Small businesses, strong financials

Not only are Indian small and mid-market enterprises among the most optimistic in the world, they are also among the most profitable with strong financials, according to separate surveys conducted by Crisil, HSBC Bank and Grant Thornton.

India's first-ever study on the financial profiles of small and medium enterprises (SMEs), carried out by the credit rating agency Crisil, highlights the strong financial fundamentals of SMEs in India.

The study, comparing the financials of 32,000 SMEs with over 2500 large corporates, reveals that 50 per cent of the SMEs have debt-equity ratios of less than 0.34, and interest cover of over 2.24 times. This is in contrast to large companies, where the respective debt-equity and interest cover levels are 0.73 and 2.63 times.

One reason for the low level of indebtedness, says the survey, could be the non-availability of financing at attractive rates, due to a perception of high credit risk in the sector.

Moreover, there is wide variation in financial profiles between the top half and the bottom quartile of SMEs; therefore, financially strong SMEs can benefit greatly by proving their superior creditworthiness thro-ugh ratings, the survey points out.

However, the study also reveals that SMEs report weaker profitability than large corporates. The operating margin (profit before interest, depreciation and tax / operating income) for the average SME was 8.7 per cent, as against 15.6 per cent for the average large corporate. However, the lower profitability is offset by much lower debt-equity levels.

An HSBC survey of 4,000 businesses in Asia-Pacific, Europe and the Americas, found that Indian small businesses are s the most optimistic in the world about the 2006 economy.

The global survey, conducted in 18 countries among small and medium-sized enterprises (SMEs) and middle market enterprises (MMEs), was to find out how businesses feel about the current and future economic climate, as well as their involvement in international trade.

In India, 88 per cent of the SMEs and 98 per cent of the MMEs surveyed say the current economy is 'very good' or 'fairly good'. The outlook for the year is equally positive, with 88 per cent of SMEs saying the economic situation will turn even better, 12 per cent saying it will stay the same and no one saying it will worsen. For MMEs, the corresponding figures were 84, 16 and 0 per cent.

The survey also gauged the level of international trading among SMEs and MMEs. In Asia-Pacific, the SMEs that trade internationally range from 37 per cent in Korea to 71 per cent in Singapore.

The figures are even higher among MMEs, ranging from 41 per cent in Indonesia to incidences above 80 per cent in Malaysia, India, Singapore and Taiwan. SMEs in Asia-Pacific trade with all regions, but the majority takes place within the region, particularly with mainland China. The situation is similar among MMEs, with companies in Hong kong, Taiwan and China being most likely to trade outside Asia-Pacific.

The Grant Thronton survey of business expectations and profitability among MMEs across the world also paints a rosy picture of Indian mid market enterprises.

Indian businesses top the list of business performance expectations in terms of profitability and employment, while it ranks number two in exports and turnover.

The survey says that the favourable economic backdrop in the country underpins vigorous growth in turnover via domestic sales. This is supported by the boost to exports from increased competition in the services sector. Employment growth and and profits are consequently strong.