India’s fragmented and cash strapped micro, small and medium enterprises (MSMEs) are navigating uneven growth and rising tariff headwinds across eight key sectors, with credit metrics improving overall but working capital pressures building in export-linked industries, according to a report by UGro Capital.
The fourth edition of “MSME Sampark”, a semi-annual report by UGro Capital, analyses financial data of more than 73,000 MSMEs and finds that while revenue growth has moderated in several sectors, profitability and interest coverage ratios have improved in select segments even as net working capital cycles lengthen.
The sector contributes around 30 per cent to the country’s gross domestic product (GDP) in FY25, up from 27.3 per cent in FY21 and accounts for 46 per cent of total exports, with outbound shipments tripling to Rs 12 lakh crore over the past five financial years. However, the long-running delayed payments crisis for MSMEs has eased for a second consecutive year, though the scale of overdue receivables remains substantial.
Delayed payments fell to Rs 7.34 lakh crore as of March 2024, down from Rs 8.27 lakh crore in 2023 and Rs 10.7 lakh crore in 2022, according to the Delayed Payments Report 3.0 released by the Global Alliance for Mass Entrepreneurship (Game), the Federation of Indian Micro and Small and Medium Enterprises (FISME) and C2FO. However, the outstanding amount still exceeds 4.6 per cent of India’s gross value added (GVA), underlining persistent cash-flow pressures that continue to constrain working capital, limit access to credit and weigh on business expansion.
In the auto components sector, MSMEs posted modest revenue growth of 3 per cent year-on-year in FY24, supported by higher value addition and localisation despite only a 9.6 per cent rise in vehicle production, the report said. Sector EBITDA margins improved to 11 per cent in FY24 from 9 per cent a year earlier, aided by favourable product mix and easing raw material costs. Interest coverage rose to 5.9x from 5.2x, while the debt service coverage ratio (DSCR) improved to 0.9 times from 0.8 times.
However, the net working capital cycle stretched to 63 days from 61 days, with working capital turnover declining to 11.4x, reflecting higher inventory holding. UGRO warned that U.S. tariff measures could constrain margins in FY26 despite resilient domestic vehicle demand. Micro enterprises in the sector fared worse, with revenues declining 7 per cent year-on-year in FY24. Although EBITDA margins doubled to 10 per cent due to cost controls, DSCR fell to 0.3 times and working capital cycles lengthened sharply to 104 days.
Chemicals: Export Drag, Rising Stress For Micros
MSMEs in the chemicals sector reported a 4 per cent revenue decline in FY24, weighed by surplus Chinese supply and destocking by global manufacturers. EBITDA margins held steady at 13 per cent, while interest coverage remained at 4.9 times and DSCR at 0.7 times. Yet liquidity pressures intensified. The net working capital cycle lengthened to 98 days from 87 days, and working capital turnover fell to 4.5 times.
Micro enterprises in chemicals saw revenues contract 14 per cent year-on-year, with EBITDA margins narrowing to 8 per cent from 10 per cent. DSCR deteriorated to 0.3 times, and working capital cycles extended to 103 days, underscoring mounting stress among smaller units.
Small businesses in this sector are grappling with a combination of weak global demand, aggressive pricing from surplus Chinese supply and elevated input and energy costs, which are squeezing margins and stretching balance sheets. Destocking by global buyers and longer receivables cycles have tightened liquidity, pushing net working capital requirements higher and reducing capital efficiency.
Smaller units are particularly vulnerable, with limited pricing power, constrained access to affordable credit and rising debt-servicing burdens amplifying financial stress. With export uncertainty persisting and inventory levels elevated, many micro and small firms face mounting pressure on cash flows, making operational sustainability and timely credit access critical to navigating the downturn.
In the education sector, MSMEs recorded one of the steepest reversals. The revenues declined 34 per cent year-on-year in FY24 after a 46 per cent rise in FY23, as weaker discretionary spending and economic uncertainty curbed demand for upskilling. EBITDA margins contracted to 12 per cent from 28 per cent, reflecting reduced operating leverage and sustained technology investments.
According to the UGro report, interest coverage fell to 5.3 times from 5.9 times, and DSCR dropped to 0.3 times from 0.7 times. Despite negative operating cash flow ratios, liquidity indicators showed gradual improvement compared with FY23 levels, suggesting stabilisation after a sharp correction.
Credit Improves, But Micro Stress Persists
Beyond sector-specific trends, the report highlights broader credit resilience. Outstanding MSME credit reached Rs 40 lakh crore in August 2025, 2.5 times higher than five years ago. Gross MSME non-performing assets declined to Rs 80,749 crore in FY25 from Rs 1.1 lakh crore in FY21, with the NPA ratio easing to 6 per cent from 11 per cent.
However, micro enterprises account for 65 per cent of total MSME NPAs in FY25, up from 54 per cent in FY23, signalling rising vulnerability at the smallest end of the spectrum.
Ugro Capital said MSMEs face growing stress from US tariffs, particularly in textiles, gems and jewellery, auto components and agri-marine exports, where 10–30 per cent of exports are US-bound. Sustaining credit growth will require targeted risk mitigation, market diversification and stronger financial monitoring, it added.
While the outlook for FY26 remains cautiously optimistic, the report warns that input cost inflation, freight pressures and trade disruptions could test the financial resilience of export-led MSMEs. |
