Following the release of the "ISO Türkiye's Top 500 Industrial Enterprises-2022" survey in September, the Istanbul Chamber of Industry (ICI) has now disclosed the results of the "ISO Türkiye's Second Top 500 Industrial Enterprises-2022" (ISO Second 500) survey, which includes smaller and medium-sized companies in comparison to the ISO 500.

The 2022 data from the ISO Second 500 research has unveiled significant insights into the performance of small and medium-sized enterprises.

In 2022, the industrial sector operated within a context marked by significant developments such as the Russia-Ukraine War, rising inflation, and tighter financial conditions, which led to a deceleration in global growth and trade during the latter half of the year. It is, therefore, pertinent to account for these developments when assessing the economic and financial aggregates of the ISO Second 500.

Considering the results of the ISO Second 500 against this backdrop, the production-based sales of the ISO Second 500 grew from TL 339.2 billion to TL 694.8 billion with a 104.8 percent increase. In this period of substantial growth, robust domestic demand and export expansion, combined with the rise in inflation and exchange rates, played a pivotal role.

Upon adjusting for year-end CPI inflation, a remarkable real increase of 24.7 percent was observed in the production-based sales of the ISO Second 500 in 2022. However, this increase fell short of the 30.4 percent growth seen in 2021.

Consistent with recent practices, year-end CPI inflation was used in calculating real changes. Nonetheless, at the close of 2022, CPI inflation stood at 64.27 percent, while PPI inflation reached 97.72 percent.

Here, it is paramount to underscore that the true reflection of industrialists' economic realities lies in PPI, where it is evident that PPI is surging at a much faster pace, leading to a significant divergence between producer and consumer inflation. In fact, using year-end PPI inflation figures results in a decrease in the real growth of production-based sales to 3.6 percent.

The Top 3 of the ISO Second 500

In the 2022 ISO Second 500 ranking by production-based sales, Şirikçioğlu İplik ve Denim claimed the top spot with TL 2.054 billion. Safa Tarım followed closely with TL 2.051 billion, and Erdoğanlar Alüminyum secured third place with TL 2.047 billion.

Enterprises with production-based sales ranging from TL 2.054 million to TL 886 million were eligible for inclusion in the 2022 ISO Second 500 ranking. In the previous year's ISO Second 500 list, the production-based sales of companies ranged between TL 980 million and TL 444 million.

125 new industrial enterprises entered this year's ISO Second 500. 51 of these were enterprises that went down from the ISO 500 to the ISO Second 500. While 74 new enterprises entered the list from outside the 2021 ISO 1000, 50 companies ascended from the ISO Second 500 list of 2021 to join the ISO 500.

Despite the slowing global growth in 2022, Türkiye's exports surged by 12.9 percent to $254.2 billion. During the same period, the exports of the ISO Second 500 expanded by 19.3 percent, reaching a historic high of $16.1 billion.

The export growth rate of the ISO Second 500 outpaced that of Türkiye and the ISO 500. This is a significant achievement for smaller and medium-sized enterprises seeking to penetrate foreign markets.

As a result of these developments, the share of the ISO Second 500 in Türkiye's industrial exports increased by 0.3 percentage points, rising from 6.2 percent to 6.5 percent in 2022.

In 2022, the ISO Second 500 appears to have had a successful year both in terms of profitability and sales performance.

During the year in question, the operating profit of the ISO Second 500 surged by 91 percent, climbing from TL 52.6 billion to TL 100.4 billion. However, in the same period, the operating profitability ratio experienced a decrease of 1.1 percentage points, from 13.7 percent to 12.6 percent.

Likewise, earnings before interest, tax, depreciation and amortization surged by 90.2 percent, soaring from TL 63.7 billion to TL 121.1 billion. Despite the increase in operating profit, the EBITDA profitability ratio dropped by 1.4 percentage points, from 16.6 percent to 15.2 percent.

The total pre-tax profit and loss demonstrated an impressive 98.2 percent increase, rising from TL 37.7 billion to TL 74.7 billion. Nonetheless, the return on sales ratio dipped by 0.4 points, settling at 9.4 percent.

These trends suggest a slightly lower performance in profitability ratios compared to the previous year. Nevertheless, the profit-loss balance was effectively managed in a year marked by rapid cost increases due to the high inflation environment and the impact of exchange rate developments.

