SMEs sparkle with 25-fold increase in net profit

If India Inc's big boys have come up with sterling numbers in the third quarter ended December 2009, their small and medium counterparts are not far behind.

For SMEs, the disastrous show last year is a distant memory. These companies have posted a 25-fold increase in net profit on the back of a 730 basis points increase in operating margins.

India Inc as a whole has recorded a 62 per cent rise in net profit and 310 basis point rise in margins.

Agrochemicals, auto ancillaries, speciality chemicals, film production, mining & metals, non-ferrous metals, steel, sugar and textiles have led the way.

SMEs, with annual net sales below Rs 500 crore each, account for a paltry five per cent of the third quarter sales and profit of corporate India, but their impressive performance is an encouraging sign for policy-makers looking for a broadbased economic recovery.

Sales may cause some worry, since they rose only 18.5 per cent, but it's the net profit that gives cause for cheer.

In the quarter ended December 2008, these SMEs had posted a 0.61 per cent rise in net sales and 97 per cent decline in net profit.

These companies, however, still have a lot of catching up to do as the performance numbers are still short of what they achieved in the December 2007 quarter. The aggregate net profit of Rs 2,773 crore in the third quarter this year is 18.3 per cent lower compared to Rs 3,394 crore earned in the October-December 2007 period. Operating margins are also lower by 14 basis points despite a 118 basis point saving in raw material cost.

However, analysts at Edelweiss Research believe the SMEs should catch up rapidly even if the government withdraws the stimulus measures. That's because India's industrial recovery has been broad-based and private consumption is reviving, from 1.5 per cent growth in the first quarter to 5.6 per cent in the second quarter of FY10 and should average 6.5 to 7 per cent in the second half.

Growth in key sectors such as capital goods and manufacturing has rebounded and should stay firmly on course. Consumer durables have registered the strongest uptick, but the base effect is the more important factor here.

Manufacturing, which accounts for more than 80 per cent of Index of Industrial Production, grew 12.7 per cent in November from an average 10 per cent in the last six months. Auto sector volumes have jumped more than 68 per cent in December, the strongest in many years for the month, Edelweiss says.

Other analysts say SMEs' performance depends on that of the bigger companies. For example, the growth in auto ancillaries is mostly linked to demand from automobiles. Going forward, the auto sector is expected to face four major concerns - input costs, interest rates, excise duty increases and emission norms.

Also, prices of both iron ore and coking coal are likely to go up in 2010, which will push steel prices higher. The frontline companies can absorb the rise in input cost by raising prices if the demand is healthy. However, small players will suffer from the rise in input cost if they do not increase product prices.

Also, the profitability of sugar companies could come down in the financial year 2011 on increase in sugarcane acreage and rise in sugar output in Brazil. However, sugar prices for now are expected to be firm because Pakistan, Indonesia, Iran and Iraq are struggling with shortages and fresh surplus sugar from Brazil unlikely to come before May 2010.