India Inc. Delivers An Encore

Donald H. Rumsfeld, who died at 88 in 2021, was the U.S. defence secretary during George W. Bush’s tenure and was responsible for the controversial invasion of Iraq in 2003. During a press meet in the run-up to the war — that many felt was never meant to be — when asked whether the U.S. had enough evidence to prove Saddam Hussein tried to supply weapons of mass destruction to terrorist groups, Rumsfeld’s epic reply was: “There are known knowns — there are things we know we know. We also know there are known unknowns — that is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don’t know we don’t know.” Referred to as the Rumsfeld uncertainty principle, the observation holds true in the realm of investing as well, where known knowns tend to get priced in, while unknown unknowns don’t.

As Fortune India unveils the marquee annual ranking of India’s biggest companies by total income (revenue) for 2022, here’s how the “known-knowns” stack up. Though the World Health Organization believes the pandemic is not yet over, the world of business has moved on. At home the elite club of India Inc. has yet again delivered a resounding performance.

Savour this.

During the year, Fortune 500 India’s cumulative revenue surged 35% year-on-year to around ₹119 lakh crore ($1.57 trillion) even as combined profit vaulted 60% to ₹9.97 lakh crore ($131 billion). Simply put, in each day of FY22, the Fortune 500 India club generated a cumulative revenue of ₹32,577 crore and took home profit of ₹2,732 crore. The encore follows an equally impressive scorecard in 2021, when the Fortune 500 India universe, despite a 2% fall in aggregate revenue to ₹88.31 lakh crore ($1.21 trillion), dished out 75% growth in cumulative profit to ₹6.22 lakh crore ($85 billion). But before we dig deep into this year’s scorecard, it’s hard to miss the bigger picture — one that shows India Inc. is coming of age.

For starters, in FY10, when India’s GDP growth stood at 8%, the Fortune 500 universe clocked a cumulative revenue of ₹38.16 lakh crore, making up for 50% of the-then GDP size of ₹76.51 lakh crore. In FY22 — when GDP growth bounced back to 8.7% after contracting 6.6% in FY21 — Revenue of Fortune 500 India equalled 81% of India’s ₹147 lakh crore GDP. The over three-fold jump in revenue just goes to show how corporate growth is shaping the rise of India’s economy.

But the icing on the cake is the improving profitability of India Inc. Fortune 500 India companies’ cumulative profit in FY22 make up for 6.77% of the country’s GDP compared with 4.32% in FY10. Just 49 companies posted losses of ₹89,505 crore in FY22 as against the pandemic-hit FY21 which saw 68 companies post a cumulative loss of ₹1.39 lakh crore. While stock indices are on a rollercoaster ride, the cumulative market cap of the listed 449 companies (as of November 11) stood at ₹239 lakh crore, a multiple of 24 times their cumulative profit — not widely expensive for a profitable franchise!

But what is remarkable about the cohort is how the number of billion-dollar companies by sales (total income) has increased from 159 in 2010 to 233 companies this year. What’s pertinent note is that the billion-dollar revenue club in 2010 was at a time when the rupee was strong at 44.90 (as of March 31, 2010) whereas the 2022 club with ₹107 lakh crore in revenues is on the back of rupee that has depreciated by 41% to 75.74 as of March 31, 2022. Had the rupee stayed at the 2010 levels, the current list would have had 349 companies with billion-dollar revenues. Even if we were to consider the rupee-dollar rate of 82.81 as of October 31, 2022 — the cut-off date for curating the Fortune 500 India universe — the list would still stand tall with 218 companies with ₹105 lakh crore topline and ₹8.93 lakh crore in profits. Clearly, there is no denying that the India growth story is shaping up well. Agrees Raamdeo Agrawal, chairman, Motilal Oswal. “How many countries are there who are going to grow at 6-7% for the next decade? Though we are interlinked globally, India’s growth stands out as other developed and emerging economies are faltering, including China,” says Agrawal.

Change may be constant but that’s not the case with Fortune 500 India list with a majority (452 companies) of the previous list staying put, belting out ₹108 lakh crore in topline growth. In other words, the 48 new entrants made up for the remainder ₹10.85 lakh crore. Given that FY22 was a record year for mainboard IPOs with 52 corporates raising an all-time high of ₹1.11 lakh crore, it wasn’t surprising to see 15 debutants comprising new listings. But the one that made a smashing debut, despite a dismal listing, is the state-owned Life Insurance Corporation of India at No. 2, pipping another government-owned company, the Indian Oil Corporation. It’s quite likely that the arrival of LIC on the back of ₹7.24 lakh crore total income will relegate the oil PSU, with ₹6.07 lakh crore total income, down the ranks for good.

Of the top 10, while the Mukesh Ambani-owned Reliance Industries takes the top spot, a record five government companies — LIC, IOC, ONGC, SBI and BPCL — have grabbed the 2nd to 6th spots. That’s not surprising considering the domination of government companies in the list — 56 entities with a total income of ₹42.27 lakh crore. In the top 10, three Tata Group companies — Tata Motors, Tata Steel and TCS — and one Aditya Birla group company — Hindalco — make up for the rest.

