SMEs PAST, PRESENT & FUTURE

PRESENTED BY:
Reena Alva Vicky Barot Rishabh Kapoor Harsh Modi Shambhavi More Ashwini Naik 04 06 33 40 42 45

SMEs(Small and Medium Enterprises)

Definition of SMEs

Organisation for Economic Cooperation and

Development (OECD) describes SMEs on basis of number of employees.

SMEs form the backbone of the Indian manufacturing sector and have become engine of economic growth in India.

The number of SSI units in 2007 were estimated at 44 lakhs.

Today it has come down to around 40 lakhs by now.

Challenges faced by SMEs

Financial constraints/ risks Research and development (R&D) Government Policies

Inspector raj, harassment and corruption

Lack of awareness of global trade laws Management Upgrading skills to enhance manufacturing output

Because of these challenges SMEs export potential which used to be between 4045% for the last many years is declining by 7-8% .

Reasons for Strategic Importance of SMEs

SMEs are important for poverty Reduction

SMEs for efficient and competitive market

SMEs contribution to Foreign Trade

Domestic suppliers of inputs to products exported by large enterprises. Exporter of specialized niche products. Importer/Distribution of goods from Foreign SMEs

Government Policy to promote SME and Trade

There is a need to create an environment as favorable as possible to business esp for foreign trade oriented SMEs.

Strategies
SME development requires a cross cutting strategy that touches upon many areas: 1. Conductive WTO compatible policies. 2. Technology upgradation 3. Encouraged to work in cluster environment. 4. Management Skills are must. 5. Substantial investment for access and integration into local & global markets.

The SMEs in India: Present Scenario

Between 2001-06, net companies with net turnover of Rs. 1 crore 50 crore had a higher growth rate of 701 per cent as compared to 169 per cent for large companies with turnover of over Rs. 1,000 crore (Business World Jan. 2007).

 Today some SMEs are investing in

R&D in order to compete globally.

With the elimination of Multi Fibre

Agreement (MFA) in 2005, lot of opportunities have opened for the Indian textile sector.

LIBERALISATION
The decade of 1990s was an eventful in terms of policy changes nationally as well as internationally. Policy changes have been taking place at three levels: 1. Global 2. National 3. Sectoral Globalization process of free movement of inputs. It was due to removal of quantitative and nonquantitative restriction across countries. Process at international level.

OUTCOMES OF INDIAS ECONOMIC REFORMS

Growth of public sector declined considerably since 1991not only in terms of investment and employment but also production. The introduction of policy for small industry for imparting vitality to the sector by making relevant policy changes to small industry.

THE POLICY MARKED.

Beginning of the end of the protective measures for the small industry. Promotion of competitiveness by addressing the basic concerns of the sector namely; technology, finance and marketing.

small industries have come up in an unplanned, uncontrolled and haphazard manner.

Smes are mostly in form of clusters. So the central issue of concern for the growth of small industries is how to strengthen its competitiveness.

CURRENT ISSUES IN SMEs..

Developing smes in India .

around the following: a. Protective discrimination b. Integration between large and small. c. Institutional support through a network of testing centers, tool rooms and entrepreneurial development institutions. GoI announced a policy package called comprehensive policy package in august 2000 to strengthen the small scale sector and enhance competitiveness .

Government development strategy for SME evolved

Mentoring and Advocacy.

Most of the small businesses are set up by first

generation entrepreneurs.
Limited knowledge about markets, bank or

government procedures, cash flow or managing labor.

Small industry development organization has moved

to a direct promotional role of land holding, advocacy and facilitation encompassing of legislative support.

 Credit
Lifeline of business Small business lack access to capital and money

market. The problem can be addressed through various ways: Establishment of ISO 9000 certified specialized banks in districts. Directive for working capital finance @ 20% of annual normative turnover. Waiver of collateral requirements upto Rs 0.5 million Composite loans from a single agency upto Rs 2.5 million.

Lending facilities to SMEs

Mindset of banks have been changed. Increased competition with the entry of private

banks. Lending grew by 69% between 2000-01 to 2005-06. ICICI and Kotak Mahindra have separate sme division. Sources of finance include:- commercial banks, state financial corporation, small industries development bank of India, informal sources.

