perceptions and experience of tapping funds from different sources also play an important role in financial analysis.

Past financial performance

While the focus of Rating exercise is to determine the future cash flow adequacy for servicing debt obligations, a detailed review of the past financial statements is critical for better understanding of the influence of all the business and financial risk factors. Evaluation of the existing financial position is also important for determining the sources of secondary cash flows and claims that may have to be serviced in future.

Accounting Quality

Consistent and fair accounting policies are a pre-requisite for financial evaluation and peer group comparisons. It may be mentioned that accounting quality is also an important indicator of the management quality. Rating analysts review the accounting policies, notes to the accounts and auditor’s comments in detail. Where necessary, Rating analysts adjust the financial statements to reflect the correct position. Over a period of time the focus of financial analysis at the credit Rating agency has shifted towards evaluation of cash flow statements as cash flows to a large extent offset the impact of "financial engineering".

Indicators of financial performance:

Financial indicators over the last three years are analyzed and performance of the enterprise is compared with its peers. Comparison with peers is important for better understanding of the industry trends and determining the relative position of the issuer. Some of the important indicators that are analyzed are presented below:

Profitability:

A traditional indicator of success or failure of any business endeavor has been its ability to add value to its wealth or generate profits. A few important indicators are, trends in:

Gross profit margin
OpeRating profit
Net Profit margin
Return on capital employed
Return on net worth

Higher profitability implies greater cushion to banks, creditors and other shareholders. Profitability also determines the market perception, which has a bearing on the support of shareholders and other lenders. This support can be an important factor during stress. In MSMEs profits are often understated for tax
issues.

Gearing or level of leveraging:

This is an important determinant of the financial risk. Some important indicators are:

a) Total debt as a % of tangible net worth
b) Long term debt as a % of tangible net worth
c) Total outside liabilities as a % of tangible total assets

Gearing or leverage ratios help in analyzing the use of debt finance and assessing the risk arising from owed funds. Generally speaking, the lower the debt equity ratio, the better.

Coverage Ratios:

Coverage ratios are of primary importance to the debt holders. The important ratios are:

• Interest coverage ratio (OPBDIT/Interest)
• Debt service coverage ratio
• Net cash accruals as a % of total debt

The level of these ratios reflects the result of business risk drivers and the funding policies. Generally speaking, higher the level of coverage, higher is the Rating. However as mentioned earlier, business with lower level of coverage can get higher Ratings if the earnings are steady (i.e., business with low industry risk).

Liquidity position:

The indicators of liquidity position are, the levels of inventory, Receivables and Payables. Current ratio and quick ratio are broad indicators of short term liquidity of the enterprise and is important for judging the short term solvency of the company. The state of competition, issuer’s market position & policies, relationship with customers and suppliers are the important factors that impact the above levels. Comparison with peers on these indicators helps to determine the relative position of the issuer in the industry. The funding profile with respect to matching of assets -liability tenures also has an important bearing on the liquidity position.

Cash flow analysis:

Cash is required to service obligations. Thus, any financial evaluation would be incomplete if cash flow analysis is not carried out. Cash flows reflect the sources from which cash is generated and its deployment. As has been mentioned earlier, cash flows also to a very large extent offset the impact of diverse accounting policies and hence facilitate peer comparisons. The coverage ratios enumerated above can be modified to factor the impact of actual cash flows only.

The scale and nature of new projects can significantly influence the risk profile of any enterprise. Unrelated diversifications into new products are invariably assessed in greater detail.

The main risks relating to new projects are time and cost overruns, including non-completion in extreme cases during construction phase, financing tie-up, operational risks and market risks. Besides clearly establishing the rationale of new projects, the protective factors that are assessed include track record of the management in project implementation, experience and quality of the project implementation team, experience and track record of technology supplier, implementation schedule, status of the project, project cost comparisons, financing arrangements, tie-up of raw material sources, composition of operations team and market outlook and plans.

