ETIG is back with the 2008 edition of India’s 100 Fastest Growing Small Companies...

Small Wonders

THE MARKETS are in turmoil" — the drama unfolding in the stock market makes this a gross understatement. Bloodbath is the only word that can aptly describe the mad rush to sell off shares faster than the clock ticks. The reasons are many and varied, and the fall has turned into a self-propelling snowball, which just keeps on gaining mass and speed on its way down the hill.
When the large-cap giants have been
beaten out of shape and their valuations have turned cheap beyond imagination, it surely is not a good idea to talk about small companies. And one also has to be extremely careful while talking about 'growth', else retail investors will discard it as an extinct word.
    But growth is the only way listed companies generate wealth and value for their shareholders and other stakeholders, including employees. The younger and smaller the company, easier it is to grow. And the earlier you are able to pick future leaders, the better it is for you. In fact, during the last bear run, which ended in early 2003, many small companies gave double-digit annual returns on a consistent basis, even as frontline companies remained grounded.
    It was for the above reasons that we decided to come out with our first list of India's 100 fastest growing small companies in 2007. The list was highly appreciated by our readers. With the annual reports of most companies out now, we need to update this list. Here, we present the 2008 Edition Of ETIG's 100 Fastest Growing Small Companies.
    Last year's list was dominated by companies from the then hot sectors such as real estate, capital goods and construction, with a sprinkling of IT companies. In the past one year, there has been a dramatic shift in the Indian growth story and this is clearly visible in this year's rankings. While investment-demand driven sectors such as capital goods, real estate and construction continue to be in the list, the toppers are now from less cyclical and asset-light sectors, especially infotech. This may surprise many readers as the IT sector has borne the brunt of the recent bloodbath in the stock market. Most IT companies are currently trading at less than half their market value a year ago due to market concerns over the slowdown in the industry's growth.
    Many IT companies figure in the top quartile of this year's list. A close study reveals that only a few of the companies in the list are typical IT companies. Most of the companies, including top-ranked ICSA, are new-age IT services providers which operate in their own niche with little competition. And unlike their frontline peers, these companies operate in the domestic market, which makes them immune to currency fluctuations.
    It won't be an understatement to say that this is the new face of the Indian IT industry — companies offering niche product and services with a clear differentiating factor. ICSA, for instance, offers supervisory control and data acquisition (SCADA)-based IT solutions to power companies, while Allied Digital provides remote infrastructure management and systems integration in the domestic market. Info Edge (India), on the other hand, owns niche portals such as naukri.com and shaadi.com, while Tanla Solutions develops value-added solutions for mobile phones.
    This just goes to prove that it is possible to grow in the toughest of economic environment. What is needed is a financially viable and scalable business model. The next challenge for these companies will be to further scale up their businesses in an environment which is getting excruciatingly difficult by the day.
HOW WE DID IT
It was only two weeks ago that we came out with the list of India Inc's elite club — ET500 — representing India's largest listed companies. In view of this, it was only logical that in order to find the fastest growing small companies, we exclude all companies that figured in ET500.
    So, the largest company in our sample had net sales of around Rs 720 crore, while the minimum net sales figure was fixed at Rs 100 crore. The next filter was market capitalisation. We considered only those companies which figured in the bottom 20% of the cumulative market cap of all companies listed on the BSE. So, the most valuable companies in our sample had a market cap of Rs 2,500 crore (the average for September '08) and we excluded companies with a market cap of less than Rs 100 crore.
    To weed out the weaker constituents, we added criteria such as return on capital employed (RoCE), debt-equity ratio (DER) and interest coverage ratio (ICR). As a result, the final list comprised financially sound companies, which had an average RoCE of over 15%, average DER below 1.5 and ICR of above 5, for the preceding three years. We could find only 106 companies which met all our criteria, or less than 5% of our initial sample of around 2,000 companies.
    We calculated the compound average growth rate (CAGR) in sales and net profit for all these companies for the preceding three years. The final ranking was done by assigning a 30% weightage each to RoCE and ICR, while a 20% weightage was given to the three-year CAGR in sales and net profits. Basically, this means that while growth is key, the quality or the ways of achieving it are of greater importance. You are now free to take your pick. But keep in mind that the ranking is not an endorsement of these companies. Make your own assessment before investing in any of these stocks.
    (To view the complete list of ETIG's 100
    fastest growing small companies,
    log on to www.etintelligence.com)