No doubt FY21 will be remembered as annus horribilis with the rogue virus not just destroying human lives, but also affecting the Indian economy with real gross domestic product (GDP) growth falling by a record 7.3% in FY21 (around ₹10 lakh crore) — the first-ever massive decline since 1980 — to ₹135 lakh crore. But, every crisis has a silver lining. The year eventually turned out to be annus mirabilis for India Inc. in more ways than one. The initial fears that corporates will sink deep into the red, thankfully, did not play out.

The steep cut in corporate tax in September 2019 — from an effective 35% to 26% — coupled with cost-cutting during the pandemic helped corporates improve bottom lines. As firms deferred capital expenditure, internal cash flows were used to cut down on debt. Companies in the top 15 sectors reduced debt by more than ₹1.7 lakh crore in FY21, according to a State Bank of India study. That is reflected in this year’s Fortune 500 list, with the average debt-equity ratio of companies working out to 1.74x.

This is the first time since 2010 — when Fortune India began chronicling Indian corporates in the marquee listing — that year-on-year (Y-o-Y) revenue growth slid 2.4% in FY21. But, profit turned out to be the best-ever — growing at a record 75% Y-o-Y to ₹6.22 lakh crore, a resounding turnaround from last year when the Fortune 500 universe saw its cumulative profit decline 22% Y-o-Y to `3.6 lakh crore. Though the base effect did come into play, the performance was also aided by a concoction of higher prices, lower interest rates, and better cost management. Banking, oil & gas and IT services accounted for over 53% of the Fortune 500 profit pool for the year.

The Debutants

While the Fortune India 500 list is all about size, what stands out this year is that 418 companies from the 2020 list made it to this year’s ranking despite the pandemic and were prime contributors — accounting for 93.92% of the cumulative total income and 94.30% of the cumulative profit. Of 82 companies that couldn’t make it to this year’s list, the total income of 56 companies was below the cut-off of the last name on the list. Of the remaining, audited FY21 numbers were not available for 23 firms as on the cut-off date of October 31, 2021, and three subsidiaries were not taken into account since the parent or holding company’s consolidated figures were considered.

Notably, there are 58 debutants in the list with a cumulative revenue of ₹2.88 lakh crore and profit of ₹12,603 crore. Among the newbies, the highest revenue (₹21,204 crore) came in from MMTC-PAMP, the joint venture between state-owned MMTC and Swiss refiner PAMP, while fabric care player, Jyothy Labs, was the smallest with a turnover of ₹1,954 crore. There were also 24 names that re-entered the list with cumulative revenue of ₹2.48 lakh crore and profit of over ₹28,000 crore.

If change is the only constant, the listing had that in plenty with just 15 companies retaining their previous year’s spots. Two companies — Suzlon and Motilal Oswal Financial Services — jumped over 100 notches higher to ranks 307 and 332, respectively. For Suzlon, 2021 was the first year of restarting operations post debt-restructuring, while Motilal Oswal made the most of the investing frenzy seen on the Street during the fiscal — clocking ₹3,631 crore in revenue. However, 15 companies fell over 100 notches, with Future Retail tumbling the most — 182 ranks — even as other retail players in the apparel and jewellery business took a knock amid the lockdown.

What is impressive about this year’s listing is that 39 companies swung into the black — posting a cumulative profit of ₹58,641 crore on revenue of ₹3.74 lakh crore. But of the list, just two companies, Indian Oil Corporation (IOC) and Vedanta, accounted for around 57% of the profit pool, with 37 companies making up for the remaining over ₹25,000-crore profit. While record commodity prices helped Vedanta overcome FY20 blues, state-owned IOC posted a consolidated net profit of ₹21,638 crore, against a loss of ₹1,876 crore the year before, even as total income fell 24% to ₹3.74 lakh crore. The profit was led by inventory gains and sale of high-margin petrochemical products. Putting the performance into context, IOC chairman Shrikant Madhav Vaidya says, “This is a V-shaped recovery and all estimates show we will grow at 8.5-9%. We have already crossed pre-Covid demand levels for petroleum products.”

The Catalysts

Though FY21 was a truncated fiscal, thanks to the lockdown impacting Q1, the last quarter did see a significant surge in inflation. The wholesale price index-based inflation, on the back of soaring energy costs and those of manufactured products, hit an eight-year high in March 2021. The WPI surged to 7.4% by the end of the fiscal year, compared with 4.17% in February, and 2.51% in January. The spurt in inflation has had a rub-off effect on earnings as well. A view endorsed by S. Naren, chief investment officer, ICICI Prudential AMC. “One of the most important factors for profits to come back is inflation. The moment WPI inflation comes back, earnings growth kicks in,” says Naren.

The other big contributor that worked in favour of India Inc. at large and not just the Fortune 500 companies was the impact of lower corporate tax rate, which was slashed from 35% to 26% in September 2019. Naren, however, points out that a confluence of factors helped companies deliver better. “While tax rate did come down, a benign rate regime resulted in lower finance costs, cost structures improved and, pertinently, in the absence of a huge capex cycle, depreciation rates didn’t rise,” elaborates Naren.