Besides, on the assessment of various project risks, assumptions about completion and contribution to/from these projects are incorporated in the issuer’s overall projections. It needs to be emphasized that the impact of the project risk on the Rating depends on the scale of projects in relation to the size of assets and cash flows of the existing operations.

Other parameters

Besides these five broad heads other parameters like applicability of pollution control certificate, impact of subsidies and sales tax deferral loans, impact of changes in accounting policies, unabsorbed depreciation and business loss as per Form 3 CD, impact of non-insurance or inadequate insurance of assets, extraordinary or windfall gains and losses, analysis of bank statements, violations of accounting standards if any, change in management, impact of the new monetary policies or budget changes or significant development in the industry are thoroughly assessed on a case to case basis. Legal risks, foreign exchange fluctuation risk and hedging mechanism followed by the enterprise if any, is studied in detail.

Indian auto ancillary industry is relatively small by global standards. The auto ancillary industry is a significant contributor to the country’s overall growth, both in terms of exports and employment. The performance of auto ancillary sector is closely linked to the auto sector. Demand-swings in any of the segments (cars, two-wheelers, commercial vehicles) have an impact on auto ancillary demand. Demand is derived from original equipment manufacturers (OEM) as well as replacement market.

SMERA has rated MSMEs opeRating in various businesses and positions in the value chain. Auto ancillary industry faces pricing pressure as well as cyclical demand from its customers.

BUSINESS RISK ANALYSIS:

Customer Concentration Risk

Most of the auto ancillary units face customer concentration risk. Due to high dependence on few customers, the performance of their customers is important for the auto ancillary unit. Diversified customer base would result in lesser volatility and less correlation performance with a specific OEM.

Performance of the OEM

Past and expected performance of the OEM as well as share of OEM in the automobile market should be considered. Expansion plans helps to understand the increase in potential orders.

Balance between direct sales to domestic OEM, Export and Aftermarket

Perfect balance with direct sales to domestic OEM, export and aftermarket ensures smooth functioning of the auto ancillary units in various business cycles.

Position & Significance in the Value Chain

Position of the auto ancillary unit in the value chain is important to understand its significance in the value chain. A high position in the supply chain ensures lesser threat of new entrants and less risk of price erosion.

Technology & Processes

Technology used in the manufacture of  auto components in developed countries is much better than in developing countries like India. Japanese automobile industry has influence on the Indian automobile industry and its allies.

OEM checks the quality management practices that are adopted by the auto ancillary units. OEM also ascertains as to whether the auto ancillary unit practices Six Sigma, JIT, etc.

Auto ancillary units adopt quality improvement methodologies such as Quality Control, TPM (Total Productivity Management), TQM (total quality management) and Zero Defects.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the auto ancillary industry. Here various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

The key success factors of the Auto Ancillary industry are:

1. Customer Concentration Risk
2. Position & Significance in the Value Chain
3. Technology & Processes

Indian chemical industry has a strong and diversified base encompassing many areas such as organic and inorganic chemicals, plastics, fibers, dyestuffs, paints, pesticides, insecticides, specialty chemicals, drugs and pharmaceuticals.

In world ranking, India stands 12th in terms of production. The chemical industry is one of the fastest growing sectors in India. It contributes 2.8% in the GDP of the country. The compounded annual growth rate (CAGR) of the major chemicals by the end of the 10th five year plan (2001-02 to 2006-07) is 4.69% as against 5.55% in it consumption during the corresponding period. The growth in import and export of the major chemicals increased annually at the rate of 14.79% and 14.13% respectively.

Broadly the chemical industry is divided into two segments, bulk chemicals and specialty chemicals. Bulk chemicals category includes those chemicals and materials which are produced in large quantities, typically using continuous processes although they may be manufactured in large batch equipment. The price of these chemicals tends to be a more important factor than their performance.

