[For the entire Fortune India Next 500 list of India's largest midsize corporations, click here]

While the Fortune India Next 500 list list showcases the largest midsize companies of India Inc. by revenue, their profitability is of equal importance. And the bad news this year is that profitability of these companies has turned red.

This year’s Fortune India Next 500—based on FY20 data sourced from CapitalinePlus—has witnessed an annual 12.6% decline in total revenue at nearly ₹5.38 lakh crore. But that is relatively a lesser worry. Because, compared to the respective annual profit decline of 65% and 36% in 2019 and 2020, this year’s Next 500 companies reported a cumulative loss of ₹46,607 crore.

What caused the Next 500 companies to report losses this year? Overall, 407 companies from this year’s list reported a total profit of ₹34,925 crore, but the balance 93 companies, with a total loss amounting to ₹81,532 crore, overshadowed the profit-makers and turned the total into a negative—the first time since the list was launched in 2015.

Take the case of Reliance Communications (R-Com)—No.30 on this year’s list—which reported a net loss of ₹42,671 crore, which alone works out to nearly 92% of the total loss of the Next 500 companies. R-Com slipped down from the 2019 Fortune India 500 list (where it was No.237). It saw its losses grow nearly sixfold compared to ₹7,206 crore in FY19. Aban Offshore, No.265 (up from No.332 last year), posted a net loss of nearly ₹8,973 crore—1.7 times higher than ₹5,273 crore last year. Both R-Com and Aban Offshore are overleveraged loss-makers.

Image : Illustration by Anirban Ghosh

If these two companies were not part of the list, the results would have been phenomenal. Assuming that R-Com and Aban Offshore were replaced by two new companies at the bottom of the list, they would have brought in ₹21.5 crore to the net profit of ₹5,037 crore from the 498 companies. This would have taken the total net profit to a little over ₹5,058 crore, or a 40% growth over 2020’s net profit of ₹3,611 crore. With R-Com and Aban Offshore in the mix, the revenue of the last company this year stands at a little over ₹562 crore—the second–lowest in seven years.

Like previous years, the list saw heavy churn, with 140 new entrants. While 13 companies slipped from the 2019 Fortune India 500 list, the rest are newcomers. Non-availability of financial data also led to certain companies exiting the list, also contributing to the churn. And 31 companies from last year’s list graduated to the 2020 Fortune India 500 list.

Image : Graphics by Chetan Singh

Among those 31 companies is last year’s No.1, Radico Khaitan, which made its debut at No.433 on the 2020 Fortune India 500 list, which tracks India’s largest corporations. Making the transition from the midsize list to the 500 list is a huge achievement as there exists a massive chasm between the two.

To get an idea of how much of a difference there is, let’s compare Reliance Industries (RIL), which is No.1 on the 2020 Fortune India 500 list, to the midsize firms. RIL’s revenue of ₹6.16 lakh crore is 114% the total revenue of this year’s Next 500 firms. And RIL’s profit of ₹39,354 crore could have recovered nearly 85% of the Next 500 firms’ cumulative losses. Not to mention, that despite a nearly 22% annual decline, the 2020 Fortune India 500 list had a total profit of nearly ₹3.56 lakh crore.

Image : Graphics by Chetan Singh

Like earlier years, the manufacturing sector with 359 companies dominates this year’s Next 500 list, with 72% share of the total revenue. Services, with 115 firms, comes in second and accounts for 22.4% of the total revenue. There’s been a steady rise in the number of services firms on the list. And this trend mirrors the evolving business environment as five of them provide payment solutions. Diversified and construction companies (with 26 firms) come in a distant third, accounting for 5.6% of the total revenue of this year’s Next 500 firms.

This year’s list also fails to bring much cheer to investors. The equity dividend outflow of ₹3,550 crore this year marks a 6% decline compared to last year’s ₹3,790 crore. The revision in Ind-AS rules contributes to the declining dividend, as the norms require accounting of dividend actually paid before the close of the financial year, instead of the fiscal’s proposed dividend.

The silver lining is that the number of dividend-paying companies has gone up to 93 this year from 74 last year. Of this year’s 140 newcomers, 24 paid dividends, adding up to ₹1,092 crore, or nearly 31%, of the total dividend.

Compared to previous years, employee costs have seen a marginal annual decline of 0.72%. Interestingly, the average employee cost of the 140 newcomers works out to ₹139 crore— marginally higher than the average of ₹135 crore clocked by the rest. Also, at nearly 13%, this year’s employee cost to total revenue ratio for the Next 500 list is fairly better than 11% in 2020.

While the economy was in a precarious situation at this time last year, the Covid-19 pandemic made matters worse before there were signs of marginal improvement. And while the Covid-19 influence isn’t apparent on the FY20 numbers, there’s more pain up ahead. In other words, the challenges brought on by the pandemic, and the subsequent lockdown, will be factors that could make themselves apparent in 2022’s Next 500 list.

However, there is light at the end of the tunnel. Given that India has been pushed into a technical recession, and that the current fiscal will end with negative GDP growth, there are hopes that the country’s economy will witness some kind of a recovery, although what shape this recovery would take is still being debated. It could be a V-shaped one, or even a K-shaped one, but hope is that the tide will turn in favour of midsize companies eventually, albeit with a lag.

[For the entire Fortune India Next 500 list of India's largest midsize corporations, click here]

(This story originally appeared in Fortune India's March 2021 issue).

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