The other big trend emerging, of late, is the consolidation story. Unlike in the past, since 2019, the contours of the Fortune 500 list, have also been influenced by a massive M&A wave that began with the government calling the shots. In 2019, the Centre unveiled a mega merger of 10 nationalised banks into four large lenders, thereby bringing down the number of public sector banks to 12. In FY22, even the heavyweights joined the party with Adani Green Energy buying out SB Energy India in May 2021 in an $3.5 billion all-cash deal, the largest acquisition in India’s renewable energy space. In the same month, Tatas acquired 64% stake in Big Basket. Similarly, Sony Picture Network India and Zee Entertainment Enterprises got into a wedlock to create one of India’s biggest TV and entertainment networks.

Not to mention the spate of hive offs, with Tata Motors creating a new passenger vehicle entity and roping in private equity firm, TPG, as a strategic investor. In FY23, the trend continued with Mahindra roping in British International Investment as a partner in its new electric vehicle subsidiary. Similarly, GMR’s non-airports business also made its debut as a separate entity at the fag end of FY22.

Haigreve Khaitan, head, corporate, M&A and PE practices, Khaitan & Co, believes a collusion of three key factors is driving the consolidation. “To begin with there is abundant availability of cheap foreign capital both from the public and private markets. Secondly, India Inc.’s biggest conglomerates, post Covid, see an opportunity to grow, especially given their squeaky clean balance sheets. Thirdly, there are many family owned businesses that are getting sold as the next generation is no longer interested in running them,” says Khaitan.

What also stands out is the distinct change in the thinking of corporates, who are no longer obsessed about being in control. For instance, the sell-out of the Nanda family in Escorts to Kubota is a case in point. Similarly, the Mahindras sold a 30% stake in the renewables business to a pension fund. “The old school of thought that you must have 51% to stay in control is going away. Indian promoters are doing what is right for the business and not taking decisions that serve their self-interest,” explains Khaitan. The inorganic momentum has continued in the current fiscal as well. In the first half of FY23, M&A transactions reached a record high of $124.2 billion compared with around $74 billion in the previous fiscal. The big-ticket deals include the $57.8 billion merger of HDFC and HDFC Bank, the Adani family’s $6.5 billion purchase of Ambuja Cements and ACC, and L&T’s $3.2 billion takeover of Mindtree.

Even as India Inc. is looking at ways to beef up growth, in terms of private group concentration, the Tatas lead the Fortune 500 pack with a cumulative revenue of ₹9 lakh crore across 15 companies, Mukesh Ambani comes second at ₹7.47 lakh crore, comprising just two companies — Reliance Industries (₹7.39 lakh crore) and Alok Industries (₹7,632 crore). But what’s hard to miss is the debut of the world’s third-richest man and the country’s richest, Gautam Adani, into the top 50 with Adani Wilmar. The edible oil maker, with ₹53,808 crore revenue and profit of ₹804 crore, entered the Fortune 500 India list after more than a decade on the back of a listing in February this year. Incidentally, the group’s turnover stands at ₹1.44 lakh crore (pre-Ambuja deal). In terms of profitability, with the cohort of top 10 private groups, the Tatas ace the charts with ₹74,721 crore (7.49% share), followed by Mukesh Ambani group coming second at ₹60,496 crore (6.07%). In fact, barring the Tatas, no other conglomerate comes close to the Ambani in terms of profit with the Aditya Birla Group a distant second at ₹30,654 crore, followed by the Savitri Devi Jindal Group at ₹30,441 and the Adanis at ₹13,423 crore.

From a sectoral perspective, energy (oil & gas) and banks are the top two total income contributors, making up for 21% (₹24.99 lakh crore) and 14% (₹16.77 lakh crore), followed by metals. But in terms of profitability, it is banks (19%) that took the lead at ₹1.90 lakh crore, followed by energy at ₹1.69 lakh crore (17%) and metals at ₹1.27 lakh crore (13%).

An outcome of the windfall gains in 2022 is the generous payouts with 356 companies from the list doling out a record ₹3.11 lakh crore in dividends, with the government being the prime beneficiary. Of the nine companies that paid dividends in the range of ₹10,000 crore to ₹17,000 crore for the fiscal, the Anil Agarwal-owned Vedanta led the pack at ₹16,740 crore. Interestingly, the entire promoter holding (69.69%) in Vedanta is pledged, and dividends is one route through which the promoters are raking it in. In fact, in the current year, the company’s two interim dividends are worth ₹18,960 crore, surpassing the annual payout of FY22.

While the two back-to-back blockbuster year performances by India Inc would make it to the hall of fame, the general view emerging is that history won’t repeat in the coming years. But then often half-truths have appeared interesting and good enough to stimulate sentiment on the Street.

The Future Is...