Specialty chemicals are produced by a complex, interlinked industry. In the strictest sense, specialty chemicals are chemical products that are sold on the basis of their performance, rather than for their composition. They can be single-chemical entities or formulations/combinations of several chemicals whose composition sharply influences the performance and processing of the customer’s product. Products and services in the specialty chemicals industry require intensive knowledge and powerful innovation.

BUSINESS RISK ANALYSIS

Product Mix

MSMEs in the chemical industry are largely determined by the product mix and competitive position of the product in the market.

SMERA has identified major factors which have impacted the margins of the MSMEs in specialty and bulk chemical segments. Typical specialty chemicals tend to be of a wide range, with smaller production quantities, but higher purity levels. It is observed that specialty chemical offers better margins to players as compared to bulk chemicals as the specialty chemical segment is backed by unique technology and process.

Proportion of specialty chemicals in the cost of production is immaterial and hence their price volatility does not impact the end product. On the other hand, bulk chemicals are pure commodities and their prices are highly volatile and have a bearing on the cost of production on very specific players.

Demand and supply position

Capital spending cycles can also create negative pressures, particularly when competing companies are flush with cash at the same time. The bunched capacity additions can disrupt supply dynamics and lower product prices for considerable period of time until the new capacity is absorbed by slower growing demand.

Government policies can affect the industry. Introduction of large increments of new supply as oil and natural gas rich nations seek to develop what are, in some instances, "stranded" (very low cost) raw materials into higher margin chemical products. This can create supply/ demand imbalances.

Diversity

A Chemical company may be helped by the diversity of the industry. The diverse nature of a company's product portfolio may help mitigate the risk that accrues from volatile prices and demand in specific products.

External risk

As many of the raw materials used by chemical companies are petroleum based, many companies have significant direct and indirect exposure to the price of crude oil/natural gas. Upsurges in crude oil and natural gas prices have a negative impact on not only because they can increase opeRating expense, but also because there may be material delays in passing these higher costs through to the customer.

Price and Margin Trend

Consumers of specialty chemicals make purchasing decisions based primarily on performance, but price can be a factor in their decision making process. As a result, specialty chemical manufacturers invest heavily in marketing efforts to demonstrate the ability of their products to meet the specific performance requirements of their customers.

Price trend of bulk drugs are seen to be a direct reflection of the variation in either down stream product price or input prices. Thus SMERA analyzes these price determinants to understand the trend.

Environmental issues

The chemical industry’s work with environmental issues is even more important than in other industries. Moreover, chemical products with environmentally hazardous properties are one of the main environmental concerns in the chemical industry.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the chemical industry. Various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

In conclusion, the key success factors of the chemical industry are,

1. Cost competitiveness
2. Diversified product mix for domestic as well as international market
3. Technology capabilities
4. Environmental and safety measure

Indian engineering industry is a major contributor to the country’s economy. The engineering goods sector consisting mainly of intermediate and capital goods have fared better during 2007-08. The engineering sector has emerged as the largest contributor to India’s total merchandise exports, even ahead of gems & jewellery. India’s export of engineering goods was USD 33.7 billion in the year 2007-08. The industry exports grew by 27.34% in 2007-08 as against the same period in 2006-07.

The engineering industry comprises of both heavy and light engineering sectors. The heavy engineering market contributes to about 80% of the net engineering production. The segments in the engineering sector are diverse, including power equipment, heavy electrical machinery, textile machinery, machine tools, earthmoving & construction equipment, mechanical equipment, road construction equipment, oil & gas equipment, sugar machinery (Distilleries), cement machinery, processing plants and industrial furnaces. The Union Government’s focus on the infrastructure and power sector has given a strong momentum to the engineering and capital goods sector.

BUSINESS RISK ANALYSIS

Order concentration

Order visibility and order quality are the main analytical aspects that distinguish heavy manufacturing companies from general or light manufacturers. An order for heavy equipment is usually placed when the industrial customer expects rising demand for products or when production machinery becomes obsolete.

The impact on cash flows can be mitigated by diversification across regions as well as customer industries, flexible delivery schedules if accepted by the customer, and most of all, a lean and flexible cost base.