Marketing
This is a big problem area for small entrepreneurs

since their survival depends on sound marketing techniques. Professional agencies are not yet engaged by small entrepreneurs on account of paucity of funds.
Technology and technological up gradation
As they realize the need to link up with large ones

they are having a relook at technology options. They need to concentrate on information about technology, actual procurement of technology and finance of technology up gradation.

Managing HR resources
Due to limited size smes cannot justify full time HR

professionals Complex HR activities result in significant drain on existing managerial resources. Scarcity of managerial talent is limiting growth of small industry. Disadvantage is their inability to offer competitive packages to attract and retain employees.

Market access
smes can hardly match the advertising support or

distribution reach of large corporation, They need to build up their marketing activity of small units around their competitive advantage.
Infrastructure
Smes traditionally operated at homes or

neighborhood. Later they formed clusters Now they are being given an industrial area for setting up their business.

Globalization
Post globalization many steps have been taken like

workshops have been held on intellectual property rights(IPR) and bar-coding.

Procedures
Government and bank procedures coupled with

inspections remain a major hurdle in growth of small units.

Sickness in SSI sector

A host of development schemes launched by the

government for solving the problems of SSI have yet to achieve their goals to arrest sickness in SSI sector.
Removal of inspection regime and

simplification of procedures.
frequent inspections by multiple government

agencies are a source of harassment. At present,55 inspectors at different levels are visiting SSI.

The Micro, Small and Medium Enterprise Act, 2006

GOI passed this act on June 2006. Act is geared towards promoting and enhancing the competitiveness of micro, small and medium enterprises. Act tries to accomplish many long standing demands of multi stake holders in MSME sector. establishes a national board for MSME. Defines sme first time in India.

Definition of SMEs:
The MSME act defines sme as Category investment (plant & machinery) service. Micro enterprises < than 25 lacs < 10 lacs. Small enterprises < than 5 crs < 2 crs. Medium enterprises < 10 crs < 5 crs. This act simplifies the registration process for new MSMEs by submitting simplified memoranda.

Continued..

The act sets agenda for specific policies that it will create and implement the procurement preference policy which will guide government policies on how much of their supplies should be purchased from the smes.

The finalization of new act:

Many questions and controversies.. i. The expansion of investment limits extend the priority sectors ii. Any Indian business enterprise with net worth of less than 10 crores cannot raise cannot raise capital from stock market. iii. Act provides need for procurement preference policy, which is yet to be formulated under sec 11 of the act.

FUTURE POLICY FRAMEWORK

PRIORITY SECTOR LENDING

32% of their net bank credit.

Target fixed by domestic and foreign banks are 40% and

PRICE PREFERENCE FOR SSIs

now it is fixed at 20%.

In past 15% preference was being extended to SSI limits

REFORMATION OF LABOR LAWS

Multiplicity of labor laws are responsible for the slow

growth of small industry. Supportive labor laws are important pre-requisite for Indian industry to face international competition.

THE OPPURTUNITY

Globalization and liberalization need not affect Indian small industry adversely. It has created beneficial opportunities as well. There is removal of quantitative restriction. Reduction of import duties. Opened up foreign markets to Indian industry.

OVERVIEW OF AUTO COMPONENT INDUSTRY

The Indian auto component industry has been navigating through a period of rapid changes.

The global auto components industry is estimated at US$1.2 trillion.

Growing at 20% per annum since 2000 and is projected to maintain the high-growth phase of 15-20% till 2015.

Average cost reduction of nearly 25-30% has attracted several global automobile manufacturers to set base since 1991

Today, India has become the outsourcing hub for several global automobile manufacturers
Several large manufacturers are in the process of substantially investing in capacity expansion, establishing partnerships in India and abroad, acquiring companies overseas, R&D facilities and design capabilities.

