Slowdowns always have a disproportionate impact on smaller companies. That conclusion is underlined by the results of a Mint study of 1,890 companies for the September quarter, which segregated the companies on the basis of market capitalization.
The sample for the survey comprises non-oil, non-financial companies, since including the heavily loss-making oil companies would skew the results for the larger companies, while the factors affecting financial companies are different from the others. Companies with a market capitalization of at least Rs1,000 crore showed a rise of 12.2% in operating profit compared with the year-ago period, while their net profits rose 13.4%. In contrast, companies with a market capitalization of between Rs500 crore and Rs1,000 crore saw their operating profits rise by 11.5% year-on-year, while net profits increased by a tepid 4.28%. And finally, the smaller companies, with market capitalization below Rs500 crore, saw a decline in both operating as well as net profits, compared with the FY08 September quarter.
What’s more, while there are 397 loss-making companies among those with a market cap of less than Rs100 crore, there are only eight firms that made losses during the September quarter among companies with a market cap of at least Rs1,000 crore.
Also See Skewed Impact (Graphic)
Other indicators too show that earnings for the broader market have been worse than that for the frontline companies. For instance, while Sensex (ex-oil) earnings growth has been 12.8%, that for the BSE 500 (ex-energy) is up 8.1%.
Nevertheless, interest costs of smaller companies haven’t increased as rapidly as for the larger companies. For instance, while the interest costs of companies with a market capitalization of at least Rs1,000 crore went up by 110% year-on-year in the September quarter, they increased by 38% for companies with a market cap below Rs500 crore. But interest cost as a percentage of operating profit was 14% for companies with a market cap of at least Rs1,000 crore, while it was 38% for those with a market cap below Rs500 crore. The rising interest cost hurts the smaller firms the hardest.
Could the trend of slower growth for the smaller companies be a factor for the more severe fall in the stock prices of mid-cap companies? Perhaps liquidity or the lack of it and a flight to quality are the main reasons for the fall in mid-cap stocks. But the September quarter results indicate there is also a fundamental basis to that fall.
Graphics by Sandeep Bhatnagar / Mint