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Journalism of Courage
The Q2 report card is out: smaller firms are healthier, and their bottomlines are glowing. An analysis of the second quarter results of 631 companies shows that 392 small-cap firms those with a market capitalisation of below Rs 300 crore have shown a substantial jump of 142 per cent in net profits. The aggregate net for the full sample went up by 29.18 per cent. The picture changes see table if one looks at the topline of these 631 firms. The small-cap firms8217; income has grown by 20.13 per cent compared to 22.42 for mid-cap firms and 22.87 per cent for the big daddies.
Volumes vs costs
Clearly, the cost-cutting measures initiated by the large firms three-four years earlier have now trickled down to the smaller firms. That said, Parikh was quick to add that the volumes game will pay dividends in terms of higher profitability for the larger firms in two or three quarter down the line.
While expenditure for large-cap firms has grown by 23.52 per cent in Q2, for small-cap firms it8217;s 19.15 per cent and mid-cap firms8217; expenditure growth is 22.7 per cent. Personnel cost of the large-cap firms has grown by 19.77 per cent, while this component has grown by 12.34 per cent at small firms while mid-cap firms have pared down labour costs growth to 7.89 per cent.
Lower rates
While the interest cost has in fact fallen for small-cap firms by 3.8 per cent, for the larger firms it has gone up marginally by 1.11 per cent. Small firms have been able to reap greater benefit of lower interest rates. Says Parekh, 8220;It is easier for the small firms to adjust to rates than the large firms. It is a paradox that inspite of the interest cost being higher for small firms, they have been able to manage borrowings in a much better way.8221;
In fact, the figures do not fully reflect the extent to which smart money management worked for them as the bulk of small firms converted rupee loans to foreign ones. Sanjay Dutt, Director of Quantam Securities adds that 8216;8216;Cost pressures continues to dog the large firms and this will continue for some more time.8217;8217;
Smart money flow
Realising this trend will persist in the next two quarters, the stock market is aligning itself. The bulk of the smart money is in fact at present flowing into the small and mid cap firms, more so in the former. 8220;Q3 and Q4 will be challenging for the large firms and though there is a small cap bubble right now, I think it will not burst very soon8221;, says Dutt. Adds stock analyst Venkatesh Aiyar, 8220;It seems in the coming months more growth will come from mid caps and small cap firms.8221;
However, it8217;s no blank cheque for small firms. The best bet will be selecting small firms who can show rise in productivity in the days to come. As Nilesh Shah, CIO, Prudential ICICI puts it, 8220;The results have been a mixed bag. Cautiously track the markets and follow a bottom-up approach.8221; Particularly as, to hedge, the market is keeping its options open on topline growth of large cap firms.