Some leading manufacturers of auto components in India include Motor Industries Company of India, Bharat Forge, Sundaram Fasteners, Wheels India, Amtek Auto, Motherson Sumi, Rico Auto and Subros

The Indias Top 500 Companies, published by Dun & Bradstreet in 2006, listed 22 auto component manufacturers as top companies in India with a total turnover of US$ 3 bn

Industry Structure
Indian auto component industry is extensive and highly fragmented The total turnover of the Indian auto component industry is estimated at US$9 bn in 2006 It has the resources to manufacture the entire range of auto products required for vehicle manufacturing, approximately 20,000 components The entry of global manufacturers into India during the 1990s enabled induction of new technologies, new products, improved quality

There are over 400 large firms who are part of the organized sector and cater largely to the OEMs
Another 10,000 firms exist in the unorganized sector that operates in a tier-format Around 4% of the companies operating in the auto component segment cater to 80% of the demand emanating from OEMs

The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs

However, there are a select few large companies that have integrated their operations across the value chain
The key to competing in this industry is through specialization by product-type, and integrating operations across the related area of specialization.

The market segments for auto components include 33% of OEMs, 25% local components and 42% comprising of spurious market including re-conditioned parts

The regional base of auto component manufacturers is mostly concentrated in the West, North and South of India

SMEs IN AUTO COMPONENT INDUSTRY

Auto component SMEs are one of the fastest growing within the SME category of industries Key contributors to the total production of auto components and also have a significant share in the exports of the industry

As part of a highly fragmented industry, these companies mostly are part of the unorganized sector which operate in a tier framework
The SMEs are riding a boom phase, driven by demand from global auto manufacturers.

The limitations of being SMEs are:

Low capital base

Limited generation of surplus funds for re-investment due to tight working capital cycle
Lack of awareness of business opportunities Inadequate exposure to international environment

Limited geographical diversity of markets

Obsolete Technology

Poor infrastructure facilities

The key risks that the auto component SMEs faces include:
Fluctuations in the cost of production; especially raw materials like steel, aluminum, polymers
Poor negotiation powers due to fragmented nature of industry; which in turn limits their pricing power Dependence on traders and agents to access overseas markets which threatens their competitiveness Product substitutes due to fast-changing technology

Government has initiated cluster-based development which gives rise to providing specialized technical, administrative and financial services
Further, the government is encouraging banks to adopt a cluster-based lending approach to ease availability of funds to SMEs

Also, the Governments initiative towards road development will give a boost to demand for vehicles and indirectly auto components

Multinational automobile manufacturers have announced plans to enter the Indian markets.
This will bring in better technology, skills, new products and an assured market. Strategic tie-ups and contract manufacturing is another way forward for SMEs in the auto component industry.

FUTURE OUTLOOK

Current trends indicate a smooth run for the auto component industry. Since 2000, this is one sector which has made a global mark and has been identified as a sunrise industry.

The industry is transforming from being highly domestic-centric, to a force ready to face global competition.

India is being perceived as a major market for cars and two wheelers by global OEMs
These factors indicate a robust auto ancillary industry in India and the overall expected good growth will provide several opportunities for the emergence of new enterprises.

The vision to compete globally comes from the inherent strengths the Indian auto component industry possesses. Some features are:
Cost reduction of 25-30% in production in the domestic market compared to overseas Low labour costs Designing, engineering and technical skills Availability of raw materials Adaptability to new technology Investments in research and development, coming in from global OEMs

Volatility in the prices of metals and other inputs could erode the industrys cost competitiveness. Further, global OEMs expect a commitment of 5-10% reduction in prices every year Tier I manufacturers taking up greenfield projects overseas Intense competition from counterparts in other emerging economies may add pressure on margins of manufacturers

The Indian auto component industry is poised for robust growth till 2010 Going by current trends in production and exports of auto components, indicate a doubling of the domestic auto component industry by 2010 The production of auto components could grow to US$22 bn by 2010 Similarly, Indias exports of auto components could grow to US$4.5 bn as compared to US$1.8 bn in 2005

The overall trend is encouraging, but remaining competitive in this changing scenario will be the toughest challenge
The combination of low manufacturing costs along with quality systems would give an edge to companies in terms of pricing and quality

