India Inc: from midgets to giants

With the economic slowdown, debt defaults and corruption hogging the headlines, it is easy to believe that little has changed for the better at India Inc over the last 20 years. But nothing could be farther from the truth.

An objective assessment of India’s corporate sector since the 1990s shows that companies have grown at a rapid pace despite the many obstacles in their path. The one quality that has helped companies vault smoothly over these hurdles is their ability to adapt quickly to change.

Here are four trends that shaped the Indian corporate sector over the last two decades:

Can you imagine a company with total revenues of Rs 14 crore in 1993 expanding into a Rs 37,000 crore index heavyweight? That is what software major Infosys has done in the last 20 years. And though Infosys may offer the most visible proof of the scorching growth managed by Indian companies in this period, there are dozens of others who have managed a similar feat.

In fact, data for all the 700 companies that have been listed on exchanges over the last 20 years show that their combined revenue has grown at the rate of 17 per cent every year and profits at 19 per cent since 1993. That is a 17-fold expansion in sales and a 24-fold increase in profits in a mere 20 years.

Corporate India’s propensity for expansion has transformed many midgets into giants. In the early 1990s, just 5 per cent of all listed companies managed a turnover of Rs 1,000 crore. Today, their numbers are up ten-fold, with nearly half the companies already in the Rs 1,000 crore league.

Companies that have managed to scale up to the big league have displayed resilience in the face of rising competition and regulatory uncertainty. They have also used business cycles to their advantage, forging both domestic and global acquisitions to achieve product, category and geographic diversification.

Over the last decade, large Indian business groups, led by the Tatas and the Birlas, have actively sought out global acquisitions. This trend, which began with companies in the metals and natural resources space seeking to augment their resource base at beaten-down prices, has since engulfed others too.

Worries about rupee volatility have prompted many traditional FMCG and manufacturing companies to give their operations a global face, thus adding new markets, new technology and even new sources of raw material.

It wasn’t old-style manufacturing but knowledge-based services that spawned many of India Inc’s success stories in the last 20 years. Everyone knows about the rise of software companies, which combined the large domestic talent pool of engineers with the rising global trend of outsourcing to create a multi-billion dollar industry.

Today, large listed companies in the software space bring in an annual profit of Rs 16,000 crore, accounting for a tenth of all profits made by the leading listed companies. In the 1990s, they made a measly Rs 14 crore.

The other less-known story is that of banking and finance firms, which today contribute Rs 54,000 crore or nearly 30 per cent of corporate India’s total profits. The entire sector earned less than Rs 1,000 crore in profits in the early nineties. If software companies have made the most of the global boom in IT spending, banking has been a domestic story through and through.

Banks and finance companies have grown mainly on the strength of catering to the rising middle-class aspiration of owning a home and a car. Of course, the latter half of the decade has also seen the emergence of niche finance companies catering to specific market needs – gold loans, microfinance, passenger and commercial vehicles.

While service-oriented businesses ranging from lending to mobile phone services have taken off in a big way, manufacturing has tended to take a back seat in driving India Inc forward over the last decade. Bellwethers from sectors such as cement, fertilisers, chemicals and engineering, which once ruled the roost, are now relatively smaller contributors to corporate India’s fortunes, also ceding place in the bellwether indices.

Another desirable trend in corporate India over the last two decades has been the waning influence of business families over listed companies. The break-up of large business houses of yesteryears such as the Birlas, Modis and even Ambanis into smaller factions is one of the reasons for family-owned firms losing their dominance.

The other reason has been the rising capital needs of Indian companies, which has forced promoters and business families to dilute their dominant stakes in favour of institutional investors. Over the last five years, a regulatory push to broad-base the public holding of listed companies has forced several promoter groups to cede stakes in favour of the public or institutional investors.

On one hand, this requirement has led to many public-sector behemoths such as Coal India, MMTC and NMDC making their debut on the Indian bourses. On the other, it has swelled the number of firms, including multinational companies, that have sought to delist from the bourses to go entirely private.

Shareholding patterns show that over the last five years, promoter holdings in listed Indian companies have plummeted from 56 per cent to 51 per cent, the bare minimum required for management control.

This has resulted in a rise in the clout of foreign institutional investors, who now hold 20 per cent of all the outstanding stock in listed firms.