India’s Top 20 Leviathans’ Awe-Inspiring Dominance
A mural marking the Formula One Grand Prix outside Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

India’s Top 20 Leviathans’ Awe-Inspiring Dominance


The top 20 profit generators in India (‘the Leviathans’) now account for 90% of the country’s corporate profits. Beyond dominating the country’s profit pool, the Leviathans also reinvest these profits far more efficiently back into their businesses. By doing this over the last 25 years, the Leviathans have also widened the RoE gap between them and India Inc. Anyone who wants to succeed in the Indian stock market should therefore be focused on: (1) assessing how long the current Leviathans’ dominance can last; and (2) identifying the next generation of Leviathans.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

Fresh Research And Data Show Even Greater Dominance

In September 2019, the Government of India cut the corporate tax rate from 30% to 22%. This tax rate cut benefited large profitable companies more than it helped small, marginally profitable enterprises. Then in the second half of March 2020, economic activity in the country slowed down very sharply as the country went into the Covid-19 lockdown. Whilst the lockdown impacted all companies, for smaller companies it posed existential risks as it threatened to wipe out their modest reserves.

As shown in the chart below, the corporate tax rate cut of September 2019 plus the adverse impact of Covid-19 on India Inc.’s profits for Q4FY20 meant that the profit share of the top 20 Leviathans zoomed up further in FY20.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

The top 20 Leviathans are also accounting for a growing share of the free cash flows generated by Indian companies. Nearly 60% of the country’s free cashflows now come from the top 20 Leviathans. However, the dominance of the top 20 Leviathans in terms of FCF is not nearly as marked as it is in PAT – see chart.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

In order to understand the drivers of the top 20 Leviathans’ dominance, we compared the RoEs of these firms with the rest of the country. The last decade has seen a steady rise in the RoE superiority of the top 20 Leviathans.

In FY20, the median RoE of the top 20 Leviathans was 17.2% whereas India Inc’s average RoE was a mere 4%!

This means that the top 20 firms are not just putting greater amounts of money to work, they are also applying these larger sums of money far more effectively and far more profitably than the rest of India. In fact, if the PAT and the net worth of the Leviathans is removed from the RoE calculation for India Inc, then RoE for India Inc declines steeply and even becomes negative in FY20.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

So what explains this rising dominance of the top 20 firms? A case study sheds light on this question. Let’s take HDFC Bank and HDFC, which occupy ranks number three and four respectively in the top 20 Leviathans list. The Covid-19 crisis, like the global financial crisis in 2008 and the NBFC crisis of the late-1990s, strengthened the position of these two well-managed lenders. In both these periods of crisis, whilst some competitors had to shut their shops and others had to retrench, these two lenders were able to sustain increased losses for an extended period of time, gain market share and then ride the wave of recovery. Similarly, as the Covid-19 crisis comes to an end, well-capitalised lenders like Bajaj Finance, HDFC Bank, Kotak Bank are emerging as winners as:

  1. Their loan book growth accelerates whilst being funded by their high-quality liabilities franchise.
  2. Their NPA ratios fall materially; and
  3. Their net interest margins expand as these lenders are able to pick and choose borrowers.

Delving deeper into these two firms gives us more clues as to why the top 20 Leviathans are pulling away from the rest of corporate India:

Superior Access To Capital

HDFC Bank’s FY20 Annual Report shows its average cost of funds to be 5.0%. However, the vast majority of Indian lenders will be lucky if they could access funds at even 7.5%. As crisis after crisis has buffeted India’s lending sector over the past five years, the advantage of the elite banks which in the top 20 Leviathans list — like HDFC Bank and Kotak Bank — has only strengthened. This can be seen in the following table where the Leviathan banks are able to lend money at much lower lending rates than their non-Leviathans counterparts.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

HDFC’s superior access to capital over the past 20 years has allowed it to seed and finance multiple market-leading franchises in India such as HDFC Bank, HDFC Life, HDFC Ergo, and HDFC Asset Management (see Marcellus’ May 27, 2020 blog).

Superior Access To Talent And Tech

The rising role of technology in driving not just business efficiencies, but also in underpinning competitive advantage, has played into the hands of the top 20 Leviathans. They have access to better talent and this allows them to build better technology which then allows them to hire better talent and invest more in tech. As explained in our October 2020 newsletter, the ability of well-managed Indian firms to enter this virtuous loop of talent, technology, and superior FCF generation is one the most potent factors driving the rise of the Leviathans:

“Bajaj Finance and HDFC Bank use their tech investments behind customer data collection and analysis to help complete credit assessment and provide loan approval to a new customer in a substantially shorter time period compared to other lenders. This is one of the strongest areas of differentiation for these firms.

Asian Paints uses proprietary historical demand data to accurately forecast demand for their products for every nook and corner of the country, for each day in a year. This helps Asian Paints delight the painters and paint dealers with ready availability of several thousand SKUs in a highly voluminous product category. That in turn delivers substantially higher inventory turns for these intermediaries (they are also the key decision makers who drive the end consumers’ choice of paint brand & colour).

