Listed SME capital expenditure growing faster than larger players

The concluding part of the series looks at investment sentiment among listed SME companies

Smaller businesses listed on the stock exchanges are outdoing their larger peers when it comes to growth in the cash they are redirecting towards creation of long-term assets such as new factories.

 

  The cash flow from investing activities, a key indicator for such activity, for listed small and medium enterprises (SMEs) is up 87 per cent from FY18, compared to a 63 per cent increase seen for BSE 200 companies. The analysis is based on 183 listed companies from the SME segment and 152 firms from the BSE 200 index, excluding banks and finance companies, with data available over the last seven years. The volatility for this metric has been higher for the SME segment. Cash flow from investing activities fell to 49 per cent of FY18 levels in FY20. The BSE 200 companies saw only a 4 per cent decline during the worst of the pandemic crunch. But the rebound appears to have been sha­r­per for the SME segment.

  The SME segment has seen record fundraising through equity markets. A Securities and Exchange Board of India (Sebi) statement in August noted that it had raised over Rs 14,000 crore since 2012 with nearly Rs 6,000 crore coming in FY24. The statement also warned investors to do their due diligence before investing in these companies, citing some instances of irregularities, which it had observed in the segment. The access to capital seems to have buoyed up sentiment for these firms as suggested by the capex numbers. This comes even as there was a year-on-year (Y-o-Y) growth of 40 per cent in the September quarter in private capex overall, according to data from tracker Centre for Monitoring Indian Economy (CMIE), though a sustained recovery in the investment cycle is still said to be awaited.

 

  The rise in the net block of these firms, or the value of their assets after accounting for depreciation, is up by two-thirds since FY18. This is close to the comparable BSE 200 companies, which have seen their net block grow around by three-quarters during the same period.

 

  The capital work in progress relates to those assets which are still in the process of being fully operationalised. The SME companies have seen their capital work in progress rise by 136 per cent compared to FY18. The BSE 200 companies have seen a 70 per cent increase during the same period. A key reason for the gains may be the fact that they are less dependent on other sources of funding. Studies have poi­nted to greater timidity amid limited funding sources for Indian SMEs.

  “While mandates push credit to small firms, they can inhibit enterprise growth by creating incentives to retain credit access. The intuition is as follows. The financial resources supplied by the directed lending programme are scarce. Indeed, this scarcity of credit is the very reason for the directed credit programme to exist. If current programme beneficiaries grow, they no longer qualify as priority credit,” noted a 2016 study titled “Do Programs Mandating Small Business Lending Disincentivise Growth? Evidence From a Policy Experiment” from authors, including the University of Chicago’s Gursharan Bhue, Universi­ty of Maryland’s Nagpurnanand Prabhala, and Prasanna Tantri from the Indian School of Business.

  “Newly eligible firms near the upper threshold for treatment exhibit significant real-side slowdown in investment, sales, and a non-accounting measure, power consumption,” the study had noted.