The India Opportunity: Is Consolidation Of Profitability A Threat To Small Firms?

Big companies accounting for a substantial percentage of the country's overall profit is a big challenge for smaller businesses that are compelled to re-evaluate their options, according to Saurabh Mukherjea of Marcellus Investment Managers Pvt.

"Typically, when you join up a country, it is the small regional player who suffers as they have to face up to the national giant," founder and chief investment officer of Marcellus, said in a panel discussion on India: The Road Ahead at BQ Prime's India Opportunity Summit in Mumbai on July 13.

As India rises to become the fifth largest economy, improved infrastructure drives interconnectivity, and businesses will adapt while larger players capitalise on this connectivity to displace local competitors, according to Mukherjea. The transformative impact of enhanced connectivity created expansion opportunities and altered the dynamics between larger and local players, he said.

Consolidation has been stark. The Marcellus' founder cited data from 2008 that 20 of the largest listed companies contributed just 25% of the nation's profits. That, according to Mukherjea, has surged to 80%.

HDFC Bank Ltd. alone contributed approximately 8–9% of the country's profits, he said to underscore the significant influence of large corporations.

Mukherjea warned that this trend posed challenges for millions of smaller businesses that previously thrived in an economy with limited connectivity. They are now compelled to reevaluate their options, he said.

Mukherjea drew parallels with the development of countries like the U.S., Japan and South Korea. These nations experienced a shift in productive resources from numerous small players to highly automated, efficient and well-capitalised giant firms.

Nilesh Shah, managing director at Kotak Mahindra Asset Management Co., however, argued that the growth of larger corporations did not necessarily result in the decline of smaller firms. On the contrary, he said, it stimulated innovation among smaller players to ensure their survival.

The entry of Big Bazaar and similar supermarkets initially threatened small grocery stores, he said. But smaller players adapted by consolidating purchases and enhancing their distribution networks, Shah said, adding that both models continue to prosper.

He cited Morbi tiles industry as an example, where leveraging available resources and improving quality and design enabled them to become competitive in the southeast Asian market. Instead of being replaced by imported Chinese tiles, they now export to the Middle East and Europe, he said.

According to Sunil Singhania, founder of Abakkus Asset Manager LLP, three key factors contributed to the success of small and medium-sized enterprises in India.

The ease of acquiring capital helped them establish and unique business ideas and models gave them competitive edge, according to Singhania. And third was the "positive impact" of Indians who have obtained world-class education abroad and returned to support their own businesses, enhancing the condition of the SMEs, he said.

In fact, he pointed out, HDFC Bank's profitability stems from its SME and retail-lending business, serving millions of consumers across India.