A strong backlog of orders relative to annual production volumes provides visibility for future work flows as well as flexibility in planning production for optimal capacity utilization. The diversification of the customer serves to mitigate order and revenue volatility in the heavy engineering industry. The MSMEs who have diversified customer base and flexibility in the production pattern have maintained the market position.

Other factors that could provide stability to sales are export sales, a reasonable proportion of spare part sale and other job work services.

End user profile

The major end-user industries for heavy engineering goods are power, infrastructure, steel, cement, petrochemicals, oil and gas, refineries, fertilizers, mining, railways, automobiles, textiles, etc. Light engineering goods are essentially used as inputs by the heavy engineering industry. The customers are typically industrial companies, or utilities which acquire the machinery under their capital expenditure budgets and depreciate the equipment over a number of years. The rated heavy manufacturing industry, as defined in this methodology, comprises a relatively high number of companies of varying size, product and customer mix, and regional focus.

Large orders have their advantages too. . Competition is often less intense than for standard products, which in turn enhances profitability. The ability to extract advance payments from customers can also be an indication of the market position and pricing power of a manufacturer. Advance payments will also signal the liquidity and solvency of the customers thereby reducing credit risk exposure.

Diversification

Diversification has three principal dimensions: geographical, segments/products and customer diversification.

Diversification provides a platform from which to stabilize sales and protect earnings by offsetting variations in demand in a given product or market. Geographical diversification is viewed as a positive factor because it reduces:

(i) Company’s vulnerability to the vagaries of a single region,
(ii) Impact of economic cycle in individual regions, and
(iii) The impact of regional regulatory, environmental, product liability or safety issues.

Segmental and product diversification balances and offsets exposure to the volatility of demand and price competition in particular industries and mitigates weaknesses in any one market or product line.

Key Cost drivers

It was observed that the MSMEs which have continuously focused on inventory management have maintained their position in the market even in the economic down turn. The input cost in any engineering companies is around 55- 60%. Further power also impacts the cost structure of heavy engineering manufacturer.

Another large component of the cost structure is efficient workforce. The flexibility of labor is important to mitigate the volatility of order and work flow. Many manufacturers have opted to shift labor-intensive production to improve on productivity as well as labor cost.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the engineering industry. Here various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

In conclusion, the key success factors of the Engineering industry are:

1. Focusing on order trends and quality
2. Diversification
3. Market structure and competitive position
4. Cost position and profitability
5. Financial policy, liquidity and capital structure

India is the world's second largest producer of food next to China, and has the potential of being the largest producer. The growth of the food industry in India stems from the consistently increasing agricultural output. The Indian food market accounts for about two thirds of the total Indian retail market.

The Indian food industry is estimated to be worth over $200 million. India is one of the world’s major food producers but accounts for less than 1.5 per cent of international food trade. This indicates the vast scope for both investors and exporters. The total food production in India is likely to double in the next ten years.

There is an opportunity for large investments in food and food processing technologies, skills and equipment, especially in areas of Canning, Dairy and Food Processing, Specialty Processing, Packaging, Frozen Food/Refrigeration and Thermo Processing. Fruits & Vegetables, Fisheries, Milk & Milk Products, Meat & Poultry, Packaged/Convenience Foods, Alcoholic Beverages and Soft Drinks and Grains are important sub-sectors of the food processing industry. The food processing industry provides crucial linkages between industry and agriculture. To aid the growth of the food processing industry, the government has implemented schemes including the setting up of food parks, packaging centers, integrated cold chain facilities, value-added centers, and modern abattoirs.

The food processing industry in India was seeing growth even as the world was facing economic recession. The industry is presently growing at 14 per cent.

BUSINESS RISK ANALYSIS

Business profile

The MSMEs rated by SMERA are mainly engaged in trading of agricultural commodities, food processing and processing of edible and non-edible oil. Edible oil in India is widely consumed and therefore the revenue pattern of edible oil business is more stable then any other in food industry.

