Small firms lose out to bigger peers, see sharpest revenue drop in 2 years

Smaller companies continue to lose out to their bigger peers and their decline has been the sharpest in two years. There has been steady decline in the revenue share of smaller listed companies, while the bigger ones have raised their share in the overall revenue pie.

The top listed companies in terms of revenue accounted for 77.2 per cent of the combined revenue of all listed companies in the July-September quarter - up from 75.6 per cent a year ago and 75.8 per cent four years ago.

In contrast, the revenue share of other firms (excluding top 200 companies) declined 22.8 per cent in the second quarter of 2020-21, from 24.4 per cent a year ago and 24.2 per cent four years ago in the second quarter of 2015-16.

The analysis is based on the quarterly results of a common sample of 2,353 listed companies across sectors, excluding banks, non-banking financial companies, including insurance and oil & gas companies. All numbers are on a trailing four-quarter (or trailing 12-month) basis to even out quarterly fluctuations due to industry-specific seasonal factors.

The decline of smaller firms is also visible in the growing gap between the average revenue of all listed companies in the Business Standard sample and the median revenue. While the average revenue of all listed companies is down 3 per cent in the past three years, the median revenue has shrunk by a quarter during the period.

The companies in the sample reported average revenue of Rs 2,008 crore during the 12 months ended September this year, against Rs 2,075 crore in September 2018 and Rs 1,683 crore in September 2016.

In contrast, median revenue for the sample declined to a four-year low of Rs 151 crore during the 12 months ended September this year, from Rs 196 crore two years ago and Rs 171 crore four years ago.

The contrasting growth between the average and median value is due to a better showing by bigger firms, lifting the average value. But that had no impact on the median value that approximates the growth witnessed by smaller firms.  

The average value is calculated by dividing the combined revenue of all firms by the number of firms. The result is greatly influenced by the smaller number of large firms. In contrast, the median represents the middle number when all companies in the sample are sorted in ascending or descending order. Median represents the typical size of a firm in terms of revenue. Riding on bigger companies, India Inc has continued to grow. But a typical firm has shrunk in size in the past four years.

Analysts attribute it to the economic and financial shocks unleashed by demonetisation in November 2016 and the goods and services tax (GST) roll-out in July 2017. "Currency purge and GST were the twin shocks to the system and smaller firms with limited financial power found it tough to survive, leading to slower growth in recent years," says Dhananjay Sinha, head research, Systematix Institutional Research.

He expects the trend to continue unless there is rebound in secular growth, making it easier for smaller firms to thrive.

According to economists, this may have worsened the employment problem in India. "Smaller firms mostly operate in labour-intensive industries and their slower growth or demise will impact job growth," says Devendra Pant, head economist, India Ratings and Research.

According to Sinha, poor performance of smaller firms has also reduced India's growth potential and contributed to the problem of bad loans in the banking and non-banking finance space.

"Smaller firms are integral to India's industrial supply chain. Their decline hits the dynamism and growth potential of the industrial sector," adds Sinha.