In sectors, banks, oil & gas, IT services and non-banking financial companies [NBFCs] accounted for 64% of the cumulative profits of Fortune 500 in 2021, with banks topping the list at over 20% (₹1.27 lakh crore) of the profit. Raamdeo Agrawal, chairman, Motilal Oswal Financial Services, points out: “Banks have performed better in FY21 and will shape up much better in FY22. The worst [NPA cycle] is behind. Subject to the caveat of a third wave, the probability of which is low, I think the second half will be a bumper one for banks.” Finance minister Nirmala Sitharaman in a written reply in the Rajya Sabha had stated that SBI topped the list of public sector banks in writing off bad loans in FY21 [₹34,402 crore] followed by Union Bank of India [`16,983 crore] and Punjab National Bank [₹15,877 crore].

In the current fiscal (FY22), the tailwind for banks has come from liabilities, which has got re-priced with a downward bias, and lower bad loan provisioning. Agrawal is confident about a continued improvement in the numbers of the biggest proxy to play India’s growth story, with banks accounting for 18.71%—the highest — of Fortune 500’s cumulative revenue. “While the extent of recovery (owing to write-backs) will vary across banks, on the aggregate, their top line will be higher, liability and credit costs will be lower and, as a result, PAT will be much higher,” feels Agrawal.

But not all companies were lucky enough in 2021, with 36 of them slipping into the red, posting a cumulative loss of ₹17,740 crore. Srei Finance was the prime contributor, accounting for 41% of the loss. The number though, is significantly lower from last year, when 81 companies ratcheted up ₹2.28 lakh crore in cumulative losses. In FY21, only 68 companies posted a cumulative loss of ₹1,38,549 lakh crore against 432 companies posting a cumulative profit of ₹7,61,040 crore.

Despite companies losing out on one quarter in FY21, and supply chain disruption in the latter part of the year, thanks to a phase-wise unlocking across states, the Fortune 500 companies did show their resilience with cumulative revenue growth contracting just 2%. But this is the first instance of Fortune 500 companies’ revenue growth falling for a second consecutive year, following last year’s decline of 1.4%. As a result the cut-off of the 500th company (Jyothy Labs) on this year’s list stayed below the ₹2,000-crore mark.

The Pecking Order

While Reliance Industries continued to retain its top rank, State Bank of India took the second spot, overtaking state-owned oil companies —Indian Oil Corporation and Oil and Natural Gas Corporation. In fact, the top 16 companies, whose revenue is above ₹1 lakh crore-plus, account for 40% (₹34.93 lakh crore) of the cumulative revenue. With steel prices on the boil, it was not surprising to see Tata Steel back into the top 10 (at rank 9) with consolidated revenue of ₹1.56 lakh crore. The private sector steel giant, which was at rank 12 in 2020, posted its highest-ever consolidated Ebitda per tonne at ₹10,938, against ₹6,267 in FY20. Managing director T.V. Narendran believes the performance is also an outcome of how the company pivoted its focus when the domestic market was in doldrums. “Exports were typically 10-15% of what we used to produce, but we went up 40-50% during the time that India was closed. So, all these helped the business deliver well,” explains Narendran.

The strong profitability comes amid deleveraging initiated by companies over the past several years. In fact, the debt-to-equity ratio for Fortune 500 companies (excluding banks and NBFCs) now stands at 1.0x. Reliance Industries for example made a pre-payment of $7.8 billion of long-term foreign currency debt — the highest-ever pre-payment of debt undertaken by any corporate borrower in India — aided also by the largest-ever capital raised — ₹2,60,074 crore — by a Fortune 500 company in a year. Similarly, Tata Steel, riding on the buoyancy in steel prices, reduced its net debt by ₹29,390 crore (around $4 billion), surpassing its annual deleveraging target of $1 billion. Narendran mentions that the trend will continue in the current year as well. “We have further brought down our debt by ₹11,000 crore over the past six months, and will end the year with a net debt Ebitda of less than one,” remarks Narendran.

Better Days Ahead?

While FY21 has been a record year, the consensus seems to be that FY22 will prove to be much better with earnings growth expected to trend higher. At ₹6.22 lakh crore, Fortune 500’s profit, as percentage of FY21 real GDP, is 4.60% and 3.16% in terms of nominal GDP of ₹197 lakh crore. If the overall profit-to-GDP ratio of all listed companies is taken into account, it is estimated to be 2% in FY21. According to Agrawal, the last time India’s corporate profit to GDP was at these levels was in 2003. “In the US, the same ratio is 10-12%. If it goes to 6%, then at 13% [nominal growth rate] GDP might double. If corporate profit to GDP goes to 6% in five years, then corporate profits, per se, will rise 5-6x. When that happens, it will give a lot of taxation to the government and that is why getting that 8% growth rate is important,” explains Agrawal.

The one constant in the Fortune 500 list is the dominance of public sector undertakings, but the four big industrial conglomerates — Tatas, Reliance, Aditya Birla and Adani — continue to account for 17.51% of the revenue and over 14.87% of profits.

It is unlikely that the contours of the list will see a dramatic change in terms of ownership as long as the government continues to be in business. While the consumer technology wave is sweeping through the Street —the likes of Zomato and Nykaa seem to have caught investors’ fancy with valuations of over $13 billion — it remains to be seen whether these new-age unicorns can break through the top ranks of Fortune India 500. Till then, the flag bearers of India Inc. will continue to do the heavy lifting.

Follow us on Facebook, X, YouTube, Instagram and WhatsApp to never miss an update from Fortune India. To buy a copy, visit Amazon.