Price and Margin trend

The Indian food industry, both primary and processed, is poised for a positive growth on account of retail evolution.

For food processing business it is important to have the right product concept that meets consumer expectations and in this, the industry is no exception.
In food processing sector it was found that the companies who have focused on innovative products and fast changing consumer needs have improved their margins and revenue.

On the other hand MSMEs engaged in the business of oil refining and trading in agriculture has largely depended on the climatic condition. Therefore the prices of the product are highly volatile which sometimes put pressure on margins.

Further inventory management plays an important role in maintaining the margin in food business as most of products are perishable.

Technology

In a global business environment, to keep pace with fast changing technology/ innovations, it is essential to have world class R&D and manufacturing facilities. This is the key to building capacity. It was studied that the MSMEs who have adapted R&D in their manufacturing have performed well.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the food processing industry. Various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

In conclusion, the key success factors of the food and food processing industry are,

1. Diversified product mix for domestic as well as international market
2. Strong research and development capabilities
3. Efficient inventory management

Information Technology (IT) and ITeS-BPO sector plays a vital role in the growth of the Indian economy. Indian IT & ITeS industry grew at a rate of 33% in FY 2008 and earned revenue of around USD 64 billion. The industry’s contribution to the country’s GDP has grown significantly from 1.8% in 1999-2000 to around 5.5% in 2007-08 and it is estimated to grow to 5.8% in 2008-09. The size of the Indian IT& ITeS industry is estimated to reach USD 71.7 billion in 2008-09.

Over the past decade, IT industry has become one of the fastest growing industries in India. India has emerged as the fastest growing IT hub in the world, its growth dominated by software and services such as Custom Application Development and Maintenance (CADM), System Integration, IT Consulting, Application Management, IT Outsourcing and Infrastructure Management. Strong demand over the past few years has placed India among the fastest growing IT markets in the Asia-Pacific region.

Software segment includes engineering and Research & Development (R&D) services, IT-enabled Services and Business Process Outsourcing (ITeS-BPO)

BUSINESS RISK ANALYSIS

Market position

Product mix

The highly competitive software services include companies that provide a wide range of services such as data processing, training, consulting, maintenance, engineering services and final product.

The industry’s vertical market exposure was well diversified across several mature and emerging sectors. Banking, Financial Services and Insurance (BFSI) remained the largest vertical market for Indian IT-BPO exports, followed by high end technology and Telecom.

The horizontal segments that most Indian software companies operate are training, software service and project consultancy as well as productized services.

SMERA examines various risks pertaining to technology, growth and end users of products.

Geographical diversification in export

Geographic diversification can potentially offset the impact of cyclicality, depending on economic trends in different geographic markets.

SMERA’s assessment of geographic diversification therefore takes into consideration differences in economic trends between regions and countries. It also takes into account the profitability of the MSMEs in IT & ITES in any given location. Geographic diversification is a positive factor depending on when the company has recovered the start-up costs of entering the market.

Our assessment of geographic diversification also covers diversification in export market. For example, MSMEs providing services in Europe and US would score better than a company opeRating only in Europe.

Human resources and knowledge

It is widely believed that the key to the success of the Indian software exports is the supply of trained, low cost software professionals. It is estimated that wage costs in India are about 1/3rd to 1/5th of the US wage costs for comparable work. The size of the talent pool complements the cost advantage.

In IT & ITES industry the attrition rate of the employees is high. SMERA analyzes the company in terms of the company’s ability to attract, train and retain the employees. Management quality is a key feature in evaluating the non-financial parameter.

Customer base

Vertical and horizontal segments in IT & ITES industry would invariably have varying degrees of exposure to very large players. The credit quality, opeRating performance and market position of these companies will have a significant bearing on the performance of the service provider market. Any improvement in diversity is likely to result in profits.

