Small, Medium Manufacturing sector Gets Very Low Share of Private Equity Pie

Published: 20th July 2015 06:20 AM  |   Last Updated: 20th July 2015 06:22 AM   |  A+A-

CHENNAI:  When Ratan Tata spoke about his personal investment choices here earlier this week, he was open about his preference for e-commerce and new tech companies. The reason? “They (disruptive tech companies) will change the face of India,” he said. And well, they might — like they did to the US in the 70s and 80s. But in the mad rush pour in the moolah into the fast growing upstarts, private investment is largely by-passing an unglamorous but vital portion of the economy — small manufacturing.

Ratan Tata is by no means the only private investor to choose new tech over the latter. When investment is fuelled by market economics, the rate of return is king. With the kind of growth figures that new tech service companies are clocking up, it is no surprise that money flows into them.

PVT INVESTMENT TRACKER.JPGAccording to figures sourced by Express from VCCEdge, a tracker of Private Equity and Venture Capital investments, manufacturing has cut a sorry figure over the last five years when it comes to attracting investment. From Fiscal years 2010 to 2015, private equity investment into the sector was around Rs 7,916 crore. The same kind of investments into e-commerce, IoT and IT/New Tech was just shy of Rs 17,000 crore — more than double the former. What’s more, the average ticket size of these investments was a lot higher in manufacturing, Rs 16.63 crore, than new tech, Rs 9.75 crore. A clear sign of investment in the former sector flowing into larger concerns — leaving SME manufacturing struggling for funds. “This is a fundamental issue that has stunted manufacturing growth in India for a very long time,” asserted M Suresh Babu, professor of economics in IIT-M.

The scale of the problem is huge. There are about 26 million MSMEs in India — most with hardly any access to funding. According to the Union MSME Ministry’s report in the 12th Five-Year Plan (2012-2017), 45 per cent of manufacturing comes from the sector. One that suffers from a serious credit gap.

Because, when private equity is barely interested in manufacturing SMEs, these rely almost exclusively on bank lending to finance seeding and scaling up. “Private equity is largely tech biased because that’s where the returns are. They find investing in large concerns easier, but for small enterprises the margins are very low, they cannot provide good exits fast enough,” pointed out P V Sahad, founder of VCCircle Network, “They have to rely mostly on debt financing — from banks.”

Bank finance however, is still woefully inadequate. According to Hasmukh Adhia, Secretary, Ministry of Finance who quoted from NSSO data in March this year, the average borrowing by these enterprises through banks and any formal financing channel is a meagre  Rs 17,000. And only 5-7 per cent of the total Rs 11 lakh crore capital in the sector came from banks.

But banks are leery in lending here, government quotas aside, because of poor returns and credit worthiness. “Most have very low profitability and are not attractive undertakings,” said a banker, who did not want to be named.

With both avenues of funding stifled, one because of lack of interest and the other due to constriction, SME manufacturers are a sorry lot.

The opportunity in, and importance of, the sector is huge. Because economists say that disruptive technology can only produce sustainable growth in an already industrialised economy. “When the industrialised countries changed into hi-tech ones they already had an established industrial sector. But ours is hardly developed. The rush into service based companies, which is what is happening mostly, is us trying to jump over a vital layer of the foundation,” asserted Babu. “That model can only work in small countries,” he said.

And while service based new-tech companies grow, there is a ceiling to that growth if domestic productivity, wages and consumption is still stagnant — which is what a poorly growing manufacturing sector promises.

The government is trying. Initiatives in the last few months — the most important of which is the Mudra Bank — seek to funnel in more funds here. “But government driven investment is what we’ve tried since Nehru. Then the complaint was that there was no space for private investment. Now, there is space, lots of it, and yet private investment is elusive,” stated Babu. That investment, into small manufacturing, is vital if the economy can grow holistically.

For SMEs who currently struggle for funds, the only answer lies in differentiation. “There are a very few firms who invest in this space. But for others, if you cannot show innovation and differentiation, you will not be attractive,” advised Sahad.

The verdict: Spruce up. Differentiate. Explore less explored sectors, and the investment will flow in.

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