CIRCUIT BREAKER. Is India ‘Uninc’ trouncing India Inc?

India Inc once again put up a lacklustre show in the latest quarter, with Sensex company profits flatlining and their sales declining 5 per cent year-on-year. Disappointed analysts are now busy slashing their Sensex targets and watering down their growth expectations to 10-12 per cent, from 20-22 per cent earlier. India Inc has clearly been struggling to grow over the last four years buffeted by multiple headwinds, ranging from slowing global growth to falling commodity prices. But India Unincorporated seems to be faring better.

The unlisted firms in India’s large MSME universe don’t put out their numbers in the public domain. But the agencies who do track these firms say that they have weathered the slowdown quite well. “SMEs have been far more resilient to the downturn in the last two or three years than large corporates. We are still seeing SMEs grow at double digits compared to large corporates, which have slowed in the last few quarters,” says V Srinivasan, head of SME ratings at Crisil.

Crisil has comprehensive data, compiled for the 7,000 MSMEs that it actively rates, to back this view. These numbers show that, MSMEs, for one, have reported healthy topline growth averaging a 17 per cent between 2011-12 and 2013-14. Data from Capitaline shows that BSE 500 companies (excluding financial firms) grew at 13 per cent in this period. Select sectors within the MSME universe such as consumer durables, agri products and pharmaceuticals with sales growth rates of 24-39 per cent, fared even better. Two, MSMEs earned thinner profit margins than the listed firms, but they held on to them better. Between 2011-12 and 2013-14, MSMEs saw their operating profit margins dip from 10.8 to 10.4 per cent. But BSE 500 firms saw their margins take a tumble from 27 to 21 per cent.As Srinivasan notes, it is creditable that MSMEs have managed to retain their margins despite slip-sliding commodity prices.

Three, the debt troubles at India Inc are legion, with banks saddled with bad loan portfolios originating from the large listed companies. But the MSMEs seem to have managed their debt better. Their overall debt-equity ratio, at 1.87 times (2013-14) stayed within manageable limits. Their interest cover at 9 times, was nearly twice the level of the BSE500 companies (4.4 times). These factors have resulted in the Crisil-tracked MSMEs averaging a return on capital of 21.2 per cent while the top 500 listed firms managed only 17 per cent. Yes, it is quite possible that after weathering the downturn well until the last fiscal, MSMEs have seen a sudden deterioration in performance since 2014-15. But this appears unlikely.

While many of the large listed firms are commodity processors whose realisations take a direct hit from the global commodity meltdown, a majority of MSMEs make intermediate goods or are traders or service providers.

They may have more to gain than lose when raw material prices decline. Persistently high interest rates do exert pressure on these firms, but then, they are hardly likely to have foreign currency loans weighing down their balance sheets, as do large companies.

There’s other evidence of a strong show by India Uninc too. Until April this year, bank credit to micro, small and medium enterprises growing at the double digits even as overall credit growth had slumped to less than 9 per cent. This good show from India’s neglected unlisted firms seems to have attracted the attention of private capital. Between 2006 and 2014, small- and medium-sized firms received over $60 billion in funding from private equity and venture capital investors. This is more than three times the money that the primary markets raised in this period. The trend has accelerated since 2012, with VCs/PEs supplying nine times the capital that IPOs did.

If India Uninc is indeed stealing a march over India Inc, that’s actually great news for the economy. While India’s listed universe boasts of just 6,000 companies, at last count the country was home to 3.6 crore MSMEs which employ 8.05 crore people. MSMEs were not just a big contributor to employment, they chip in with over a third of the country’s manufacturing GDP.

If MSMEs are indeed doing as well as the numbers suggest, policymakers should pay less attention to Sensex gyrations and foreign investors’ constant griping about MAT, and focus on the real issues that matter to India Uninc.