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Small is Sexy

The small memories are flooding back in full swing, full of hopes. The recent ET survey reveals an encouraging picture for small Indian companies. During the last quarter of year 2000 small companies have recorded a much better performances compared to the big and middle sized ones. What has been instrumental in this performance? Does the answer lie in improved sales or more controlled costs.

The small sized companies, on an average, posted a 250% rise in aggregate net profit to Rs.441 crore during the last quarter of fiscal 2000 as compared to Rs.125 crore during the quarter ended March 31, 1999. What is important is that their bottomlines grew despite relatively lower aggregate sales growth. Aggregate sales rose a mere 12% to Rs.13765 crore. Interest expenses, the most crucial factor to determine profitability also soared marginally by around 4% to Rs.1086 crore from Rs.1047 crore. So what then has spurred a major profit growth in these small companies? But first some instances.

Take for instance, the example of ATL textiles that registered a net profit of Rs.1.20 crore against a net loss of Rs.1.04 crore last year and Eternit Everest (Rs.5.17 crore, up from Rs.0.69 crore). In fact a large part of the improvement in bottomlines maybe attributed to lower interest outflows despite the overall interest cost going up. Apart from that increase in operating profit margins, improved price realization, greater operational efficiency and significant demand pull in the economy have also been instrumental.

There are some interesting lessons that emerge from these small companies coming into the performance limelight. First and foremost these small companies have been more focused and hence in a better position to cut their costs. Secondly, their small size has helped them to be more focused which has resulted in efficiencies of operation. Not surprising then that the expense to revenues ratio has actually gone down for these small companies. Flexibility has been another advantage for these small companies as they have been more receptive and adaptive to change than their larger counterparts. But the most important factor has been that unlike the large market favorites, these small companies have not been overtly obsessed with market valuations and hence not resorted to playing to the gallery. This effectively means that not only their bottomlines have improved but also the quality of their earnings has improved. That is what you call the small companies coming of age.

Deepanjan