‘Winner Takes All’ In India’s New, Improved Economy

“….three big revolutions will be—democratizing credit through AA [Account Aggregation Framework], democratizing commerce through ONDC; and essentially making the delivery of products much simpler and cheaper with logistics’ transformation. These three steps will lay the foundation for equitable commercial activity for both goods and services. India will move from a pre-paid cash informal economy to a post-paid formal cashless productive economy.” ­ -Nandan Nilekani in an interview with the Livemint, 2022.

We are seeing the rise of a new, more efficient, more digital and more scalable India. An example of this is the local chai vendor who has set up shop just outside our office in the Andheri East suburb of Mumbai.  A year ago, when the tea stall started business, the said vendor was selling 500-600 cups per day. Today, the vendor sells around 7,000-8,000 cups of beverages per day i.e., 15x growth in one year. Spotting a gap in the market, a cigarette vendor set up shop next to the tea vendor, four months ago. From clocking revenues per day of Rs 1,000/day in his first few weeks, the cigarette vendor now generates Rs. 8,000 per day.

Both of these vendors receive vast majority of their payments via Unified Payments Interface, a real-time mobile-based payment system. According to them, when they started their tea and cigarette stalls hardly 20-30% of people used to pay via UPI. Today, almost 70-80% of their customers pay via UPI (the remainder still use cash). According to National Payments Corporation of India, peer-to-merchant UPI transactions recorded 138% YoY growth in November 2022—chart below shows that in November alone, India recorded 4 billion peer-to-merchant transactions!

If we look at the digital payments data in India, National Electronic Fund Transfer (NEFT) accounts for 55% of all digital transactions in FY22. Going further, if we look at transactions done via smartphones [which includes UPI (16% share), Immediate Payment Service or IMPS (12%), and e-wallets (1%)], they account for another 29%, which brings the total to 84%. If we again add the share of debit and credit cards, another 3.5% is added, which brings the total to 87.5%. Therefore, as of FY22, around 88% of transactions in India (by ) were via digital methods of various sorts.

Among categories which recorded high volumes of approved UPI transactions in November were groceries and supermarkets, eating places and restaurants, games, department stores, pharmacies, etc. In fact, the cigarette vendor outside our office told us that when it comes to online payments, he only transacts via UPI. This implies that he does not use any banking apps or websites, nor does he use debit/credit cards. According to the Ministry of Finance, now more than 40% of total digital transactions (by volumes) in India are via UPI and UPI based transactions amounted to more than $140 billion in August 2022. In other words, on an annualised basis UPI transactions are running at $1.7 trillion per annum. UPI has become ubiquitous in India. For instance, recently one of our colleagues was in a small village in Meghalaya, near the border with Bangladesh, and there he paid for his Maggi noodles using UPI.

UPI and the digitisation of business activity in India is one of the several factors driving an exponential surge in the concentration of corporate profitability in India. As explained in this note, improvements in transport infrastructure (e.g., the highway network has doubled over the past decade), the introduction of GST (in 2017) and new business models which have migrated from the developed world to India over the past decade, are resulting in India’s 20 largest profit generators earning a staggering 80% of the nation’s profits as compared to around 40% a decade ago (as shown in Chart 1). This, in turn, is leading to an increasingly polarised stock market.

In the decade ended March 31, 2012, the Nifty added around $440 billion in market cap. In these 10 years, ~80% of the generated came from 17 companies and the median total shareholder return or TSR CAGR was 26% for these 17 companies. Moving forward by a decade, in the decade ended March 31, 2022, the Nifty added ~$1.4 trillion in market cap. And 80% of the generated in these 10 years came from just 20 companies whose median TSR CAGR was 18%.

As the table above shows, wealth creation in India is being driven by a dozen and a half companies. Another way to understand this is to look at the polarisation in free cashflows-to-equity or FCFE. A decade ago, the top 20 FCFE generating companies in the Nifty (in the decade ended March 2012) accounted for just 23% of India Inc’s FCFE. Moving forward by a decade, if we look at the top 20 FCFE generating companies in the Nifty in the decade ended March 31, 2022, they account for 51% of India Inc’s FCFE. (See Table 4 in the appendix attached below).

Polarisation in the Indian stock market therefore has two separate dimensions:

1. A handful of companies—precisely 20—are now taking close to 80% (on a three-year moving average basis) of the profits and more than half of the FCFE generated by the Indian corporate sector—see tables 3 & 4 in the Appendix. Even though the concentration has reduced on an absolute basis in FY22 vis-à-vis FY20 and FY21, the uptrend (as seen in Chart 1) is quite distinct and clear. This profit concentration in the hands of the top 20 companies and an even greater concentration of cashflows in the past decade has allowed strong franchises (with healthy PAT to FCFE conversion rates) to reinvest in their businesses and thus outgrow their competition. And it has nothing to do with quantitative easing by central banks or with Covid.

2. Just 20 companies have accounted for 80% of the wealth created by the Nifty in the decade ended March 2022. In comparison, 17 companies accounted for the same proportion of the wealth created by the Nifty in the decade ended March 2012, meaning wealth creation has consistently remained concentrated in the hands of a few dominant franchises over the last decade. (See Tables 1 & 2 in the appendix attached below).