The last six years have witnessed a dramatic decline in profitability at India Inc. despite the country’s rapid economic growth. However, Kanvic analysis has found that companies which pursued aggressive growth have managed to improve their bottom-line.
Today India Inc. finds itself in difficult terrain. Revenue growth has stagnated and profits have hit at an all-time low. This is despite the fact that India’s headline growth rate today marks it out as the world’s fastest-growing large economy.
Yet amidst the many troubles beleaguering Indian Inc., we have been able to identify a number of companies in every industry that have prospered in this hostile environment, achieving healthy revenue growth at the same time as bettering their bottom lines. What our analysis discovers is that the winners of recent years have been those that pursued aggressive growth, relentlessly focussing on expanding their top lines to steer their way to higher profits.
Indian companies face shrinking profits
The last six years have been a rough ride for most Indian companies as they have succumbed to falling profits. The Kanvic Performance Navigator shows that the net profit of India’s leading companies as a share of GDP has more than halved, from 4.1% in 2010 to only 2% in 2016. EBITDA has also seen a significant fall over this period, from 8.7% of GDP to 6.4%.
These falls followed an extended period of rising corporate profits in India, as the country’s rapid growth propelled it into the club of emerging BRIC economies. However, over the last six years, profitability has been steadily eroded.
This trend has continued into the most recent financial year, compounded by a deterioration in the financial strength of companies in sectors like metals, particularly steel - which have come under acute financial pressure following a global supply glut brought about by a slowdown in Chinese growth.
The decline in profitability at India Inc. is also reflected in the stock market valuations of the country’s largest companies. Eight years on from the global financial crisis, the market capitalisation of around one-third of the companies in the BSE 500 is still lower than it was in January 2008 - just prior to the Lehman collapse. Back in 2008, these companies represented over two-thirds of the entire market capitalisation of the BSE 500.
Five sectors capture 75% of the profit pool
What has been equally significant as the profit squeeze that occurred over recent years, is how the remaining profits have shifted between sectors. In 2016 the top five most profitable sectors in India captured three-quarters of the entire profit pool. A dramatic doubling of their share since 2010.
The big winners in this profit shift have been sectors like automotive and auto-components. While utilities have also seen steady performance. Similarly, the knowledge-intensive industries of IT and Healthcare (which is dominated by Pharmaceuticals) have increased their share of the profit pie, thanks to their ability to deliver lower costs to export clients around the world.
Aggressive growth leads to higher profits
One of the most significant findings from the Kanvic Performance Navigator is that the companies that have increased profits over the last five years have been those that pursued the most aggressive growth.
Companies that increased their top-line by more than their industry’s median were more likely to see profit growth, while those who grew below the industry median were more likely to see a profit decline.
Given that top-line growth has had a disproportionate impact on profits, the clear imperative for India Inc. is getting back to growth.
Equally interesting as the correlation between aggressive growth and increasing profitability is the fact that there are companies in every sector that have achieved growth. This is despite the fact that many industries have faced well-documented challenges in recent years.
For example, even in the troubled construction space that has been beset by delays to large infrastructure projects, there are companies that have achieved growth above the median of any other sector, including such high performers as information technology.
In fact, the Kanvic Performance Navigator shows that there is eight times more variation in revenue growth within sectors than between sectors for a five-year period from 2010 to 2015. Therefore, whatever the industry, breakthrough growth is possible for India Inc.