Rising Re: Small biz feels the heat

T Surendar / TNN / Jun 22, 2007, 02:10 IST

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Across the country, garment makers, component suppliers to global automobile industries and sea food exporters are feeling the heat.

MUMBAI: Earlier this week, in a private conference organised by a leading foreign bank, one issue kept a room full of equity analysts preoccupied. They repeatedly asked senior executives of a BPO company, who was making them a presentation, how a weak dollar would impact its profitability.
Broking houses have already put out reports saying that two industries which are considered flag bearers of high tech exports — software and pharmaceuticals — will see a big drop in margins.That is not the worrisome bit. A strong rupee is threatening to render several export oriented business of small and medium sized industries uncompetitive.
Across the country, garment makers, component suppliers to global automobile industries and sea food exporters are feeling the heat.
Garment makers, who typically work on margins of 8-15%, have seen margins shrink dramatically to anywhere between 2-6%. in the last eight months on account of the rising rupee. Says a Mumbai-based garment manufacturer, who also doubles up as a senior official at the Clothing Manufacturers Association: "Already some of our US-based buyers have begun moving the large volume, low margin orders to China."

The blow comes at a time when some of these industries are just beginning to gain scale. After the WTO removed quotas for garment exports, Indian manufacturers have invested over $1.5 billion in the last two years to add more capacity. In the last few months, the increase in interest rates have made their loans expensive. Says Sridhar Rajan, director of Tiruppur based Rajan Exports:
"It is being served a double whammy. If we lose the large orders now, it may well be death knell for small players like us."After rising sharply for last ten months, industry experts estimate that garment exports for April-May will be lower by 40-45% compared to last year.

Sensing the pressure, the commerce minister announced some incentive for exporters on Sunday. The industry reads the measures as being still inadequate. Manufacturers says that the commodity nature of their exports makes customers move orders quickly. This is very unlike what happens in software and BPO companies.
Such companies train large number of professionals for specialised jobs that meets specific customer requirements.
That makes it very tough for a client to move a service contract to other company. This often gives these service sector companies some room to negotiate an increase in contract prices when the exchange rates are unfavourable.
Says an official from Coimbatore-based Pricol, which manufacturers dash board equipment for several global car makers: "For generic components, which forms the largest volume of our exports, companies now place orders through the internet. The lowest bidder wins the contract."
Says Emkay Share and Stock brokers portfolio manager Samir Rachh: "Software companies will have to run faster to stay at the same place whereas for textiles, the outlook is clearly negative."
The problems of SME sector is compounded by the fact that RBI has chosen not to intervene in currency market. To strengthen the dollar, it will have to buy the currency from the market by pumping in rupees.

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