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By design and by default: Industry consolidation gathers steam across India

Murali Srikantaiai, Equity Portfolio Manager
2023-11-30
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Many industries across India remain highly fragmented. However, a trend that has become more visible in India over the past several years under Prime Minister Narendra Modi’s administration is that of industry consolidation, which has streamlined the number of companies operating within each sector.

I see this as a largely positive development that presents opportunities from which some equity investors can (and should) seek to benefit.

A little background on this trend

The reasons for the increased industry consolidation are many. In the past, many sectors in India could have been typecast as “small-scale industries,” populated by mostly inefficient, uneconomical companies that did not generate the anticipated levels of employment. The Indian government has come to realize that size and scale matter in today’s world. Thus, it has forged ahead to attract large-scale manufacturing to the country using subsidies and other means. The most notable and successful example of this is that iPhones, including the iPhone 14, are currently being made (“assembled” is the correct word) in India. In fact, India has been the world’s second-largest maker of smartphones of all types for a few years now.

The change in the Indian government’s mindset is most apparent in existing businesses and sectors. The government has been a key facilitator of consolidation, either by design or by default. There seems to be a growing recognition that Indian companies need to get bigger to stay relevant and competitive globally. While the government has not explicitly articulated any such policy, I believe its actions on this front speak for themselves. Here are some examples of what I’m talking about.

Consolidation: Examples by design

  • India’s competition commission has been allowing corporate mergers to go through even in cases where it could have blocked them. A month or so ago, for instance, the country’s number one and two multiplex chains were permitted to merge unconditionally. Even more recently, two big cable TV players were allowed to merge, subject to some conditions.
  • India’s banking sector has been consolidating for several years now. In a few years, I suspect only two or three large state banks will be left. Meanwhile, some smaller state-owned enterprise (SOE) banks have been absorbed by bigger ones. (I would not be surprised if the large SOE banks are privatized at some point, but that is still a long ways away.)

Consolidation: Examples by default

  • In India’s telecommunications sector, there are effectively two large players and two other “bit actors” remaining in the wake of industry consolidation that has created some significant shareholder value.
  • In the airline industry, there have been several bankruptcies and a government sale of one airline, which could eventually be merged with one of the others, potentially resulting in just two large players left to serve one of the world’s fastest-growing air-travel markets.
  • There has also been consolidation in India’s scattered, disorganized retail jewelry sector. My view is that the number of players in the sector could shrink further over time, due mainly to tax-rule changes that limit arbitrage opportunities for some players.

Bottom line

Industry consolidation has been gaining considerable traction in India. All in all, I expect to see a lot more of it happening in the coming years, which should generally be good news for investors as consolidation of legacy, mostly family-run businesses into larger enterprises boosts market share, operating leverage, and profit margins for publicly traded companies in India. I believe these conditions offer equity investors an opportunity to benefit from positive change across a variety of industries in one of the world’s fastest-developing nations.

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