Big gets bigger

Earlier this week, this newspaper carried a report that Gautam Adani-led Adani group is set to acquire the prestigious Mumbai airport run by debt-ridden GVK group. This will make the Ahmedabad-based conglomerate the largest airport operator in the county after the GMR group, with eight airports in the bag, including the one under-construction in Navi Mumbai.

Staying with aviation, the over $111-billion saltto-software Tata group confirmed its interest in bidding for up-for-grabs national carrier Air India. Tatas already have interest in two Indian airlines, Vistara and Airasia India, and a successful bid here will make it one of the biggest in the industry.

Elsewhere, Reliance Industries’ retail venture is reported to be ready to gobble up India’s original “Retail King”, the Kishore Biyani-run Future Retail. Reliance is already the country’s largest retailer, and with Future Retail, it will stride the sector like a colossus.

Marquee global investor Blackstone may shell out $1.7 billion to acquire Prestige Group’s rent earning properties to add to its already impressive $8 billion of realty assets in India. Already the biggest in online education, decacorn (valuation over $10 billion) Byju’s has recently snapped up coding-for-kids firm Whitehatjr for $300 million. Reliance bought online pharma Netmeds to add to its online shopping repertoire, even as two of the biggest firms in the sector, Pharm Easy and Medlife, announced a merger.

There is consolidation apace across India Inc— from aviation, retail, financial services, e-commerce, online education, consumer expendables to steel and cement. That much is obvious. But more importantly, and some may say worryingly, is big getting bigger a secular trend? Or are the above examples just isolated cases, largely an Ambani or Adani thing, limited to a few sectors like aviation, retail or e-commerce?

Let’s turn to numbers for some help. An analysis of Capitaline database of over 1,000 listed firms over the last five financial years till March 2020 across sectors show the share of top five players on the rise. Between FY16 and FY20, the top five cement players have added over 8 percentage points to their share of the sector’s total sales. For the comparable period, the gain for the top five was over 4 percentage points for banks (in terms of interest income), 3.5 percentage points for metal players, 3 percentage points for capital goods, 2 percentage points for oil & gas players. Even in an already consolidated industry like IT, the big five upped their share by over 2 percentage points. The only outliers were pharmaceuticals (loss of 3.5 percentage points), auto (1.6) and realty (1.4).

Management consultant Bain & Company’s most recent India Mergers & Acquisition Report too points to the big getting bigger trend. In steel, the top five players increased their share of production by 7 percentage points between FY14 and FY19. For a comparable period, the top five power producers increased their share of installed capacity by 5 percentage points, and the top three telecom firms by almost 20 percentage points in terms of subscribers, according to the Bain report.

The reasons for this big getting bigger may vary across sectors. For a majority, like retail, cement, telecom or aviation, it may be driven by a surfeit of distress asset sales in the sector, more so after the unprecedented Covid-induced market disruption. For others, reasons like firms getting rid of non-core assets, the need for strong players to scale up and foreign players looking at India entry provide the opportunity for consolidation. This big getting bigger theme has even caught the fancy of global money managers now. A Hong Kong-based $558 million India-focused equity fund, Pinebride Investments Asia, is solely focused on investing in firms that stand to gain market share post the pandemic.

Interestingly, for brand-driven categories like fast moving consumer goods (FMCG), it may very well be the consumer’s preference for big established labels that is dictating this trend towards consolidation. There was a time when a sector like the ~4.2-trillion FMCG, with wide reach across millions of Indian villages and mofussil towns, was a beacon for small, regional brands to exist and prosper. Not any longer.

For the last three years, brands from big marketers have consistently beaten small regional brands on growth. For 12 months till February, these big brands had almost double the growth rate compared to the ones from smaller players. More importantly, they have done it without sacrificing margins, as profit share of the top five players here has gone up by almost 4.5 percentage points during the same period. The Covid-led lockdown appeared to be giving small FMCG brands some hope of capturing consumers desperate to stock up, but that seems to have fizzled out. With gradual opening of the economy, big marketers have come back with force, and minnows have lost anywhere from 5 to 20 percentage points share to bigger rivals across FMCG categories like biscuits, softdrinks, tea, edible oils and wheat flour.

Is dominance of big players necessarily a bad thing? After all, consolidation, and its natural corollary, emergence of a few players of size and heft, is the obvious path for any market like India as it starts maturing. But one has to guard against big players’ tendency to push a market’s oligopolistic structure into a duopoly, or worse a monopoly! Going ahead, the mettle of India’s competition regulator will be tested like never before.