Expansion and diversification will help break into new markets

It would be imperative for these companies, which are largely based on traditional management practices, to imbibe technology in a big way
The SMEs can exploit these opportunities through joint ventures, collaboration and technical tie ups Knowledge, specialisation, innovation and networking will determine the success of the SMEs in this globally competitive environment

SMEs IN THE TEXTILE INDUSTRY

THE INDIAN TEXTILE INDUSTRY

Most important in the economy in terms of output, investment and employment The sector employs nearly 35 million people The Industry accounts for around

4% of Gross Domestic Product 14% of industrial production 9% of excise collections 18% of employment in the industrial sector 16% of the countrys total exports earnings

India vis--vis Global Textiles

The global textile and clothing industry is estimated to be worth about US$ 4,395 bn Global trade in textiles and clothing stands at around US$ 360 bn The US market is the largest importer, estimated to be growing at 5% per year, and in combination with the EU nations, accounts for 64% of clothing consumption

The Indian textile industry is valued at US$ 36 bn with exports totalling US$ 17 bn in 2005-2006 At the global level, Indias textile exports account for just 4.72% of global textile and clothing exports. Cotton yarn and fabrics, man-made yarn and fabrics, wool and silk fabrics and a variety of readymade garments

Indias presence in the international market is significant in the areas of fabrics and yarn
Largest exporter of yarn in the international market and has a share of 25% in world cotton yarn exports India accounts for 12% of the worlds production of textile fibres and yarn In terms of spindle age, the Indian textile industry is ranked second, after China, and accounts for 23% of the worlds spindle capacity Around 6% of global rotor capacity is in India The country has the highest loom capacity, including handlooms, with a share of 61% in

SMEs IN TEXILE INDUSTRY

An SME intensive sector Focus on promoting domestic employment Decentralised power loom and handloom sectors

INSIGHTS INTO THE INDUSTRY

2006 - 08
2004 - 06

Cluster-based Approach to Development

Government of Indias cluster development initiatives: involving technical assistance, subsidies for technology up gradation and marketing support Textile Committee under the Ministry of Textiles: capacity building in textile and clothing SMEs in across 20 clusters in the country

Key benefits:
Networking among enterprises Economies of scale Improved bargaining power Technology and skill up gradation Global visibility and being part of the value chain Easier access to finance Greater institutional support

FUTURE OUTLOOK

Challenges for the globally competing textile SMEs are:

Imbibing global best practices Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains

Supremacy in cotton based products, especially in the readymade garments and home furnishings segment Readymade garment exports were worth US$8 bn in FY06 and will cross US$16 bn by the end of 2010 Investments in textiles are expected to touch US$31 bn by 2010 Change in preferences of Indian consumers - from buying cloth to readymade garments

Gems & Jewellery Sector

Introduction
Part of the Indian civilisation since its recorded history. 1966-67, the export turnover was just Rs 220 m representing a 3 per cent of total merchandise exports. Export turnover of around Rs 675 bn during 2006-07 and contributing 16 per cent of total exports,

Significant foreign exchange earner for the

Classification

SWOT Analysis - Strengths

About one million craftsmen are associated with this industry. Availability of abundance of cheap and skilled labor in India. Presence of excellent marketing network spread across the world. Supportive government industrial/ EXIM policy.

SWOT Analysis Weaknesses

Small firms lacking technological/ export information expertise. Low productivity compared to labor in china, Thailand and Sri Lanka. As the major raw material requirements need to be imported, companies normally stock huge quantities of inventory resulting high inventory carrying costs.

SWOT Analysis Opportunities

New markets in Europe & Latin America Growing demand in South Asian & Far East countries. Rupee value depreciating resulting in a windfall increase in the profitability. Industry moving from a phase of consolidation

SWOT Analysis - Threats

China, Sri Lanka and Thailand's entry in small diamond segment Infrastructure bottlenecks, absence of latest technology Unusual increase in the prices of gold and rough diamonds

Present State
Total exports stood at Rs.67500 crore, a growth of 29.27% YOY 2006 Exports continued to rise India 's share of the world's polished diamond market :

60 per cent in terms of value, 85 per cent in terms of volume 92 per cent in terms of pieces.

