1 Million Companies DEAD? India’s Profit SHOCK (See 3)

Marcellus Investment Managers have observed shifting profitability trends across India, according to CIO Saurabh Mukherjea and Investment Advisor Nandita Rajhansa, who shared insights from their recent research at a dedicated event.

Mukherjea highlighted that India is on the brink of significant transformation, influenced by factors such as the China+1 strategy, the rise of UPI, and increased bank deposits among women.

Marcellus used data from the Center for Monitoring Indian Economy (CMIE) up to 2022 to analyze profit trends over the past decade, examining 30,000 companies and categorizing them into deciles. They noted a marked increase in profits across all deciles from FY2020 to 2023, following the Covid-19 pandemic.

The 800 largest companies in India, termed “rulers,” each have profits exceeding $60 million and typically account for 60 percent of the country’s total profits, growing at a compound annual growth rate (CAGR) of 15 percent. Beneath them are about 5,000 “challengers,” companies with profits ranging from $6 million to $60 million, growing at approximately 16 percent CAGR.

Saurabh Mukherjea pointed out that, contrary to the common belief that “money begets money,” most of the pre-pandemic “rulers” did not maintain their leadership post-Covid. He highlighted an encouraging trend among the challengers: emerging smaller companies are well-positioned for growth due to technological advancements and agile business models.

1 Million Companies DEAD? India’s Profit SHOCK: “The new superstars will not be the rulers but the challengers,” Mukherjea stated, referring to disruptor companies that start small and scale up or large companies that develop challenger franchises. He cited examples like Trent’s affordable fashion brand Zudio, Asian Paints in home décor, and Narayana Hrudalaya in insurance.

Based on income tax data from FY2012 to FY2022, the study initially divided companies into three groups according to their profit-after-tax (PAT): high, medium, and low. Rajhansa noted that companies with a PAT above Rs 1 crore have seen annual profit growth of at least 15 percent. These high-profit companies, making up about 17 percent of India’s profitable entities, contribute nearly 90 percent of total profits.

1 Million Companies DEAD? India’s Profit SHOCK: Approximately 6,000 companies fall into the high-profit category (both listed and unlisted), consistently growing profits over the past decade.

This starkly contrasts with the broader corporate landscape, where many firms struggle to maintain profitability. Mukherjea remarked on the significant rise of these high-profit companies, noting that their post-Covid profitability has surged dramatically. Conversely, companies with PAT between Rs 10 lakh and Rs 1 crore, and those below Rs 10 lakh, have shown little to no growth over the same period.

Mukherjea also pointed out the increasing number of companies filing nil returns. “A decade ago, there were 600,000 nil returns; now, this has doubled to 1 million,” he said, highlighting concerns about a significant portion of the corporate sector’s struggle to generate profits.

This economic disparity among companies affects both consumption and employment. “With only 17 percent of companies thriving and 83 percent struggling, this impacts all their employees,” Mukherjea explained.

He described the situation as a K-shaped recovery, illustrating the stark contrast: while the upper tier thrives and purchases luxury goods, the lower tier faces significant challenges.

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