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Echoes of oligopoly as big firms get bigger

A total of 2,863 BSE-listed firms across 20 broad industries were considered in the analysis. In almost a third of these industries, the top five earned over 90% of the profits, as both technology and easier capital provided them greater competitive moat. (Mint)Premium
A total of 2,863 BSE-listed firms across 20 broad industries were considered in the analysis. In almost a third of these industries, the top five earned over 90% of the profits, as both technology and easier capital provided them greater competitive moat. (Mint)

  • Just five companies alone took home 21% of all profits earned by listed firms in 2020-21, up from a 17% share six years ago, a Mint analysis shows. In several sectors, the top five made more than 90% of the profits as larger firms found it easier to wade through the pandemic-led crisis

Some of India’s biggest companies across sectors got even bigger over the last fiscal as the pandemic triggered a fight for survival for much smaller firms down the value chain, a Mint analysis suggests. Five companies alone took home 21% of all profits earned by listed firms in 2020-21, up from a 17% share six years ago, a deep-dive into their earnings data shows.

A total of 2,863 BSE-listed firms across 20 broad industries were considered in the analysis. In almost a third of these industries, the top five earned over 90% of the profits, as both technology and easier capital provided them greater competitive moat.

In 11 of the 13 industries where the top five bagged 75% of the profits, the concentration has only inched up in the fiscal 2020-21, with the realty and infrastructure sectors recording the biggest jump. In terms of revenue dominance, infrastructure and power were the biggest movers.

Some analysts pointed out that the oligopolistic tendencies are a usual trait of economic development—market concentration was rising even earlier in India. But the findings confirm that the pandemic paced up that process. In a monetary policy meeting last year, committee member Jayanth R. Varma suggested that the “oligopolistic core" in several sectors had weathered the pandemic better, and could be well-placed to start exercising pricing power. Economists have in the past linked greater profit concentration to lower competition and investment, too, a risk that the pandemic may have thrown open.

Key drivers

The market dominance of a few players has accentuated in recent years not just due to the pandemic, but because of a series of factors, including demonetization and the new goods and services tax regime, said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

Each of these factors has hit smaller companies to a larger extent, and market watchers feel such churns and disruptions are likely to continue to stir up further concentration in the economy. Consolidation has also paced up as high leverage whittles down efficiency, forcing several firms to either sell assets after being put through the insolvency process, or getting gobbled up by rivals, experts said.

As a result, in some sectors, virtually no more than one major player remains, with the biggest entity alone accounting for half the industry’s revenue, as in the case of Larsen & Toubro in infrastructure (a rise from 47% to 52% share in four years), the analysis shows.

Market boost

This profit polarization is also leaving an impression on large firms’ share in the country’s output. Ten firms alone accounted for 1.1% of India’s GDP last fiscal, a jump from 0.9% or less in the last three years. The 1,449 profit-making companies in the sample contributed 2.9% to the GDP in 2020-21.

Sachin Gupta, chief rating officer at CARE Ratings, said big companies were getting bigger because of economies of scale, access to capital, people and technology. These factors enabled higher efficiency of operations, which was also making the market leaders globally competitive, he said.

With rising dominance, the top firms also form the vanguard of wealth creation on the bourses. Roughly 16 firms accounted for 80% of the $1-trillion wealth created by the Nifty 50 over the last decade, several of them among India’s top 20 profit generators, said Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers.

Global reality

All said, rising corporate concentration is a global phenomenon today. In a 2020 paper examining this trend, US economist Leena Rudanko suggested that benefits of greater market power may outweigh its social costs if the concentration was an outcome of new technologies that favoured larger-scale operations.

In India’s context, regulatory lawyer Soumya Hariharan said dominance per se was not problematic, “so long as the product or service retains quality, benefits consumers and prices are based on natural demand-supply forces". “What is frowned upon is when a dominant company indulges in abusive market practices," she said.

In January, India’s antitrust regulator made clear warnings about the vulnerable telecom industry descending into a duopoly: it said a strong, competitive sector augured well for new technology such as 5G, while a weak sector could discourage innovation. Not just telecom, the pandemic may have set off the alarm bells for some other sectors, too.

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