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Unorganized sector is down but not out after pandemic impact

For smaller and regional players in the unorganized sector, the covid-19 lockdown and the resultant impact on business proved fatal, leaving them cash strapped with rising input cost pressures and stretched working capital needsPremium
For smaller and regional players in the unorganized sector, the covid-19 lockdown and the resultant impact on business proved fatal, leaving them cash strapped with rising input cost pressures and stretched working capital needs

  • Though the economy has rebounded, it will take years for companies in the unorganized sector to recover
  • According to a study by SBI Research, the share of the informal sector in India’s economy fell to 15-20% in FY21 from 52.4% in FY18

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In March 2020, when the country went into a nationwide lockdown due to the coronavirus pandemic, retail fuel stations ran dry of customers and the retailers of cash.

The state-run oil marketing companies provided financial support to many of its retailers to pay their staff and keep operations running till the country gradually lifted the lockdown.

But players in the unorganized sector weren’t as lucky. Retail, jewellery, apparel, building products, footwear, electrical equipment, plastics and rubber products, food products, security services, dairy, beverages, tobacco, leather, wood and wood products, among others, all struggled to survive even as the pandemic began inducing a gradual formalization of the economy, a trend that now appears to be irreversible.

The informal sector in India consists essentially of proprietary and partnership enterprises.

According to a study by SBI Research released this November, the share of the informal sector in India’s economy fell drastically to 15-20% in 2020-21 from 52.4% in 2017-18 due to digitization and the rapidly expanding gig economy.

“India has a large informal economy with around 93% of its total workforce earning their livelihoods as informal workers (National Sample Survey Office 2014)," SBI said in its November note.

“Though the pandemic has led to a huge devastating impact on all the sectors of the economy, the impact has been felt more by the informal sector. While the formal sector is now back to its pre-pandemic level, the informal sector continues to bear the brunt," the SBI note added.

Analysts said it would take years for companies in the unorganized sector to recover, though the economy has rebounded and started creating jobs.

“We have been concerned about the informal economy since the middle of last year and were by far the first to flag that the pandemic would leave the rich much better off than the poor and the larger corporates than the informal sector," said Neelkanth Mishra, co-head of Asia-Pacific strategy and India equity strategist at Credit Suisse.

For the smaller and regional players in the unorganized sector, the covid-19 lockdown and the resultant impact on business proved fatal, leaving them cash strapped with rising input cost pressures and stretched working capital needs.

Analysts say smaller businesses lost market share to bigger rivals despite FY21 being a turnaround year in corporate earnings for India Inc., marked by margin expansion and high deleveraging of balance sheets.

For instance, the Indian retail market is shifting from unorganized to organized, with e-commerce seeing strong growth rates.

“Unorganized players and regional retailers still account for 50% of the industry, and there is a substantial scope for e-commerce to gain market share," according to an 8 December note by Jefferies Equity Research, adding that despite losing share, unorganized players still account for more than 85% of the Indian retail market.

The Indian retail market is estimated at $800 billion in size as of last year, according to consultant Redseer. Within this, the organized market, estimated at around $80-100 billion, contributes only around 10-12% to the overall retail market.

Within organized retail, the market is led by e-commerce majors and Reliance Retail, followed by a long tail of smaller players (often regional)—of course, the unorganized market remains a large opportunity, Jefferies added.

Similarly, covid-led curbs on dining out meant quick-service restaurants could better meet the takeaway needs of consumers than their smaller counterparts.

According to a study by consulting firm Technopak, India’s organized food services market is poised to grow from 1.6 trillion in FY20 to 3.2 trillion by FY25. With that, the organized market share is likely to increase from 38% in FY20 to 50% by FY25.

Analysts said the introduction of goods and services tax in 2017 has triggered consolidation across sectors, leading to more pricing power, lower wages and greater bargaining power with suppliers.

So, while in the paints segment, Asian Paints said it gained market share at the cost of both organized and unorganized sectors; in the consumer electronics segment, Havells said it gained market share from the unorganized sector. Both companies, however, declined to divulge the market share gain.

In the cement industry, the top five firms had a 48% share of volumes in FY17. These companies cornered 91% of the incremental volumes in the next three years.

Several smaller firms and leveraged companies have fallen by the wayside in sectors such as aviation and telecom, leaving the market to the stronger ones.

For the organized players, the pandemic has also brought a period of a strong investment cycle, nearly after a decade.

“In our assessment, capital expenditure (capex) over the ensuing three years in core sectors—cement, metals, oil refining and power (especially renewables)—should be about 5 trillion. This should not only be the highest in a decade but is also likely to be over two twice the capex over the previous three years," said Spark Capital Advisors India Pvt. Ltd in a report.

Spark Capital added that companies in the organized sector are getting bigger. Market share of top players in sectors such as aviation, cement, steel and telecom has seen incremental gains of more than 90% from FY17 to FY20, showed the research, adding that categories like electrical cables, tiles, batteries, pipes, luggage and grocery retail are witnessing increased consolidation.

The report said incremental market share between FY20 versus FY17 garnered by a few players should logically lead to more pricing power, resulting in a revival of capital expenditure.

“Corporate balance sheets are much better today than two years back. So, to the point on credit growth also the reality is bankers will lend when the credit environment is very positive. And it’s only turned positive very recently," Hitendra Dave, chief executive of HSBC India, said at the Mint Annual Banking Conclave on 15 December.

According to Dinesh Khara, chairman of State Bank of India, the bank currently has unavailed and unutilized limits of as high as 5 trillion, for which the bank has begun to see some traction now with a decent pipeline of investment proposals.

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