“This has been a wonderful year, beyond our expectations.” The comment from Rajesh Gadodia, chairman, Scan Steels, in the company’s annual report is reflective of the performance of India’s emerging companies in Fortune India’s Next 500: 2022 list, an annual ranking based on the total income (gross revenue) of companies.
The TMT steel bar maker saw the highest percentage growth [9,509%] in net profit, from ₹0.32 crore in FY20 to ₹30.75 crore in FY21, taking its earnings per share from 0.06 paise to ₹5.87, even as its total income was up a measly 8% year-on-year to ₹725 crore.
Such a narrative this year from the Next 500 is a welcome change as the universe of Next 500 swung back to profit of ₹14,902 crore in FY21 from a cumulative loss of ₹46,607 crore in FY20. The turnaround came on the back of a recovery in revenue (total income), which grew 2.46% to ₹5.51 lakh crore in 2022, after having slid by 12.64% to ₹5.38 lakh crore in 2021. Better realisations and lower losses by other constituents have also helped burnish the bottomline. The performance is noteworthy since the Next 500 companies have been struggling in terms of profitability, with profit growth falling 65% in 2019 (FY18) and 35.75% in 2020 (FY19), before plunging into a sea of red in 2021 (FY20) (See: Proving Their Mettle).
Beating Covid Blues
What’s ironic is that the turnaround came in a year ravaged by the pandemic. In fact, the profitability for 2022 (FY21) would have been much higher had it not been for 92 companies which cumulatively accounted for losses of ₹26,607 crore. The remainder 408 companies posted a cumulative profit of ₹41,509 crore.
Of this year’s list, 246 companies saw a drop in total income between 1% and 86%, but profits fell for only 145 firms (between 1% and 98%). What is notable is that 77 companies saw their profits surge between 102% and 9,509%, even as 32 turned profitable. In terms of losses, the cumulative number stood at ₹26,607 crore, as 37 companies slipped into the red and 27 companies widened their losses. Of the loss makers, 28 firms managed to lower their losses. Just as last year, Reliance Communications continued to be the biggest drag with a loss of ₹5,791 crore, though lower than last year’s ₹42,671 crore, followed by Tata Teleservices (Maharashtra) with a loss of ₹1,997 crore in FY21 compared with ₹3,714 crore in FY20.
While the Fortune 500 list represents large and super-large companies, the Next 500 is all about emerging medium enterprises. The average total income of a company in the Fortune 500 list is ₹17,663 crore, while the same for a Next 500 company is ₹1,103 crore. The two sets behave quite differently though. While the cumulative total income of the Next 500 grew 2.46% to ₹5.51 lakh crore in 2022, Fortune 500 universe’s total income fell 2.4% to ₹88.31 lakh crore.
When it comes to profit, while Next 500 companies’ profit grew the highest-ever, in percentage terms, since the Fortune India listing began in 2015, the Fortune 500 set shone brighter. In FY21, the Next 500 companies’ cumulative profit grew 132% to ₹14,902 crore, against a 75% jump for Fortune 500 (₹6.22 lakh crore). On an average the Next 500 companies reported a profit of ₹30 crore, compared with ₹1,245 crore for a Fortune 500 entity.
The New Entrants
Given that change is the only constant, it was visible in this year’s list as well with 68 new companies making their debut, including those that went public such as Vedant Fashions, known for its ethnic wear brand Manyavar and PB Fintech, one of the country’s leading financial products aggregator platform. Besides, there were also 16 debutants but their entry was owing to the fact that they fell off from the Fortune 500 2021 list as their revenues were below the cut-off of the last company on the list. These companies saw their revenue fall between 6% and 73%, with Indiabulls Real Estate seeing the maximum fall in total income.
