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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

No ‘achhe din’ for small businesses in India

Indian companies are in the doldrums, but it is the smaller businesses that are suffering the most

Indian companies are in the doldrums, but it is the smaller businesses that are suffering the most. For most firms, operating profits during the first quarter of the current fiscal year have not only shrunk, but have contracted at a more rapid pace than a year ago. So much for “achhe din".

In any downturn, smaller businesses suffer the most. They typically don’t have huge piles of cash lying around or capital assets to pawn and find it more difficult to raise money. The current economic slowdown is no different. The tables here provide ample proof. The irony is that the firms are in such bad shape at a time when the economy is supposed to be growing 7%.

Among listed Indian firms, the smaller companies in terms of sales have been shellacked the most. They have been the worst and the earliest hit. Sales growth for firms whose quarterly revenues are less than 25 crore started falling two years ago. For those companies which fall in the 500 crore and above bracket, sales growth has fallen, but is still in the positive territory. In the June 2015 quarter, it’s the grouping of smallest firms which has seen the sharpest decline in sales—of 33.7%.

The story is the same when comparing other yardsticks as well. Take operating profit growth. For the bigger set of firms, operating profit is still growing, even if the pace has come off from the same quarter the previous year. But for all firm groupings with quarterly sales of less than 500 crore, operating profits have fallen. For the two smallest brackets, operating profits have fallen for three straight June quarters now.

The size of the firms seems to also affect their ability to pay their loans at a time when lending rates haven’t really fallen much despite an accommodative monetary policy. Interest coverage ratios are lower, the smaller the size of the firm. The largest set of firms has an interest coverage ratio of 3.5 times, while those whose quarterly sales are less than 25 crore are barely earning enough to meet their interest expenses.

If this is the state of affairs among listed firms, then it is very likely that things would be worse for millions of unlisted firms most of whom would fall in the smallest sales category. Not only is the pain of the downturn persisting, it has gotten worse than last year for many firms. And, of course, it hits the smallest firms the most.

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