In 2022, income and profit from other operations was TL 70 billion, while expenses and losses from other operations was TL 63.5 billion.

Considering the difference between these two items, it is evident that the ISO Second 500 raised a non-operating revenue of TL 6.5 billion, with this item only increasing by 0.5 percent YoY. Notably, net profit from foreign currency exchange was negative.

The contribution of non-operating revenues to profitability has seen a significant decrease in 2022. The share of non-operating revenues in the total profit and loss for the period decreased from 17.2 percent in 2021 to 8.7 percent in 2022. Despite differing trends due to unique yearly conditions, it seems that in 2022, industrialists focused more on their core activities and derived profit from their primary business.

In 2022, financial expenses continued to be a key determinant of the profitability in industrial enterprises. The financial expenses of the ISO Second 500 rose by 60.8 percent, reaching TL 32.3 billion.

However, due to the higher increase in operating profit during the same year, the ratio of financial expenses to operating profit decreased by 6 percentage points to 32.2 percent in 2022, compared to 38.2 percent in 2021.

While the relief from the burden of financial expenses on profitability was a positive development, it appears that the low-interest rate environment in 2022, along with regulations imposing strict conditions on loan utilization, played a role.

Nevertheless, the current tightness in interest rates and credit access, compared to that period, raises questions about the sustainability of the relative improvement in the financial expenses to operating profit ratio.

Examining the developments in the asset and resource structure of the companies, it is evident that the balance sheet growth of the ISO Second 500 in 2022 was 68.2 percent.

While this growth was fueled by equity capital, which increased by 100.3 percent, the rise in debts was more moderate, at 48.9 percent. This data indicates that, unlike previous years, the growth in total assets was funded through equity capital rather than debt.

On the other hand, while fixed assets grew by 87.9 percent with the contribution of revaluation, the increase in current assets was lower at 58.8 percent.

Evaluating the debt-equity capital relationship of the ISO Second 500, there is a relative improvement in the resource structure of the enterprises after a lengthy hiatus.

In 2022, the share of debts of the ISO Second 500 decreased from 62.5 percent to 55.3 percent, while the share of equity capital climbed from 37.5 percent to 44.7 percent.

In addition to the sustainability of profitability, the impact of restricted borrowing and revaluation appear to have been influential in this improvement.

In 2022, financial debts increased by 38.2 percent, while other debts experienced a more significant increase of 61.6 percent. Thus, the share of financial debt in total debt dropped from 54.2 percent to 50.3 percent, hence the share of other debts going up from 45.8 percent to 49.7 percent. As in 2021, commercial debts were used more extensively than financial debts for financing activities in 2022.

The increasing utilization of commercial debt suggests that companies are seeking to address their resource requirements by borrowing internally, instead of opting for financial institutions. Entering this cycle of debt during a period of economic contraction poses one of the most formidable challenges for the real sector. A crucial risk to be aware of is the potential disruption in inter-sector value chains that may arise from this situation in the days ahead.

With regards to debt performance according to their maturities, the growth in short-term financial debt outstripped the growth in long-term financial debt, with 70.1 and 6.3 percent, respectively.

The most pronounced consequence of this shift was observed in the proportion of short-term financial debts within total financial debts. The rate, which maintained its upward trajectory in both 2021 and 2022, hit its highest level post-2008 at 61.5 percent.

This surge was attributed to the negative interest rate environment, along with new loan regulations making it challenging to access long-term loans and incentivizing the use of short-term loans. It is safe to say that companies will face greater adversity in a high-interest-rate environment as a result of this situation.

Deferred VAT claims, which are one of the issues that industrialists currently expect to see a reasonable solution implemented for, continue to be a severe problem for both the ISO 500 and the ISO Second 500.

As one might recall, the VAT burden for the ISO 500 approached TL 49 billion in 2022, marking a 107 percent increase. The VAT burden accumulating on the ISO Second 500 increased by 72.7 percent YoY to reach TL 8.9 billion.

These developments indicate that the problem of deferred VAT, where industrial enterprises effectively lend money to the state at zero interest with indefinite maturity, has intensified rather than mitigated, particularly with the backdrop of high inflation.