Over-dependency on a single or a limited number of customers can result in the risk of greater volatility and high correlation of performance of that customer.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial Risk analysis of the IT & ITES. Here various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

In conclusion, the key success factors of the IT & ITES industry are

1. Diversified domestic as well as international market
2. Technology capabilities
3. Effective management of Man power

Logistics is defined as the process of planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption so as to meet customer requirements.

The Indian logistics industry is characterized by dominance of an unorganized market. Logistic industry in India is a highly fragmented industry and broadly covers freight transportation, warehousing, packaging, customs clearing and forwarding, inventory management, labeling and order processing. Logistic service providers allow companies to focus on their core competence. The infrastructure required for moving goods from one place to another involves the active roles of Roads, Railways, Ports & Shipping, Airlines and Express Cargo / Courier companies. It is estimated that logistics spends INR 90 trillion globally and India contributes around INR 4 trillion.

The Indian industry is increasingly looking at improvement in supply chain and logistics activities as a means to gain the competitive edge by adopting logistics and Supply Chain Management (SCM) concepts & practices. The major sectors contributing to the logistics market include Pharmaceuticals, Chemicals, Automotives, Auto Spares, Computer Peripherals, fast moving consumer goods (FMCG), Engineering products, Machinery, Spares, retail and healthcare sectors.

BUSINESS RISK ANALYSIS

Revenue Stability

For our analysis, we shall take a value chain view of the logistics sector and identify unique segments within the sector.

The road transportation and warehousing segment in logistic industry would perhaps show the greatest growth potential in coming years. These segments traditionally are extremely fragmented, small scale and scattered geographically. A majority of players in this industry have been small entrepreneurs running family owned businesses.

Because reliability is a good predictor of revenue stability, SMERA reviews the customer service performance history in terms of percentage of on-time deliveries and arrivals, contract renewal rates, lost or diverted shipments, and safety record. We also consider customer service programs and how they influence overall operations. SMERA believes that shippers are generally willing to pay premium rates for higher quality service. Just in time approach is one of key element of a good rated company.

Customer concentration

SMERA looks for predictability in revenue from long-term contracts with shippers, regional or product dominance, and core demand for the product being shipped (for example, the long-term demand stream for metal is more predictable than for footwear) . We also take into account concentration risk and the potential impact, should the issuer fail to perform under these major contracts. SMERA also recognizes the long-term relationships with the customers as providing the basis for revenue stability.

Manpower skills

This lack of focus on developing manpower and skills for the logistics sector has resulted in a significant gap in the number and quality of manpower in the sector. This gap, unless addressed urgently, is likely to be a key impediment in the growth of the logistics sector in India, and consequently, could impact growth in industry. This underscores the need for identifying areas where such manpower and skill gaps are critical, and developing focused action plans to improve the situation. SMERA has also emphasized on this parameter because efficient manpower skill will improve the quality and efficiency of logistics service providers.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the logistics industry. Various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

The key success factors of the Logistics (land transportation) industry are

1. Quality of Service
2. Customer concentration in terms of their long term relationship
3. Quality of manpower

Iron and steel are the main ingredients for any major manufacturing industry. Both heavy and light engineering industrial products largely use iron and steel as its major inputs. Steel is crucial to the development of any modern economy and is considered to be the backbone of the human civilization. The level of per capita consumption of steel is considered as one of the important indicators of socio-economic development and living standard of the people in any country.

India is the fifth largest steel producing country in the world. Indian steel industry is growing at CAGR of more than 10% from the period 2003-04 to 2007-08. The steel industry contributes to 1.3% of India’s GDP and accounts for 10% in excise duty collections in 2006-07. The industry provides employment to 0.4 million people directly and 0.6 million people indirectly. Government of India is aiming to boost its steel production to 110 million tonnes by 2020 from the current level of 49 million tonnes.

The steel industry is mature, cyclical and highly competitive on a global basis. The frame work of  SMERA’s analysis incorporates evaluation of MSME’s business risk, which primarily includes market position, and opeRating efficiencies.

