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Our Bureau

Mumbai, Sept. 13 Small may be beautiful. But when it comes to corporate financial performance there is nothing quite like having a 600 lb gorilla on your side.

Large corporates can generate higher rates of growth in sales; contain expenses; shelter incomes from taxes better to leave shareholders with higher returns. That is the message from the Reserve Bank of India’s analysis of financial performance in 2006-07, of nearly 2,400 companies in the private sector (RBI Bulletin September 2007).

In the RBI sample, companies with turnover in excess of Rs 1,000 crore grew the fastest (29 per cent) during 2006-07 over the previous year (See table). They posted a similar higher rate of growth among all companies even in the previous year. Not only has growth rates been higher right across the spectrum of size, companies with miniscule turnover are actually struggling to sustain their present turnover.

This becomes evident when we consider that in the case of companies with turnover of less than Rs 25 crore, the growth rate has been negative (7.2 per cent) in 2006-07, which was only a marginal improvement from the previous year when the negative growth rate was even larger at 9.5 per cent.

The superior growth rate in sales has also translated into similar performance on the profit front. The net profit of the large companies (Rs 1,000 crore and above) grew nearly 46 per cent, improving on its previous year’s growth rate of 23 per cent in 2005-06. Mid-size companies (those in the turnover range Rs 25-50 crore and Rs 50-100 crore) had a better growth rate in net profit during the current year. But two factors should be borne in mind. In one case, the growth rate turned positive from a negative number thus suggesting a size effect at work.

In the other case, profits grew at a slower rate compared to the previous year raising doubts about the sustainability (higher growth rate) in the future. Large-sized companies have , through a combination of better control of operating costs and a capacity to defray fixed costs over a larger turnover base, been able to register higher growth rates in gross profit. Companies, in the Rs 1,000-crore and above category, more than doubled the growth rate in gross profits (44 per cent from 21 per cent) in 2006-07 from the previous year. This has largely been responsible for their posting a higher growth in net profits despite a rise in interest costs and tax provisions.

But size differential apart, the RBI numbers do confirm anecdotal evidence of a fact noticed for some time now: The year 2006-07 has been a generally good one for the corporate sector. Sure, there have been pressures on the wage front. They have been no more than in other elements of cost. As a proportion of total costs, they are up only marginally. But in any case they have been more than made up by a rise in sales as the growth in profits testify.

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