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India’s 20 Largest Profit Generators Are Earning 80% Of the Nation’s Profits - Nandita Rajhansa, Saurabh Mukherjea

A decade ago, this figure was around 40%. This is leading to an increasingly polarised stock market

- Marcellus/The Wire

The United Payments Interface and the digitisation of business activity in India are one of the several factors driving an exponential surge in the concentration of corporate profitability in India. Improvements in transport infrastructure (e.g., the highway network has doubled over the past decade), the introduction of GST (in 2017) and new business models which have migrated from the developed world to India over the past decade, are resulting in India’s 20 largest profit generators earning a staggering 80 percent of the nation’s profits as compared to around 40 percent a decade ago. This in turn is leading to an increasingly polarised stock market.

Two different dynamics – one Indian and one global – are at play here. A networked economy helps more efficient companies. Over the 2012-2022 period, the length of highways in India has nearly doubled from 76,000 km to 1,40,000 km. The number of smartphone subscribers has increased from 44 million to 600 million. The number of internet users has increased from 137 million to 658 million. Fifteen years ago, only 1 in 3 Indian families had a bank account, now nearly all Indian families have a bank account. As a result of this networking of the Indian economy, efficient companies with strong pan-India distribution systems have pulled away from regional & local players. For example, as the economy gets integrated, lending, which was once dominated by regional players, is now seeing the emergence of a few national leviathans like HDFC Bank and HDFC, with both lenders entering the list of top 20 Profit After Tax generators.

The global dynamic is the rise of affordable, easy-to-use enterprise technology (built around mobile, SaaS, and cloud) which if implemented well, increases profit margins, reduces working capital cycles, and increases asset turnover. Sunk costs drive industry concentration, in the sense that companies which invest in brand building and in R&D – basically, invest in intangible assets which are critical sources of competitive advantage – go on to dominate that industry. Further, companies that invest in technology benefit from increasing returns to scale.

Scale, sunk costs, spillovers and synergies and the underlying heavy intangible investments that enable them, have been catalysed in India by the introduction in 2017 of a single Goods and Services Tax (GST) which has integrated the economy. Building of infrastructure like extensive road networks and freight corridors has eased the transportation of goods and materials across geographies. Attack on tax evasion and the associated shift by Indian households to financial savings from physical savings. Indian households have over each of the past five years generated incremental financial savings of $300 billion per annum. This has sharply reduced the cost of capital for companies with clean accounts and prudent capital allocation. Rise of mobile broadband – the cost of 1 MB of mobile broadband in India has fallen to Rs 0.0043, versus Rs 2.5 a decade ago.

These four economic changes have in the space of a decade created a cohort of well-managed, increasingly high-tech listed Indian companies which are investing heavily in intangible assets (R&D, networks, training, branding, databases, etc.

Please click here to read the Marcellus blog post