Global gold Jewellery consumption increased 33% YOY Buoyant demand in countries like India, the Gulf States, China and Turkey pulled up the overall figures. Avg growth of over 30% for a decade , India the fastest growing Jewellery exporter in the world

Diamonds

Domination in cut and polished diamond market and smaller diamonds in particular. Amply reflected in the export growth of diamond industry with a total export of US$ 11181.48 million (48000 crore) as compared to US$ 8627.48 million (37000 crore) against the corresponding period in last year.

Jewellery
Sales in United States of America increased by 4% to a huge 73000 crore. The Jewellery sector recorded a massive growth of 49.23% CAGR. The demand for the diamond Jewellery will continue to grow stronger due to continued marketing support by the industry especially in the U.S., India and China.

Major Players
Vaibhav Gems Ltd. Classic Diamond (India) Ltd. Shrenuj & Company Ltd. Goldiam international Ltd. Su-raj Diamonds & Jewellery Ltd. Rajesh Exports Pvt. Ltd.

Financial Comparison
Topics Shrenuj & Company Ltd. Goldiam Rajesh Exports Su-Raj Diamonds & International Ltd. Pvt. Ltd Jewellery Ltd. Vaibhav Gems Ltd. Classic Diamond (India) Ltd. Adjusted EPS (Rs) Cash EPS (Rs) Book Value (Rs) Dividend Per Share (Rs) Return On Net Worth (%) Return On Capital employed (%) 10.24 12.61 104.46 3 9.8 8.99 14.95 15.78 102.83 2.5 17.82 15.2 125.42 127.47 211.62 10 29.08 73.1 7.62 8.31 121.56 1.2 6.27 8.76 13.39 14.56 60.54 2.5 23.62 24.49 17.19 20.11 204 1.8 8.42 8.56

Operating Profit Margin (%)

Gross Profit Margin (%) Net Profit Margin (%) Inventory Turnover Ratio Export as % of Total Sales Bonus component in Equity (%)

7.35
6.82 2.28 2.42 0 0

11.39
10.77 13.48 11.28 100.61 70.42

-1.43
-1.46 1.01 71.72 99.17 0

4.41
4.18 2.98 7 94.35 26.2

10.04
9.31 9 4.71 99.64 69.07

6.8
6.44 2.12 2.81 0 0

Future Prospective

Personal disposable income to increase worldwide. Jewellery sector to grow by 49% CAGR Exports to contribute 70% of the total sales of the industry. U.S. contributing most (35%) in the export bill. Acquiring subsidiaries Proposal of increase in the FDI limit on mining from 74% to 100%, Overall with the economic fundamentals looking good

Government Policy

Levy of two per cent excise duty on premium branded Jewellery. 100 per cent Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs)/Special Economic Zones (SEZs), enjoy a package of incentives and facilities, which include duty free imports of all types of capital goods, raw material, and consumables in addition to tax holidays against export. Currently 74% FDI, 100% proposed.

Company Analysis
Vaibhav Gems Limited (VGL)

incorporated in Jaipur in 1989,. Professionally managed, end-to-end vertically integrated business organization. Engaged in the exports of gemstones on a nominal scale upto 1994. In 1996-97, as an exercise in forward integration, the company came out with IPO In 2003-04, established a new manufacturing unit at Sitapura In 2004-05, ventured into international retail market by setting up its wholly owned subsidiary Jewel Gem Inc. USA. In 2005-06, became an Indian MNC, the first in the Indian gems and jewellery sector by extending its operations in more than 10 countries, through the acquisition of STS Group of companies and setting up of 12 Retail Stores at major holiday destination of the world. Completed US$ 70 Million GDR issue successfully. Warburg, one the leading private Equity Investor of the world has also acquired more than 27% Equity Stake in the company.

Company Analysis Vaibhav Gems Limited (VGL)

Largest exporter of colored gemstones from India, and also the one of the largest exporter of studded jewelry. Awarded 'Emerging India Award 2006' to the company in Gem and Jewellery category. Short listed for the 3rd time in Succession for adopting good corporate governance practices, for the ICSI National Corporate Governance Award. Started 24 hours jewellery TV channel in UK, Germany and USA.