BUSINESS RISK ANALYSIS

Market position

Market share and the customer profile are the main features of any steel making company to define a market position. Indian steel industry is characterized by fragmentation, particularly in the downstream segment, with a large number of unorganized players.

According to SMERA, the steel industry can be classified in three different ways. The most significant is classification by type of plants, namely, integrated steel plants and secondary steel plants. Integrated steel plants engage in the entire spectrum of steel making operations, commencing from extracting iron ore and coal until the stage of steel manufacture. Secondary steel units undertake only a portion of the operations.

Primary producers (Integrated Steel Producers (ISPs)) in the country produce a majority of flat products and secondary producers (mini steel plants) produce most of the long products. A number of companies are also active in distribution and trading of steel and other commodities, as well as non-related businesses. Most of the MSMEs in India are secondary steel units.

Customer Profile

Customer profile in any segment of the steel industry determines its business position. Some of the major steel consumption sectors like automobiles, oil & gas, shipping, consumer durables and power generation enjoy high bargaining power and get favorable deals. However, small and retail consumers who are scattered and consume a significant part do not enjoy these benefits.

SMERA believes that effective diversification of customer base exhibits a greater degree of revenue consistency. Diversification may also be across geographical locations, including export sales.

Level of competition

The steel industry is truly global in terms of competition with leading producing countries like China significantly influencing global prices through aggressive exports. Steel, being a commodity, branding is not common and there is little differentiation between competing products. The intensity of the competition is influenced by the demand and supply of the company’s product and their concentration in different geographies.

The demand pattern of the steel industry is highly cyclical according to the end user industry. The competition in secondary steel units is high as their products are mainly used in infrastructure sector. Flat product consumption is higher in developed countries as they are used in automobiles, consumer durables, etc.

Product mix

The nature of products produced, industries sold to, and the mix between commodity and value-added products are an important part of the Rating criteria.

In steel industry the product range may cover several grades and product types. Typically steel industry products range from flat to long products.

Primary producers are those players who process the mined ore into primary metal, which is commercially available in the form of rods, ingots, cathodes, products like foils, extrusions, dry batteries, castings etc. either by procuring the metal from the primary producers or from scrap.

The extent of value addition is another crucial factor for differentiating steel companies. Value products offer high realization for the company which in turn boosts the company’s profitability.

Technology

The future growth prospects of MSMEs in steel industry largely depend on efficient use of available energy resources. It was recognized that small and medium enterprises not only need greater awareness but also technical, financial and institutional support in order to develop and adopt efficient technologies. The art of using efficient technology can enable companies to achieve a competitive cost position.

OpeRating Efficiencies

Given the industry characteristics of underlying pricing volatility, limited producer pricing power, sensitivity to underlying economic conditions, and a relatively high fixed-cost base, particularly at the integrated producers; elements that are within a company's ability to manage, such as cost structure and opeRating efficiency, are important considerations in the Rating analysis.

Factors that measure costs and opeRating efficiency help in assessing a company's ability to operate through economic downturns and its ability to not only continue servicing its debt, but also meet other obligations, which can vary extensively on a geographic basis due to regulatory, environmental compliance and other differences.

The cost structures of the integrated steel companies or the backward integration companies are different from the secondary steel producers. The raw material volatility does not materially impact the integrated steel producer as they have control over prices. On the other hand the rapid escalation in all input costs has an impact on mini-mill producers.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the steel industry. Various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

The key success factors of the Steel industry are

1. Diversified customer base
2. Cost Efficiency and Profitability
3. Diversification in client base
4. Value addition in product mix

The textile sector is important to the country on account of its contribution to income generation, employment and exports. The industry is self-reliant and complete in value chain, right from availability of raw materials to manufacture of garments. India is the third largest producer of cotton in the world. However, the Indian textile industry that used to dominate the world trade until the early 1960s has a very small share now.