The benefits highlighted for the lenders and Asian Paints here are akin to the ‘network effects’ that drive tech-based businesses like Uber and Facebook. The more proprietary data Asian Paints and Bajaj Finance collect about customer demand, the sharper is their demand forecasting and customer understanding, and the wider is the gap between these CCP companies and their competitors.”

In contrast, as Sameer Arora of Syntel highlights, older Indian firms are reluctant to update their old IT systems because of the heavy capex involved and the need to provide training to the workforce (with many of the unionised workers themselves having no interest in being trained). This drags down the efficiency of these businesses and condemns them to low profitability and market share losses. India’s PSUs are an obvious example of this resistance to tech change (Link).

Greater Access To The Levers Of Policymaking

As the Indian economy has slowly but steadily liberalised over the past 20 years, the central government, state governments, and various regulators have obviously reached out to India Inc. for its inputs. Both directly (through their access to the corridors of power) and indirectly (via trade bodies, where market-leading firms clearly have more say than the minnows), market-leading firms have had greater visibility on impending policy changes. This, it would appear, gives them an advantage when pathbreaking policy changes are announced in heavily regulated industries. As ‘The Economist’ put it in an article published in May 2020, “These are huge private companies with mediocre returns but a knack for navigating both India’s labyrinthine bureaucracy and its corridors of power. They operate in heavily regulated industries: Larsen & Toubro, an engineering group, builds roads; Hindustan Zinc, a subsidiary of London-listed Vedanta Resources, is a big miner.” As explained further in this note, our analysis of churn in the ranks of the Leviathans suggests with the passage of time the ability to manage regulation has become less relevant for maintaining membership of the Leviathan club.

Superior Ability/Strength When It Comes To Handling Exogenous Shocks

Over the past 30 years, the Indian economy has not only become more integrated with global capital and trade flows, it has also transitioned from being a socialist economy (which used to have Soviet-style Five-Year Plans) to a more free-market economy (where the role of the state is gradually but steadily reducing). As result, Indian corporates are now far more exposed to exogenous shocks. These shocks can arise from the world outside India (eg. 2008-09, Covid-19) and/or these shocks can arise from within India (eg. demonetisation, GST, the collapse of IL&FS/DHFL/etc.). The corporate performance of the Leviathans is more immune to these shocks than the performance of smaller companies because the Leviathans have stronger balance sheets (and better access to capital) and superior access to talent & tech (which, ironically, allows them to adjust to shocks like GST, Covid-19 quicker than their smaller competitors).

So, in common with what happened to the United States and Japan in the decades where they transitioned from being closed economies to open and industrial economies (in the USA this happened in the 50 years between 1880-1930 and in Japan this happened in the 40 years after World War II), the rise of the free market economy in India is hastening the ascendancy of the Leviathans as exemplified by the case study of HDFC and HDFC Bank given earlier in this article.

Churn In The Top 20 Leviathans

Underneath the big picture of the rising dominance of the top 20 PAT generators is another story of churn: on average, the decadal churn rate since FY02 has been 57% whereas the FY10-20 period saw the top 20 list churn by 45% i.e. just under half the names in the Leviathans list from ten years ago have now been replaced.

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

Here are the nine firms that have exited from the list between FY10 and FY20: Indian Oil, Bharti Airtel, Steel Authority of India, Reliance Communications, Bharat Heavy Electricals, Punjab National Bank, Hindalco, Sterlite Industries, Jindal Steel & Power.

And here are the nine firms that have entered between FY10 and FY20: HDFC Bank, HDFC, Coal India, Power Grid, HCL Tech, GAIL, Kotak Mahindra Bank, Power Finance Corporation, Hindustan Unilever.

Only the most cynical observers will have a problem with this sort of change. This churn tells us that the free market is working in India because:

  • Every single exiting company is either a public sector entity and/or hails from a heavily regulated industry where manipulating the regulatory levers used to be the name of the game.
  • Barring Coal India (which listed in FY11), Power Grid, GAIL, and Power Finance Corporation, the majority of the entrants into the Leviathans list are private sector companies that have used skill, and superior access to capital, talent & technology to build world-class businesses.
In fact, as the number of public sector names in the top 20 list dwindle further from the current seven, more well-run private sector companies are likely to enter.

Obviously, it is more likely than not that these firms will come from the next 20 names on the list of India’s top PAT generators. So here are the next 20 names:

India’s Top 20 Leviathans’ Awe-Inspiring Dominance

Note: HDFC Bank, Kotak Bank, TCS, Maruti Suzuki, Bajaj Finance, Axis Bank, HDFC Life, HDFC AMC, Asian Paints are part of many of Marcellus’ portfolios.

Saurabh Mukherjea and Harsh Shah are part of the Investments team at Marcellus Investment Managers. Saurabh is also the author of ‘The Unusual Billionaires’ and of ‘Coffee Can Investing: The Low Risk Route to Stupendous Returns’.

The views expressed here are those of the authors, and do not necessarily represent the views of BloombergQuint or its editorial team.

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