NAPOLEON BONAPARTE once said, "Strategy is the art of making use of time and space. I am less concerned about the latter than the former. Space we can recover, lost time never." It is this very philosophy of the famous French emperor that India Inc. has imbibed in recent years. In the face of the worst adversity that shook the world, Covid-19, companies proved their mettle by not only overcoming the adversity but managing impressive growth as well. While Fortune 500 India ranking chronicled how the mightiest of India Inc. fared, it should not come as a surprise that the vast universe of small and mid-sized companies had a field day as well.

Savour this.

This year's Fortune India The Next 500 club has seen a robust 40.94% year-on-year growth in total income to ₹7.77 lakh crore in FY22, and an even-more impressive performance on the profitability front with cumulative profit jumping 255.89% to ₹53,035 crore (See: Cometh the Hour, Cometh the League). This is by far the best-ever performance shown by the Next 500 constituents and a remarkable turnaround from a massive loss of ₹46,607 crore seen in Covid-hit 2021. Yet, it's the resilience of India Inc. that stood out in the dark hour. While it's true that 41 companies are still in the red with a cumulative loss of ₹13,950 crore, what's pertinent to note is that a record 43 companies swung back into the black with a cumulative profit of ₹6,309 crore.

The optimism, unsurprisingly, is hard to miss.

Sunil Koul, executive director, Asia-Pacific portfolio strategy, global macro research, Goldman Sachs, says: "The macro environment was very tough over the past few years, but, of late, we are seeing a very strong broad-based credit growth across industries. It only shows that the domestic economy is on a strong footing, with capacity utilisation rising as well."

In some sense, this year's ranking is an ode to the unflinching spirit of the 'India Growth Story', and how! Since the listing began in 2015, a record 120 companies have dominated the ₹2,000 crore club. Of this lot, 31 companies have, for the first-time ever, surged past the ₹2,500 crore threshold in terms of total income. What's heartening to note is that in each of the past five years, the peak cut-off for the list kept trending higher — from ₹1,690 crore in 2015 to ₹2,761 crore this year. The sweet spot for the list though is the ₹1,000 crore to ₹2,000 crore zone — an indication that small companies are not only the bulwark of the Indian economy but also of the Fortune India The Next 500 list.

Sunil Singhania, founder, Abakkus Asset Manager, says: "It's natural as we have transitioned to a $3.5 trillion economy over the past five years, and the rising tide has lifted the growth of companies as well. That is also reflecting in the markets as, today, there are 100 companies with a mcap of more than ₹50,000 crore, and another 250 to 300, whose mcap is in the $2-6 billion bracket."

An interesting facet of Fortune India's The Next 500 list is that unlike the larger firms in the Fortune 500 India ranking, wherein the top 10 companies dominate the revenue and profit scorecard, in the case of the former, the contribution is evenly spread across all constituents. For instance, while the Fortune 500 India ranking of 2022 saw the top 10 companies making up for 35.94% of the cumulative total income and 26.40% of profits, the top 10 in this year's The Next 500 merely make up for 3.52% of revenue and 14.25% of profit. (See: Even-stevens). What's more, none of the companies make up for even 1% contribution to the cumulative topline, with an average contribution of 0.35%! Only in terms of profits, their average share is at 1.42%. Also, unlike in the Fortune 500 India list where commodities and energy companies dominated the top 10, The Next 500 has a diverse mix of sectors such as agrochemicals, retail, pharma, financials, textiles and infrastructure.

"The beauty of the India growth story is that it's pretty diversified and, hence, even if some sectors don't do well, on the whole, we tend to do well in terms of growth and earnings," says Singhania.

While the total income topper in this year's list is agrochemicals major Meghmani Organics with a topline of ₹2,760 crore, pharmaceutical and vaccine maker Panacea Biotec leads the profitability chart at ₹1,077 crore. It's likely that Meghmani could soon break into the Fortune 500 India club as the company is adding heft to its operations. In Q3FY23, Meghmani began commercial production of a new multi-product agrochemicals facility, which is expected to significantly contribute to revenue growth from FY24. The company has also won a five-year supply contract worth ₹800 crore from a multinational customer. Besides, it is foraying into nano urea (liquid) fertiliser for which it is investing ₹150 crore in Gujarat. The facility is expected to commence production from Q4FY24.

Similarly, the profit topper, Panacea Biotec, won a ₹1,040 crore order from UNICEF and Pan American Health Organisation, for supply of its pentavalent vaccine Easyfive-TT, a five-in-one for infants and young children, for active immunisation against five severe diseases, including diphtheria, haemophilus influenzae type b and hepatitis-B. However, its high profits this fiscal were a result of sale of its pharmaceutical business to Mankind Pharma for ₹1,872 crore. It would be worth observing if Panacea manages to stay profitable as it has slipped into the red for the nine months ended December 2022.

From the sectoral point of view, auto ancillaries top the chart with 50 companies making up 10.65% (₹82,773 crore) of the cumulative topline (See: In the Driver's Seat). The tailwind for the sector, according to ratings agency ICRA, is on account of rising components per vehicle, besides greater thrust by OEMs to locally source components. "Domestic OEM demand constitutes almost 50% of sales for the Indian auto component industry. This is likely to remain healthy in FY23, with double-digit growth expected in both passenger vehicle and commercial vehicle segments," according to Vinutaa S., vice president and sector head, ICRA.

The second spot goes to FMCG, which makes up for 9.57% of the topline at ₹74,366 crore, followed by chemicals at ₹68,044 crore (8.76%). After a prolonged period, specialty chemical players are ramping up capacities to meet growing demand from domestic and global markets. For specialty chemical companies, sales in FY22 rose 42.4% to ₹1.63 lakh crore, while PAT growth was even more robust at 71.5% to ₹17,756 crore. Rating agency Crisil estimates companies' capital spending to surge by 50% to ₹15,000 crore through 2023. The resurgence in domestic demand has come from end-user segments such as agrochemicals, dyes, and foods and fragrances that make up 55-60% of the total demand. Koul of Goldman Sachs sees corporates leveraging on their leaner and cleaner balance sheets. "India is at a stage where there is strong domestic demand and as you go through the year, with external demand improving, it will encourage firms to speed up capex," says Koul.

Another significant trend that has been playing out for companies is import substitution, with the government incentivising them to reduce dependence on imports and find domestic alternatives under the Production-linked Incentive scheme. In this year's list, a record 60 multinationals account for 13.50% (₹1.05 lakh crore) of the cumulative revenues and 17.42% of profits (See: The Foreign Hand). For MNCs, the years spent on creating a supply chain locally is coming to fruition. "An important aspect of becoming competitive is how strong a company’s indigenisation content is. For instance, at GE we have experts whose only job 365 days a year is to keep driving higher localisation. Today, entire wind turbine manufacturing is 90% indigenised. These are critical components which can only be produced locally if there are economies of volume," points out Mahesh Palashikar, president, GE South Asia, which has a 14-factory manufacturing footprint in the country.

While the overall capex spend in the country is slowly coming to life, it's unlikely to be all hunky dory in the days to come as the record profit growth is expected to fizzle out. "In 2020 and 2021, metals did very well but now they are struggling because prices have come off. Going forward, commodity users will start to benefit," says Singhania. But it's not going to be a lost cause as operating leverage will come into play. In other words, despite lower and slower topline growth and lower margins, profits will still be healthy. "Many corporates, especially in the consumer sector, have reported margin recovery starting from the December quarter. Therefore, we believe that despite the moderation in topline growth, improved margins will drive earnings growth," opines Koul.

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