SMERA has rated number of companies right from yarn manufacturer to ready made garments. It has been observed, that the MSMEs in textile industry have adapted themselves to the cyclical nature of the industry and simultaneously diversified the product range to minimize the risk. For example organized players in MSMEs have modernized their manufacturing process and therefore have been able to enter the export market. Factors impacting risk and credit quality of the textile industry are outlined below.

BUSINESS RISK ANALYSIS

Business volatility

Seasonality is a factor for most apparel companies. Even general apparel companies that sell around the year tend to generate a bulk of their income in the fall/winter season, when unit prices are higher, and during holidays, when unit demand is high. Higher volatility creates lesser room for error in product or operational execution. It has been observed that the textile units which have a command on the volatility of the business have maintained their market position.

Excellence in the product and assortment

In any yarn market the quality of the product is distinguished by the range of the count. More the count of the yarn, the finer is the quality. Further the price of yarn also depends on the number of the counts. Price of finer count yarn is substantially higher than the coarser count. Fabric manufacturers are distinguished by the commodity texture and the color range. Fabric quality depends on its processing. The least processed fabric before it goes to garmenting will have least price elasticity.

Readymade garment is the final stage of textile chain. In this stage adding variety to the product range is not difficult because it is not commoditized in nature.

Diversified Product mix

SMERA has observed that diversified product mix in yarn as well as fabric has strengthened the market position of the players. Further diversified product mix and backward integration in garment units has reduced the impact of commodity price fluctuations on profitability. Likewise fabric manufacturers who have expanded the range of fabric, color and designs have been successful in developing relationship with exporters and international retailers.

Geographical diversification

Geographical diversification both within the country as well as internationally and diversified customer base are key factors for long term revenue generation. From past decades India is seen as one of the major supplier of textile products all over the world. In SMERA’s view, an MSME having effective cost control, modern plants and good export exposure is placed in a globalised trade regime.

Efficient procurement of raw materials

Units in the textile industry have maintained profit margin by efficient procurement of raw material. Raw cotton is the major raw material for most of fabric manufacturers. It accounts for around 60-65% of the cost of production and has significant impact on operational performance of textile units. Cotton as an agriculture commodity is exposed to many factors like crop area, monsoon, type of fertilizer, pest control, etc. Hence impact on these factors will affect the price of cotton. A commodity like cotton is price sensitive, so fluctuations in the prices would impact the procurement pattern of the textile unit. Further, Indian textile units are increasingly influenced by the international price movements. This is because of the liberalization of import and growth in trade around the world. Hence combination of imported and domestic cotton would command the price as well as margins of the business.

Cost Structure

Labor and power are two key cost elements in the textile units.

Labor:

Labor is a major cost element in handloom units in the textile Industry. Further this sector gives good revenue generation from exports. Given the industry’s labor intensive nature, affable relations help ensure uninterrupted operations and controlled labor cost. Frequent labor problems in any textile unit will impact labor efficiency and the profit of the company.

Power:

Power is one of the most important cost elements in the power loom units in textile industry. It accounts for around 10 percent of the cost of the production. It has been observed by SMERA that frequent power cuts have impacted the quality of yarn as well as fabric of manufacturers. It as also been surveyed that many units in the textile industry have put up captive power plants as a measure to reduce power cost. Units in the coastal regions have opted for alternative source of power such as wind mill. Factors like captive generation facilities, power cost reduction measure and efficient power consumption would impact the over all operations of textile units.

Modernization

It is observed that MSMEs in the textile units lag behind international standards where technology and modernization are concerned. Only few financially strong units resort to continuous modernization. Units which have done continuous modernization have improved installed capacity as well as captured export market.

FINANCIAL RISK ANALYSIS

SMERA follows the standard criteria used in all manufacturing companies for the financial risk analysis of the textile industry. Various financial ratios are tracked to have an idea of the performance of the industry.

CONCLUSION

The key success factors of the Textile Industry are:

1. Efficient raw material procurement
2. Diversified customer base
3. Diversified product mix for domestic as well as international market
4. Efficient method for controlling power and labour cost