While the benchmark indices are flirting with new highs, the current fiscal’s numbers are telling a different story. Of the Fortune 500 India universe,446 listed companies have put up a spunky top line show in the first half — with cumulative revenues surging 27.83% to ₹66.34 lakh crore — but profit growth has dramatically wilted — 9.6% year on year to ₹4.71 lakh crore!

That could well mean that Corporate India’s dream run is coming to an end.

Noted value investor Chetan Parikh, co-promoter of Jeetay Investments, a portfolio management firm, and Jasmine India Fund, believes a big part of the profit expansion in the past came from the mean reversion of depressed profits and steep losses. “While the balance sheets of the top 500 companies are much better than what they were in the past, we have to be a bit cautious about not extrapolating the past six months or one-year performance, as the deltas have come about from depressed lows.” For instance, while 68 companies posted a cumulative loss of ₹1.38 lakh crore in FY21, that number has reduced to 49 companies posting a cumulative loss of ₹89,505 crore in FY22.

The party is fast fizzling out for commodity companies that had a bonanza year. For instance, heavyweight Tata Steel not only clocked its highest-ever consolidated EBITDA (operating profit) of ₹63,830 crore with an EBITDA per tonne of ₹21,626, but also pared net debt by ₹24,340 crore to ₹51,049 crore in FY22. But in the current fiscal, adjusted EBITDA per tonne is down 67% to ₹8,045 in the second quarter, even as profit (before tax and before exceptional items) fell 81% to ₹2,625 crore from ₹13,604 crore in Q2 FY22. “If you can go back to the past and start seeing the patterns, one can clearly see that if a commodity company was completely outperforming, it went on to underperform subsequently. It’s not rocket science. Hence, it’s wrong to draw inferences by examining deltas over a short period of time,” says Parikh.

The abnormal profits in commodities and energy (oil and gas) were an outcome of the Russia-Ukraine conflict and a fractured global supply chain on account of the pandemic. “The global liquidity cycle translated into a trade cycle, and in an environment where supply chains were closed, the created huge price distortions. In the case of commodities, it was clearly a price cycle and, at the margin, operating leverage came into play as costs were lower and revenues went up,” says Shridatta Bhandwaldar, head, equities, Canara Robeco Mutual Fund.

While some sectors are expected to lose their fizz, banks will continue to make hay. “In a way, operating leverage will be at play in banks because if a bank grows at 18%, its costs do not increase proportionately,” says Bhandwaldar. Agrawal agrees. “We are in a very good credit cycle, and it will not derail very quickly. Even as growth is coming good, the quality of banks’ books, too, looks pristine. I believe the cycle will run for at least another three to four years,” he says.

That indeed is true.

Consider this: Even as overall credit growth to the industry accelerated to 12.6% in September 2022 from 1.7% a year ago, State Bank of India posted its highest-ever quarterly profit of ₹13,265 crore (up 74%) in Q2 as advances grew 20%. Bad loans, too, fell to 3.52% from 4.90% in the year-ago period.

Though government companies have an overwhelming contribution to the Fortune 500 India list — making up for 35.56% of the revenue and 32.28% of the bottomline — Agrawal is not too bullish about the cohort. “Government lacks entrepreneurship drive. They create monoliths but not necessarily growth machines. Getting entrepreneur excellence is very tough in government companies, particularly when there’s competition from the private sector.” But that would hardly matter to the government as these undertakings serve more as a milch cow, what with the exchequer fetching ₹59,000 crore as dividends from central public sector undertakings in FY22, up 48% year-on-year. That’s not surprising considering that 12 public sector banks from the list doubled their profits in FY22 to a little over ₹72,051 crore.

Though bank credit is growing, it’s largely being driven by retail loans as a survey by the central bank shows that capacity utilisation in the manufacturing sector has slipped to 72.4% in June 2022 from 75.3% in March 2022. As per CMIE data, capex on new projects in April-June almost halved to ₹4.28 lakh crore from ₹8.18 lakh crore in Q1. Agrawal does not expect corporations to go on an unbridled expansion spree. “Having burnt their fingers in the past, this time around, corporates don’t want to front-end capacity and then wait for demand to play out. Rather, they would do it the other way round — wait for signs of a sustained demand to show up and then play catch-up,” says Agrawal.

With the year drawing to a close, the macro narrative is not inspiring confidence either. Inflation is still stubborn even as interest rates are heading north. The global and geo-political risks are at play what with the US Fed still behind the inflation curve and the Russia-Ukraine conflict is showing no signs of abating. The news flow from the startup world is not encouraging either with a record 44 startups having sacked over 15,700 employees thus far during the year.

Parikh believes that the current environment is too uncertain. “I think external influences may have a bigger role in what happens to India and that is unpredictable. We have too many mitigating factors at play: Rising interest rates will benefit the banking sector as net interest margins (NIMs) will widen for sure, but if it goes too high, the risk will emerge on the asset side. A very wild increase in oil prices will benefit oil companies but will impede the airline sector and in turn impact the hospitality sector,” says Parikh.

In other words, India Inc. is in the Rumsfeld zone of unknown unknowns and, clearly, that is not a good place to be in.