SMEs' operating cash flow fell 69% in FY24; sales and profits outperformed

Amid increased scrutiny of price action in the SME segment by regulators and investors alike, a looks at their fundamentals in a three-part series. Part-1 examines sharp decline in operating cash flow

The cash flow from operating activities for small and medium enterprises (SMEs) listed on stock exchanges has more than halved (fallen 69 per cent) in the financial year 2023-24 (FY24) even as indices tracking the segment have been surg­ing.

SMEs’ operating cash flow for FY24 has been the lowest since the pandemic began, even as the BSE SME IPO index and the National Stock Exchange (NSE)’s Nifty SME EMERGE Index have roughly doubled in value during the period, and continued to hit new highs in the current financial year. These companies are listed separately from the main stock exchange platform and function with fewer compliance requirements, including the filing of financial results. The SME segment only requires them to file financial statements on a half-yearly basis.

This analysis is based on the latest available numbers for FY24. The analysis here considered 183 SME companies from the segment across both the NSE and the BSE. These were compared with a similar set of 152 large companies from the BSE 200 index, with continuous data over the last seven years.

Operating cash flow is often considered a sharper metric of business performance than other acco­unting metrics, some of which can be influ­e­nced by aggressive assumptions. Operating cash flow gives a more grounded picture of the amount of cash generated by the underlying business. The companies under consideration had negative operating cash flow in FY18. This rose to positive territory in the subsequent year and surged afterwards. The operating cash flow in FY23 was 56 per cent higher than it was in the pre-pandemic year of FY19 before the sharp decline in FY24.

The operating cash flow of BSE 200 firms, among India’s largest listed firms, was up 125 per cent in the same period. The analysis looked at firms with data over the last seven years and excluded banks and finance firms, as was done for the SME segment. This means that larger listed players have significantly outperfor­med SME play­ers when it comes to operating cash flow as of FY24, though this may well reflect the volatility of smaller businesses. Ope­­r­ating cash flow has nea­rly doubled for BSE 200 companies since FY18.

One of the major drivers of operating cash flows is profitability. The SME segment has outperform­ed. Reported net profit is up 242 per cent since FY18 for SMEs compared to 119 per cent increase for the sample of BSE 200 firms.

Cash flow from operations can take a hit when businesses expand, said Pavan Kumar Vijay, founder of Corporate Professionals, which also brings SMEs to the stock market through its merchant banking division. Typically, working capital costs can go up, reducing operating cash flow. The absolute amount of business that SMEs are doing has continued to grow faster than their larger cousins. Sales are up 115 per cent since FY18 compared to a 93 per cent increase for BSE 200 companies. Both have grown faster than the economy overall, as represented by gross domestic product (GDP), which grew 73 per cent during the same period.

The Securities and Exchange Board of India (Sebi) has been putting the segment under increasing scrutiny. It halted the share sale of Trafiksol ITS Technologies, which was oversubscribed by 345.65 times, after noting irregularities, in an order dated October 11. The market regulator had warned investors in August about companies and promoters who are “resorting to certain means that project an unrealistic picture of their operations” and subsequently sell out amid increased interest from investors.

Next: Debt/equity for listed SMEs at lowest in years