Coronavirus to trigger fresh consolidation across sectors, says BofA

Brokerage says organised, large firms will grab more market share in the post-Covid world

The Covid-19 pandemic will trigger a second wave of consolidation in India, resulting in big firms across sectors gaining further market share from smaller and unorganised players, says BofA Securities.  

The first round of consolidation was triggered by demonetisation and implementation of the goods and services tax (GST) in 2016 and 2017, respectively.

BofA Securities analysed 1,125 listed companies across sectors such as consumer, financials, real estate, communication services and energy. Broadly, the top five players in each sector accounted for less than 60 per cent market share before 2016. Currently, the share of the top five players has increased to 62 per cent, and is expected to rise further as Covid-19 triggers a fresh round of disruption.

“The share of top five players has increased 250 basis points (bps) in the last two and half years. That’s a big change at the country level. Once the Covid-19 pandemic is over, this number will accelerate even further,” said Amish Shah, managing director, co-head India equity research & equity strategist, BofA Securities, at a media round table on Tuesday. “The two key drivers for consolidation are access to low-cost institutional funds and technology.”

Shah said the new cost dynamics are favouring bigger players in the organised sector.

“Organised companies will be able to cut down on cost and their working capital cycle. These are the benefits which unorganised players are not getting. In addition to that, the cost of compliance, regulation and taxation is increasing. As a result, the returns and working capital of unorganised players are getting impacted. The cash crunch created by the pandemic will hit unorganised players the most,” he said.

Shah said large companies have easy access to working capital funds from banks, whereas lenders have become averse to giving money to smaller firms.

BofA Securities says there is still a lot of market share left to be captured by the organised players. Some sectors still have anywhere between 35 per cent and 98 per cent market share with the unorganised sector. “There is a lot of market share to be gained from unorganised sector. So this will be a theme for several years,” said Shah.