VGL has again received highest Export Award (Coloured Gemstone Category) for the 16th time, 13th time in succession.
Nalanda India Fund Limited invested USD 35 million in the Company.

Mar '05

Mar '06

Mar '07

Mar '08

Mar '09

Net Sales Other Income Stock Adjustments Total Income Total Expenses

167.71 1.09 0.09 168.89 150.95

219.47 2.16 0.99 222.62 180.25 40.21 42.37 3.67 38.7 1.53 0 37.17 0 37.17 0.72 36.32 22.83 0 4.14 0.58

278.17 4.28 5.5 287.95 255.85 27.82 32.1 4.55 27.55 1.87 0 25.68 -0.18 25.5 1.23 24.29 34.56 0.18 1.38 0.27

311.47 -196.6 3.85 118.72 291.97 23.35 -173.3 9.19 -182.4 1.76 0 -184.2 0.06 -184.1 -0.09 15.04 34.13 0 0 0

170.96 -92.63 -10.02 68.31 304.66 -143.7 -236.4 15.84 -252.2 1.5 0 -253.7 -0.01 -253.7 0.49 -22.66 153.29 0 0 0

Operating Profit PBDIT Interest PBDT Depreciation Other Written Off Profit Before Tax Extra-ordinary items PBT (Post Extra-ord Items) Tax Reported Net Profit Total Value Addition Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised) Shares in issue (lakhs) Earning Per Share (Rs) Equity Dividend (%) Book Value (Rs)

16.85 17.94 1.63 16.31 1.23 0 15.08 -0.09 14.99 -0.12 15.1 15.73 0 2.64 0.37

105.61 14.3 25 60.54

275.88 13.17 15 219.5

275.88 8.74 5 227.55

316.98 4.75 0 168.62

316.98 -7.15 0 92.09

EDUCATION SECTOR

Over-regulated and under-governed In a failed public education system, aspirations are meeting affluence Estimated private spend of US$50bn; $80bn by 2012 The not-for profit nature of the $40bn formal IES has deterred for-profit private participation.

Inability to transform education into a process-driven model curtails scalability Value creation potential in the space, mainly due to scale issues. Pricing power as an ability to create an annuity pool.

Navneet Publications
Publisher of syllabus-based supplementary/ reference books in Maharashtra and Gujarat (66% of FY08 revenues), and also operates in stationery (33%) Multimedia in schools. In the publishing business, the company is a leader in a segment Scalability is difficult to achieve.

VETA (UNLISTED)
VETA is Indias largest English training institute Revenues of ~Rs600m 175 centers (scaled up to 500 by FY10). more than 90% of its revenues accrue from the Indian operations, small international presence using the franchisee route. received private equity to the tune of $ 10m from SAIF capital

FUTURE AND CONCLUSION

FUTURE OUTLOOK
Expectations high, Prospects are bright Some prerequisites:

Imbibing global best practices Adopting rapidly changing technologies and efficient processes Innovation Networking and better supply chain management Ability to link up to global value chains.

Intensely competitive environment since 1991, New challenges & opportunities for the Indian small industry. Effort needed from the government and small industry. Financial infrastructure needs to be broadened. It is essential to take care of the sector to enable it to take care of the Indian economy.

Green Shoots in Sight: India

Asian economy is recovering despite slack Developing economies to outperform advanced markets. The bounce back is being led by China & India. S.M.E.s to play an important role

PROJECTIONS
2010 2015 SMEs GDP contribution to rise to 22 % Attract 45 % of the foreign investment To employ around 50 % of total workforce Considered as the engine of growth

SUGESSTIONS

Owners perceptions should be changed

Not to be run as family businesses Professionally managed Hiring outsiders Expansion Attitude & vision Adoption of globalised practiced Create MNSMC

SUGGESTIONS

Work force perceptions should change

Accept the attractiveness of the sector Ready to work for the sector

Setup regulating bodies and ease the various laws SMERA SME Stock Exchanges

CONCLUSION
Indian SMEs are not world class For India to be a world class economy, its engines have to be of global perceptions Entrepreneurship to be encouraged. We should look towards the SMEs as the next best levels of attractiveness of employments

THANK YOU