Firm size matters in recovery

by Mahesh Vyas

India’s smart economic recovery is often described as one in which large companies did well for themselves even as the smaller ones languished. MSMEs have suffered as they are unable to survive the sudden and prolonged lockdown and the consequent shrinking of overall business. Large companies are not only better placed to ride out of the storm but also gain by cannibalising markets of the withering smaller companies.

Comprehensive data or, even representative sample data that could quantify or verify this belief is not available. However, it is possible to test the hypothesis that large companies are doing well and small companies are not doing well by studying the performance of listed companies by their size. We study the 3,220 listed non-finance companies for which quarterly financial statements are available for the three quarters of 2020-21. These companies are divided into 10 equal parts by their size where size is determined by a combination of their assets and turnover.

Data was available for 3,256 companies for the June 2020 quarter, for 3,254 companies for the September 2020 quarter and 3,220 companies for the December 2020 quarter. Each size decile therefore had about 320-325 companies. This is a reasonable sample size to make generalised statements and a set of ten such groups enables us to draw reasonably strong inferences on the role of size in determining performance.

We use three measures of performance to test the hypothesis in a descriptive way. These are growth in net sales, growth in wages and profitability. Growth in net sales is an obvious choice as it reflects the amount of business that the companies could do compared to a year ago. The choice of growth in wages is related but it is also independently important because one of the fears emanating from the aggregate data of these companies has been that while they have made huge profits they have cut wages. It will be useful to see how this pans out across size groups. Finally, we do not use growth in profits but we use profitability instead because growth in profits is prone to extreme values and often is not computable because of losses turning into profits or vice-versa. Profitability is a related and much more stable variable that lends itself to easy, comprehensible analysis.

Listed companies have been recording a fall in net sales in year-on-year comparisons well before the lockdown pounded them. Business had started shrinking three quarters before the lockdown. Net sales were down by 6.7 per cent in the September 2019 quarter and they were 5 per cent down in the December 2019 quarter. In the March 2020 quarter, the fall worsened to 9.8 per cent. Then, in the first quarter of the lockdown, the quarter ended June 2020, net sales were down by a massive 39 per cent. In the September 2020 quarter, they were down 10 per cent and then in the December 2020 quarter, they were down by a little less than one per cent.

A fall in net sales is therefore a story of six consecutive quarters of which only three are in the lockdown period while the other three were just before the lockdown.

As can be gleaned from the data presented in the earlier para, the net sales performance in the December 2020 quarter can be seen as a recovery. It is the lowest fall in nine quarters and India is still not out of the pandemic era. This recovery is essentially the recovery of the larger companies. The lockdown hit companies of all sizes severely. The hit was not discriminating. But, the recovery is selective. Larger companies have recovered in terms of sales growth while smaller companies still see shrinking sales.

The largest companies by size saw their sales shrink by 1.5 per cent in the December 2020 quarter. This group registered a decline because of the dominating presence of two industries that did not perform well petroleum refining and aviation. If we remove the impact of these industries, this size-group shows positive growth. Sixty-two per cent of the companies in the first decile reported growth in net sales.

Companies in the second decile registered a growth of 6.6 per cent. This was the only size-group that registered positive growth. Its positive growth was not just the only size-group to register positive growth in the December 2020 quarter but it is the only instance of any size-group registering positive growth since the quarter of September 2019. So, the performance of these relatively large companies is truly outstanding.

Companies in the third decile saw their sales stagnate. This is the next best performance of all size groups in the December 2020 quarter and also since September 2019. The relatively outstanding performance of decile 2 and decile 3 companies demonstrates the discriminating nature of the recovery. Size mattered in the recovery. Each of the seven smaller deciles recorded a fall in sales. And the extent of the fall in sales was inversely proportionate to the size of the companies.

We see a similar phenomenon in wages and profitability. In the December 2020 quarter, the wage bill of non-finance companies increased by 3.5 per cent. The top decile companies saw a higher, 4.7 per cent increase in the wage bill. Decile 2 companies saw a 1.2 per cent increase in their wage bill and all other size bins saw a fall in their wage bill. And, the fall in the wage bill increases as the size of the companies becomes smaller.

The net profit margin of non-finance companies in the December 2020 quarter was a handsome 8.3 per cent. The distribution of this was again skewed in favour of larger companies. Top decile companies ended with a net profit margin of 9 per cent. Deciles 2 and 3 saw margins at 5.2 per cent and 6.6 per cent, respectively. Then, the margins drop sharply to 1 to 3 per cent for Deciles 4 through 7. And, the last three deciles saw losses in increasing proportion of their sales.

It is evident from the above analysis of listed companies, that growth and profitability has discriminated by size in the recovery process. Is it possible to generalise this across non-listed companies and to non-company forms of enterprises? We will know the answer to the former in about a year when the Annual Reports of companies for 2020-21 become available. Performance of non-company forms of enterprises, however, is not similarly possible. But, the sample sizes from listed and not-listed companies are large enough for us to generalise. So far, the evidence points in the direction of tough times for small companies but a smart recovery for the large companies.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.4 +0.3
Consumer Sentiments Index
Base September-December 2015
57.5 0.0
Consumer Expectations Index
Base September-December 2015
58.9 0.0
Current Economic Conditions Index
Base September-December 2015
55.2 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Jun 20 Sep 20 Dec 20 Mar 21
New projects 0.96 1.40 1.16 1.40
Completed projects 0.26 0.73 0.83 0.62
Stalled projects 0.11 0.08 0.31 0.14
Revived projects 0.68 0.29 0.11 0.13
Implementation stalled projects 0.09 0.07 0.15 0.30
Updated on: 18 Apr 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Jun 20 Sep 20 Dec 20 Mar 21
All listed Companies
 Income -27.6 -6.3 1.6 6.2
 Expenses -27.9 -10.3 0.1 4.5
 Net profit -40.3 47.2 57.9 12.4
 PAT margin (%) 5.3 8.3 8.5 21.1
 Count of Cos. 4,400 4,400 4,371 22
Non-financial Companies
 Income -37.4 -10.5 0.2 6.1
 Expenses -37.7 -14.2 -0.7 5.2
 Net profit -56.0 31.5 54.6 9.1
 PAT margin (%) 4.5 8.1 8.9 20.7
 Net fixed assets 5.9 2.5
 Current assets 0.7 0.5
 Current liabilities -2.7 5.1
 Borrowings 8.3 6.4
 Reserves & surplus 4.2 5.7
 Count of Cos. 3,265 3,265 3,251 17
Numbers are net of P&E
Updated on: 18 Apr 2021 8:28PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.3 -0.1 -8.7
 Expenses 13.6 -0.1 -9.8
 Net profit 15.4 -10.8 0.2
 PAT margin (%) 2.1 2.1 9.5
 Assets 9.6 7.7 0.3
 Net worth 8.5 4.3 -0.5
 RONW (%) 3.8 3.6 9.3
 Count of Cos. 30,693 29,280 30
Non-financial Companies
 Income 13.9 -2.0 -9.4
 Expenses 14.1 -1.7 -10.7
 Net profit 21.7 -20.9 0.7
 PAT margin (%) 2.9 2.4 10.2
 Net fixed assets 5.5 8.8 0.0
 Net worth 8.1 2.0 -0.7
 RONW (%) 6.4 5.0 10.6
 Debt / Equity (times) 1.0 1.0 0.1
 Interest cover (times) 2.3 2.0 18.8
 Net working capital cycle (days) 71 70 47
 Count of Cos. 24,568 23,344 23
Numbers are net of P&E
Updated on: 11 Apr 2021 5:03PM