Small companies struggle to stay afloat as bigger peers race ahead

While revenues of all listed companies grew 30% in last three years, the bottom quartile saw a 40% decline

The recent recovery in corporate revenues and profits has bypassed firms at the bottom of India’s corporate pyramid, and many of them are now struggling to stay afloat or going through a decline. The combined revenue of the lowest quartile (the bottom 25 per cent) of listed companies (in terms of revenues) was down 9.3 per cent year-on-year (YoY) during the July-September 2018 quarter against 23.1 per cent YoY growth in the combined net profit of all listed companies (excluding financial firms).

Cumulatively, the combined revenue of these smaller companies is down around 40 per cent in the last three years against 30 per cent growth in listed companies’ top line during the period.

Smaller companies’ combined net profit was down 4.7 per cent YoY in the second quarter against 23 per cent YoY growth in the overall corporate profits. Nearly a third of the 426 smaller firms in our sample reported a loss at net level during the quarter.

Experts attribute this to the inability of smaller firms to scale up their operations due to a combination of external and internal factors. “Smaller firms have always struggled compared to bigger firms but their financial and operational troubles increased after demonetisation and the roll-out of the goods and services tax (GST). Now they have been hit by liquidity crunch in the non-banking space,” said Madan Sabnavis, chief economist at CARE Ratings.

The analysis is based on the universe of 1,705 companies (excluding banks and financials), which reported quarterly results in the last 16 quarters and had revenues of Rs 10 million or more during the July-September 2018 quarter. 

The sample is restricted to companies that constitute the bottom 25 per cent of the universe in terms of revenues during the second quarter. A typical firm here had median revenue of Rs 69 million and net profit of 1.4 million during the second quarter. The corresponding numbers for the entire universe is Rs 935 million and Rs 27.3 million, respectively.

A similar underperformance is visible in the fourth quartile of the BS1000 companies -- a listing of India’s top 1,000 non-financial firms in terms of their annual revenues. A typical small company here reported revenues of Rs 5,480 million and net profits of Rs  164 million in FY18.

The combined revenue of BS1000 companies in the lowest quartile was up 3.4 per cent YoY in FY18 against 10.7 per cent top line growth reported by all companies. The combined net profit of these small-sized firms was down 21.9 per cent YoY last fiscal. In comparison, the combined net profit of all BS1000 companies was up 10.9 per cent in the last fiscal year.

The numbers for BS1000 companies suggest that small firms have consistently lost out to the bigger peers. In the last five years, the combined revenue of firms in the first quartile has grown at a compounded annual growth rate (CAGR) of 2.2 per cent. In comparison, BS1000 companies’ combined revenue grew at an annualised rate of 6 per cent.

In the same period, the smaller firms’ combined net profit halved, as against 56 per cent cumulative growth in the combined earnings of all BS1000 companies. Experts say the biggest challenge for smaller firms is to raise working capital to tide over their short-term cash flows woes. “Many micro, small and medium enterprises (MSMEs) are forced to forgo businesses due to lack of working capital to fund operations till such time that their end customers pay up,” said G Chohkkalingam, founder and managing director, Equinomics Research & Advisory.

Raising working capital has become more challenging and expensive after the financial troubles of public sector banks, which have historically been the main lenders to the MSME sector. “Public sector banks are now reluctant to lend to smaller firms due to worries over bad loans while non-bank lenders now face a liquidity crisis. This is a double whammy for smaller firms,” added Sabnavis.