Mind the Gap

APL Apollo is India’s largest manufacturer of structured steel tubes. Like most companies, it was hit hard by the first wave of the pandemic, with sales halving and profits being wiped out completely in the April-June 2020 quarter. But, it was a blip. What followed was a relentless cycle of market share gain, so much so that the company will end FY22 with 55 per cent share of the steel tubes market, up from 40 per cent in FY20. Its operating cash flows have doubled during this period. Many of its competitors, particularly in the unorganised sector, have either shut shop or curtailed operations significantly. Such a sharp rise in market share in just two years is nothing short of staggering. Yet, APL is not alone. Strong leaders in practically every business sector have increased market share during the last one year, at the expense of weaker competitors with less access to capital, technology or labour. Bajaj Finance in the NBFC space, Polycab in cables and Asian Paints in paints are just a few examples. This trend, of concentration of market share, profitability and shareholder returns, is something which was already under way in India, but got hugely accelerated by the Covid disruption.

Recent figures from the Reserve Bank of India show that the sales share of non-financial companies with annual revenues of more than Rs 1,000 crore — the biggest corporations — went up to 91 per cent in the January-March quarter of 2021, up from 89 per cent in the corresponding quarter of the previous year. Smaller companies lost ground. Even more significantly, data from investment management firm Marcellus reveals that today, 90 per cent of India’s corporate profits are accounted for by the top 20 most profitable companies. This startling fact, that a handful of companies generate almost all of Indian corporate profits, hasn’t gone unnoticed by the stock market. Nearly 80 per cent of the wealth created by the Nifty in the last decade has come from only 16 companies. Even accounting for the fact that this has been an exceptionally lean patch for corporate India, one unlikely to continue forever, this trend of concentration is too pronounced to be ignored, for it gets reinforced with every major disruption such as Covid or demonetisation — the strong get stronger, the weak struggle. In a perverse way, market leaders may even welcome such external shocks, almost as the village moneylender craves the occasional drought. In the adversity of others, there is an opportunity; such is the sad truth of the capitalist jungle.

This trend of unequal growth trajectories or concentration partially explains the baffling performance of the Indian stock market in the face of widespread economic distress. Here, too, concentration is at play. The top six stocks in the S&P BSE Sensex — Reliance, HDFC Bank, Infosys, ICICI Bank, HDFC and TCS — account for 60 per cent of the index’s weight. Add the next two, and the top eight account for as much as 70 per cent. Basically, if these few stocks, all market leaders in their industries, continue to do well and gain market share, chances are that the Sensex will keep rising, regardless of how poorly the Indian economy does. It will not matter if a few hundred smaller stocks are languishing or perishing, as they border on irrelevance. One must hasten to add here that the number of companies which are leaders in diverse sectors is not as small as this simplistic analysis may suggest. Maybe a hundred-odd names can grow fast in the years to come. Yet, concentration is a reality that no Indian investor can be oblivious to. The tall trees are getting taller with every passing day, blocking out sunlight and oxygen for the smaller shrubs.

This widely disparate performance of economic participants, both in the corporate sector and financial markets, is reflected in income and wealth of individuals and households. In the last one year, when large swathes of the economy struggled to stay afloat, India added 40 new billionaires. The combined wealth of our 177 billionaires doubled to well over $750 billion. The country’s richest man, Mukesh Ambani, saw his wealth double to $84 billion. Gautam Adani, whose riches, like his surname, rhyme with Ambani’s these days, faced more volatility, but nevertheless saw his wealth soar to over $60 billion. This at a time when, as data from the Azim Premji University shows, 23 crore Indians got pushed into poverty and millions lost employment. None of this is to disparage India’s billionaires. We need them. Without wealth creation and a flourishing corporate sector, India’s unemployment and low per capita income problems will get worse, not better. And it is not as if these billionaires have prospered by unfair means, at least in most cases. Yet, such extreme concentration of wealth comes with its own risks. The stock market may celebrate how a successful company squeezes out competitors and makes survival difficult for unorganised players, but these smaller outfits are significant generators of employment and income for a large population. When they are hurt, or go bust, more Indians get driven into poverty. It is all very well to call this inevitable creative destruction, but at some point, a more nuanced, and humane, lens is called for. Else, it may go on to create an unstable social situation, if it hasn’t already. That is not desirable, not just by the have-nots, but also by the rich who have prospered in this difficult time.

Left to itself, this trend will only grow stronger. Current momentum favours the market leaders and with every higher step they make conditions more difficult for challengers. Amazon is the perfect example. This is a big test for capitalism as we know it and one that may be fundamental in deciding if it will survive the century. Would a ‘winner take all’ trend be allowed to flourish, or would this extreme concentration of wealth and influence need to be reined in somehow? In India, this question is especially germane, for while markets are always very important, a nation has to be more than just that – a marketplace.