The polarisation of corporate profits in India is reducing

In the decade running up to COVID-19, corporate profits were increasingly polarised in India. The top 20 listed companies accounted for a significant share of India Inc's profit pie. Since FY21, smaller companies have grown their profits faster. Profit democratisation owes much to: (a) the India Stack and UPI, (b) the widespread availability of affordable credit and (c) the rise of social media as a medium for smaller companies to reach customers. Interestingly, though the stock market seems to have overdone its enthusiasm for small caps - the top 20 companies' share of the BSE 500 market cap now stands at 35 per cent, the lowest in this century. "A truly democratic society is one in which every citizen of these million smaller Indias is included in the mainstream, able to benefit from government services and participate in the country's development. We need to fix our country's problems at great speed, at scale, with high quality while providing solutions that are easy to access, independent of geography, and low cost. Technology, the great leveller, is our only hope of meeting these goals." - Nandan Nilekani and Viral Acharya in their book 'Rebooting India: Realizing a Billion Aspirations' (2015). Introduction Two years ago, we wrote, "The 20 most profitable firms in India now generate 70% of the country's profits, up from 14% thirty years ago." Thankfully, the data on corporate profitability over the past two years shows a trend reversal. Exhibit 2 displays three distinct measures of profit concentration. The numerator is identical for each: the total profits of India's 20 largest (by profit) listed companies. The denominator remains different: The denominator for the green line is the Indian government's corporate tax collection, which is grossed up to approximate the total profits of all profitable companies in India. The denominator for the grey line is the total profits of the BSE 500 listed companies. The denominator for the black line is the total profits of the 12,000 largest companies in India. For all three lines, we use a three-year rolling average to remove the 'noise' in the YoY fluctuation (we calculate the ratio 'top 20 PAT/ total PAT' for each year and average the ratio across three years to create a rolling average). We believe the most comprehensive measure is 'PAT top 20 / India Inc PAT'

This article was originally published on April 01, 2024.