Smaller companies have been facing a double-whammy of weak demand and elevated cost pressures post the pandemic. This led to stretched working capital needs and increased debt, which has weighed on their overall finances
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The coronavirus pandemic has dealt a severe blow to smaller companies, so much so that even after nearly two years into the event, small companies are still struggling to survive. To understand the severity of the situation, investors need to look at their September quarter earnings performance.
A size-wise analysis by Care Ratings Ltd based on net sales shows that the improvement in corporate performance is skewed towards larger companies.
Based on their turnover in July-September 2021, companies have been classified as micro (up to ₹5 crore), small ( ₹5 crore- ₹75 crore), medium ( ₹75 crore- ₹250 crore) and large (more than ₹250 crore) This is in line with the central government's classification of MSMEs. The ratings agency has analyzed the quarterly earnings results of 2113 companies covering around 40 industries and spanning the last five quarters as well as of the pre-crisis period i.e., Q2 FY20. It should be noted that this analysis does not include companies from the banking and financial services industry.
Large companies comprise 34% of the sample size and account for 96% of the net sales, 96% of operating profit and 98% of profit after tax in Q2 FY22, showed the analysis. Further, large companies have seen their volume of sales, operating profits and profit after tax surpass the pre-pandemic levels of September 2019.
On the other hand, micro-sized companies witnessed a sequential decline in sales and their volume of sales is well below September 2019 and that too by over 70%. These companies comprise around 15% of the sample, said the Care report. Barring the micro-companies, there has been a sequential improvement in net sales, operating profit and profit after tax in the latest quarter, added the Care Ratings report.
Analysts say, smaller companies have been facing a double-whammy of weak demand and elevated cost pressures post the pandemic. This led to stretched working capital needs and increased debt, which has weighed on their overall finances.
This is yet another example of a K-shaped recovery. Investors would reckon that global economists have warned of a K-shaped recovery and rising income inequality when the pandemic begins to recede. A K-shaped recovery is where certain sectors recover quickly, while others continue to lag, thus forming two divergent forks of the letter 'K'.
Simply put, the big are getting bigger due to accelerating pace of consolidation across industries. For instance, the September quarter management commentaries of companies in paints, pipes and tiles sectors point to increased market share gains from unorganised sector given that regional companies are finding it challenging to survive.