The Istanbul Chamber of Industry has long advocated for the conversion of deferred VAT receivables into bank collaterals, especially for Eximbank loans, as a solution that could alleviate the burdens on industrialists in this regard.

Another striking indicator of the ISO Second 500 is the breakdown of value-added by technology intensity. A breakdown of these figures reveals that low-tech industries hold the largest share at 49.2 percent, with this group's share increasing by 1.4 percentage points compared to the previous year. Similarly, the share of medium-to-low-tech rose to 25.3 percent following a 1.1-point increase.

Conversely, the share of medium-to-high-tech industries declined by 1.4 points to 23.1 percent, and the share of high-tech industries decreased by 1.1 points, from 3.5 percent to 2.4 percent. This data suggests that enterprises struggle to surpass a certain threshold in terms of technology intensity. Additionally, the lack of meaningful change over the last decade in these measurements highlights the significant gap between current conditions and the need for structural transformation in this field.

R&D is vital for the competitiveness of the industrial sector. The number of enterprises engaged in R&D in the ISO Second 500, after reaching a peak in 2021, decreased by 7 to 228 in 2022. Nonetheless, it is important to note that this figure is the third-highest on record.

Despite the decrease in the number of R&D-active enterprises, survey data indicates that R&D expenses of the ISO Second 500 in 2022 approached TL 2.8 billion. This amount represents a 111.5 percent increase compared to the spending of TL 1.3 billion in 2021. Notwithstanding this surge in R&D expenses, they appear to have remained broadly unchanged at 0.4 percent compared to production-based sales.

Employment within the ISO Second 500 increased by 1 percent in 2022, reaching 261,000 employees. Concurrently, the rise in wages and salaries paid during the same year stood at 75.9 percent.

The number of publicly held companies in the ISO Second 500 decreased by 5 YoY, totaling 26 in 2022. Over the past five years, the number of publicly held enterprises has seen a modest decline, with figures at 35 in 2017, when data collection began, 37 in 2018, 35 in 2019, 24 in 2020, and 31 in 2021.

Initial Public Offerings (IPOs) play a pivotal role in facilitating the spreading of capital to the base and are used by companies as a means of financing. Nonetheless, the trend in the number of publicly held enterprises suggests that fewer companies have embraced this method thus far. Conversely, despite the substantial increase in IPOs in 2022, it is worth noting that this growth does not seem to have been significantly reflected in the ISO Second 500.

When the ISO Second 500 enterprises are ranked based on the information about the chambers they are affiliated with, it becomes evident that the weight of Anatolia in the industry has been steadily increasing over the years, resulting in a more balanced distribution of industries throughout Türkiye.

Even though the number has gradually decreased in recent years, the Istanbul Chamber of Industry still holds the largest share with 142 enterprises. The number of ICI members appears to have increased by 10 in 2022. Following Istanbul, the Aegean Region Chamber of Industry and the Kocaeli Chamber of Industry both have 39 enterprises each, while Gaziantep, Bursa, and Konya are placed high in the ranking with 35, 34, and 16 enterprises, respectively.

Considering the distribution of the ISO Second 500 among the sector groups of 10 outlined by the ICI, it is clear that over 60 percent of the enterprises are concentrated in four sectors.

These are, in order, "manufacture of food of products" with 94 enterprises, “textiles” with 85 enterprises, "manufacture of basic metals and machinery" with 73 enterprises, and "manufacture of chemical, plastic and rubber products" with 71 enterprises.

These four sectors also accounted for over 60 percent of net production-based sales according to 2022 data and managed to increase their share in production-based sales year over year.

In the 2022 ISO Second 500 ranking, the top 10 companies, ranked by their production-based sales, are as shown in the table. "Şirikçioğlu İplik ve Denim İşletmeleri San. ve Tic. A.Ş." secured the first position in the ISO Second 500 with production-based sales approaching TL 2.054 billion. This enterprise was ranked 364th in the ISO 500 in 2021.

Immediately following, "Safa Tarım A.Ş." took the second place with production-based sales of TL 2.051 billion. Safa Tarım was ranked 105th in the ISO Second 500 in 2021.

The third-ranked enterprise is "Erdoğanlar Alüminyum San. ve Tic. A.Ş." with production-based sales of TL 2.047 billion. This enterprise was ranked 158th in the ISO Second 500 in 2021.