Data dive: Small firms punch above their weight, but the party may not last
The long tail of India Inc. now commands a greater share in corporate profits than it ever has in seven years. But the edge that the top guns enjoy may not be going anywhere, shows an exclusive analysis of 4,006 listed companies.
India Inc.’s long tail of small companies has expanded its share in industry profits in recent years, capitalizing on a pandemic-led scramble for survival that forced them to adopt leaner operations, a Mint analysis reveals.
The bottom 80% firms accounted for 0.3% share in total profits of the BSE-listed universe in 2023-24, the highest in seven years, a Mint analysis of data for 4,006 companies showed. The figure had lately been languishing below zero, due to the dominance of loss-making companies. The share of loss-makers in the sample is down at 24% from nearly 33% in 2019-20 and 26% in 2021-22.
The top 10% firms still command a 95% profit share, but that’s down from 97% in 2021-22. Their share had peaked at an unusual 127% in 2019-20, when many companies reported losses amid already falling global demand and commodity prices, with added stress due to the seven days of covid-19 lockdown. (It’s possible for a set of firms to have more than 100% profit share due to the presence of loss-making firms.) The analysis classified companies into deciles based on their latest revenue, i.e., the biggest 10% revenue-earners, the next 10%, and so on.
The trends reflect broader industry dynamics. “The variations seen in performance will be more due to specific industry traits," said Madan Sabnavis, chief economist at Bank of Baroda. “For example, the years in which crude oil prices are high and oil marketing companies hold on to their prices, their profits would take a hit and vice versa."
Despite a loosened grip on profits, larger firms seem poised to maintain their outsized share given their deep pockets and brand power, experts believe. Modest declines in profit concentration are likely as market dynamics evolve and smaller firms adapt.
In 13 out of 17 sectors, the top 10 companies have seen a post-pandemic dip in profit concentration, most prominently in media, metals and mining, and textiles. “Consumers' preference for on-demand and personalized content has reshaped media and entertainment, while smaller players in textiles are benefiting from supply chain resilience," said Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers.
Also read: Echoes of oligopoly as big firms get bigger
Banking boom
Over half of India Inc.'s net profits in 2023-24 came from the banking, financial services, and insurance firms (BFSI) and oil and gas sector, taking their profit concentration to at least an eight-year high. However, while BFSI's profit share has surged rapidly—from 18.2% seven years ago to nearly 37% now, that of the oil and gas sector (which operates under a stringent regulatory regime) dipped from 23% to nearly 16% in the same period.
“The financial sector's dominance in India is rooted in comprehensive reforms and liberalization, which, despite initial hardships, have strengthened the sector," Hajra noted. The BFSI segment’s profit edge is likely to persist in a growing economy, fuelled by high credit demand.
Also read: The pockets of stress in India Inc’s improving credit health
The other two profit-making powerhouses—information technology (IT), which is reeling under a slowdown, and metals and mining, whose profit realizations are down due to lower commodity prices—have witnessed gradual declines in their profit share to below 10%.
Top guns’ clout
The declining profit concentration among the biggies is not to say their clout is declining. The profits of the top 10 companies in the sample made up 0.84% of India’s overall economic output in 2023-24, steadily rising from 0.69% seven years ago to the highest in this period. The aggregate profits of the full sample as a share of gross domestic product have also risen to an eight-year high to 4%.
This again illuminates a troubling trend of profits being concentrated among just a handful of sectors. Financial services, oil and gas, and IT continue to reign supreme at the top of the pyramid, and their consistent dominance is a testament to sustained market leadership. Experts argue that while profits may fluctuate in the coming years, these sectors will continue to maintain massive sales volumes, likely leading to increased concentration. However, it raises questions about broader market dynamics and profit distribution in the wider corporate landscape.
Demand outlook
After the pandemic, leaner operations and easing commodity costs led to a windfall for corporate profits, helping the net profit margins of the sample shoot up by nearly 2.4 percentage points (from 7.6% of revenue to 10%)in the last four years. But a cost-cutting knife isn’t sustainable. “Continuous investment in innovation and technology is crucial for enduring profitability," Hajra said.
In 2023-24, the aggregate profits of the sample surged 29%, but it could be challenging to maintain the momentum. “There will be moderation in profit growth for sure due to base effects," said Sabnavis. Demand has been sketchy (aggregate sales grew just 7%), though Sabnavis said it was likely to recover this year, and would be more visible after the harvest season in October when the festival season is also at its peak.
This is the first part of a three-part data journalism series featuring a corporate health check-up in the post-pandemic period.
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