Growth dilemma of Mid-Cap firms

Abstract

Comprehensive project of IIM Bangalore is a risk free opportunity to learn about something that excites you. Both of us wanted to do a research on something that would give us an insight on some happenings in the capital market and which in turn could surprise us with the findings that we generate out of the research. We approach Professor J Ramachandran, for a discussion on guiding us meet our research objective. He presented us with a very challenging question, Why do you think many midcap companies remain midcap and never move to the next level? Is that they prefer remaining there or the circumstances are forcing them to remain there? We took up this research question and in search for the answers; we investigated all the companies listed under Nifty Midcap 50 index. We took up the financial data of each company, their performance data for the last 10 years, comparative analysis among the companies in Midcap 50 and between the companies in Midcap 50 and Nifty 50, and used the knowledge we had gained over the last few months to come up with our findings. Our findings below give a summary of what the mid-cap firms did well and what challenges they face: 1. Overexpansion: Wanting to be the first to market, taking on added overhead and the need to demonstrate revenue growth to anxious investors can induce organizations to overextend them financially. Organizations end up making lot of mergers and acquisitions to keep investors happy and in turn create large holes in their pockets which they fail to come out of. Rather than head down this path, organizations need to start with realistic goals and allow them to grow as needs dictate. 2. Poor capital structure: Look at the organizations that fail and you will find that many of them took on too much debt. Organizations need to keep careful records of all money coming in and going out. 3. Lack of reserve funds: Failing to prepare for volatile markets and uncontrollable costs like materials, labor, disasters, foreign exchange volatility, and the like is another top reason many organizations and businesses fail. Organizations need to ensure that they protect their investment and keep enough reserve cash to carry themselves through market downtrends and seasonal effects. 4. Excellent execution and internal controls: Mid-cap firms had superior operational efficiencies than the large-cap firms. Mid-cap firms were able to raise funds because of better returns on account of superior operational efficiency.5. Lack of talent: Talent retention in small companies can become a big bottleneck to their growth. Talent joins small companies, establishes itself and then moves on to large organizations creating a void that becomes a hurdle to growth.6. Customer dependency: Getting new customers is a huge challenge for small companies and even if they get customers, their entire energy and talent gets focused on the existing customers and their retention creating a void of talent and energy to gain new customers. Some mid-cap firms get complacent about the business they have secured from the anchor customers. It seems to have misled the company from making right investments. When an appropriate time comes, the company is found struggling because of lack of right capabilities etc.7. Investment capability: Large cap firms have better capability to invest and that furthered the gap between them and their counterparts in midcap category. Even if the mid-cap firms were able to invest, the ones which came out successful were the ones that moved to the next level and the ones which failed were washed out.8. Handling downturns: Large cap firms were able to handle downturns more efficiently than mid-cap firms. Mid-cap firms that catered to regions which were not affected by downturns were able to survive. Midcap companies have an ambition to grow but are thwarted by some of the decisions that make in due course of their existence. If nothing else, we hope that this project report will spark a debate among the midcap companies and make them implement our recommendations which would them to their next level of growth.