The churn was also visible for 341 companies that retained their Next 500 tag but saw their rankings change, in some cases substantially. The company that jumped the maximum ranks is Krishna Institute of Medical Sciences, which leapfrogged from 460 last year, with its total income rising 18% to ₹1,334 crore. The second company to improve its ranking is refractory MNC RHI Magnesita India, which moved up 283 places to the 118th spot. Reliance Communications, however, fell from 30 to 361.
This year’s list has 59 multinational subsidiaries, 11 government-owned firms and 398 domestic companies. Of these, 32 companies are owned by conglomerates such as the Tatas, Birlas (BK,KK and CK), Reliance Industries, Mahindra & Mahindra and the likes. However, while prominent business groups constituted 6.52% of the total income, they cumulatively posted a loss of ₹6,968 crore, with two Tata group companies (Indian Hotels and Tata Teleservices) posting combined losses of ₹2,717 crore, besides that of Anil Ambani-owned RCom. What’s pertinent to note is that 59 multinationals accounted for over 12% of the total income, but contributed a significant 40.13% to the overall profit pool at ₹5,980 crore, with Nippon Life AMC being the biggest contributor at ₹680 crore.
While 2022 has brought in good tidings, a small pocket of India Inc. is still struggling. While the overall leverage level is well below 2x for 453 companies in the list, the remainder have debt-equity [D/E] ratios ranging between 2x and 36x. For instance, SBEC Sugar, owned by the Umesh Modi group, has a D/E of 36x with a debt pile-up of ₹231 crore, costing the company ₹22.38 crore in interest charges. As a result, the company slipped into the red amid volatility in sugar prices. Infrastructure players such as Jayant Mhaiskar-owned MEP Infrastructure Developers are saddled with debt of ₹2,293 crore, translating into a D/E of nearly 17x.
While some struggling companies such as Stoppers’ Stop are staging a comeback as the economy opens up and footfalls return to normalcy, others are seeking salvation in bankruptcy courts. For instance, Visa Steel, which has improved its Next 500 rank from 419 to 276, in all probability, may not exist next year as it is among the 15 large accounts likely to be transferred to the bad bank, the National Asset Reconstruction Company. State-owned Punjab National Bank has put up the Madhya Pradesh-based steel company to recover its dues of around ₹200 crore. Similarly, the National Company Law Tribunal (NCLT) has approved the scheme of amalgamation of Srikalahasthi Pipes, which is ranked 94th in this year’s list, with Fortune 500 company Electrosteel Castings.
What’s interesting though is that Reliance Industries, the Numero Uno on the Fortune 500 list, has set its sights on some of the companies on the block among the Next 500. The Mukesh Ambani-owned firm is reportedly in the race to acquire Sintex Industries, which provides fabric to global fashion majors such as Armani, Hugo Boss, Diesel and Burberry. RIL is also close to acquiring the towers and fibre assets of Reliance Communications even as it has sought forensic audits of the company and Reliance Infratel from lenders. Similarly, after a prolonged court battle it is now all set to buy Kishore Biyani-owned Future group’s retail, wholesale, logistics and warehousing businesses.
Similarly, kitchen and small appliances maker, Butterfly Gandhimathi Appliances, which has climbed 81 ranks this year, is being taken over by Fortune 500 company Crompton Greaves Consumer Electricals for ₹2,076 crore, indicating that India Inc. could see a spate of M&As as companies look at new growth avenues.
What Lies Ahead
While past performance is not indicative of the future, Fortune India took a look at how the current fiscal (FY22) is panning out for the Next 500 constituents. The good news is that India Inc. is back on track with 457 companies posting a 46% growth in cumulative revenue (total income) at ₹3.02 lakh crore in the first half (H1) of the fiscal. But 78 companies have seen their profits lower between 1% and 99%, while 15 companies have slipped into the red. Yet the overall profitability of the Next 500 universe stands at a cumulative ₹15,500 crore in H1, compared with a loss of ₹62 crore in the year-ago period.
While a clear picture will only emerge when Fortune India gets down to its annual exercise next year, here’s hoping India Inc. finds its way out of the woods for good.