India Inc's big boys get bigger still as unorganised market shrinks

Q3 results point to the trend; consolidation will continue, say analysts

The Covid-19 pandemic appears to have given large companies a fillip, many of whom have seen sharp volume, market share and margin improvement, as they fight to stay ahead of the curve. December quarter (Q3) results of firms in the consumer, retail, paints, wires, home improvement and electricals categories shows that the big are getting bigger, with consolidation likely to continue, according to sector experts.

"The shift from the unorganised to organised market has been sharp over the last few months. Small players have struggled to carry on their operations through the lockdown and beyond, while large players have the bandwidth to go on. This has aided consolidation," says Deven Choksey, managing director of Mumbai-based brokerage KR Choksey.

Consider Asian Paints. The Mumbai-headquartered company reported a 25 per cent rise in consolidated revenue to Rs 6,789 crore in Q3, driven by a 33 per cent growth in decorative-segment volumes. The volume gains were much higher than analysts’ estimates of 19 per cent.

The earnings before interest tax depreciation and amortisation (Ebitda) margin expanded by more than 400 basis points to 28.2 per cent, driven by lower raw material costs and an improved product mix. Cost optimisation is something that most of these firms have taken up seriously as the pandemic has forced businesses to get leaner. Margin improvement, in part, is a result of this relentless focus on cost efficiencies.

Amit Syngle, managing director (MD) and chief executive officer, Asian Paints, says that he sees the organised market continuing to grow as real estate and construction activity picks up pace. Most large players have reported market share gains not just in large towns, but in rural and semi-urban pockets as the impact of the pandemic has been lower in these places. Consumer confidence is slowly making its way back as the vaccination drive revives optimism of a return to normalcy.

Experts say that branded players have an advantage in a market disrupted by the pandemic, since trust codes remain high. "Category leaders are also more likely to take initiatives that will expand the market, which therefore ensures their growth too," says G Chokkalingam, founder of Equinomics Research & Advisory.

Take Havells, for instance. Consolidated revenue and net profit for Havells was up 39 per cent and 74 per cent to an all-time high of Rs 3,175 crore and Rs 350 crore in Q3, aided by strong growth across segments.

Kajaria Ceramics, on the other hand, reported a 13 per cent and 93 per cent increase in consolidated revenue and profit each in Q3. While Saregama India saw a three-fold rise in its net profit in Q3 as it gained from digitisation.

Reliance Retail though seeing a revenue decline, reported a 380 basis point expansion in operating margins in Q3, while Westlife Development, which runs McDonald's restaurants in the west and south of India, saw a sales recovery level of 97 per cent in December, with dine-in sales at 83 per cent of pre-Covid levels for the month.

"Month-on-month the business has been getting better as the government relaxed restrictions. In Mumbai and Maharashtra, eateries were allowed to open in October, so it has been a steady climb from there. Having said that, the confidence in organised players, especially, western QSRs, remains intact. Which is why there is no drop in sales from convenience channels even as dine-in is staging a comeback," Amit Jatia, vice-chairman, Westlife Development, said.

In a call with analysts after its Q3 results last week, Havells' management said that it saw share gains from the unorganised market to be sticky. "There is increasing demand from residential and consumer segments. Customers have become less price-sensitive and are opting for branded products. And the import ban on Chinese components and products is hurting small players," Anil Rai Gupta, chairman and MD, Havells India, said.

Gandharv Tongia, chief financial officer, Polycab India, which reported a 12 per cent and 19 per cent year-on-year rise in consolidated revenue and profit respectively in Q3, said that the unorganised market in cables and wires, had shrunk to around 30-32 per cent now from 37-38 per cent a few years ago, and the decline would continue in the months ahead.

“Large players also have a stronger risk appetite. They are willing to take the necessary bets in search of growth. This could mean expanding their distribution footprint across the country, portfolio expansion and aggressive sales and marketing,” he says.

Polycab, a nearly Rs 8,000-crore company, has employed consultancy BCG to work out its vision and gameplan for the coming years.

Clearly, being big is wonderful.