Market concentration increased across India's key industries in FY24

Market concentration continued to increase in India’s key industries as top players grabbed a larger share of the business in 2023-24 (FY24) either through organic growth or acquisition.
 

As a result, the Herfindahl-Hirschman Index (HHI), a common measure of market concentration in an industry, reached a new high in FY24 in industries suchas telecom, airlines, cement, steel, and tyres.
 

In a Business Standard analysis, paints was the only industry that reported a decline in theHHI or a rise in competitive intensity due to market share gains by new players such as JSW Paints.

Market concentration in paints is expected to decline further with the entry of the AV Birla group.
 

The numbers indicate a steady rise in the revenue share of the top two firms across industries in the last 10 years, leading to a rise in HHI scores.

 

For example, in airlines the revenue share of the top two players increased from 53.1 per cent in FY14 to 92.6 per cent in FY23.  In telecom the rise was from 46.5 per cent in FY15 to 71.9 per cent in FY24. In steel it rose from 44.5 per cent to 57.6 per cent in the period.
 

The trend has been similar in cement and tyres but to a lesser extent. This, in turn, has led to a rise in the HHI scores in these industries.
 

Most industries in India are either highly concentrated or moderately so, according to the antitrust division of the United States Justice Department’s common measure of market concentration. According to the merger guidelines (2023) of the US Department of Justice and Federal Trade Commission (FTC), an industry with an HHI score of 1800 is believed to be highly concentrated, while one with an HHI between 1000 and 1800 is moderately concentrated. An HHI less than 1000 means the industry is competitive.
 

On this scale, the airline sector in India is the least competitive with an HHI score of 4400, based on the various airlines’ revenue share in FY23.
 

The two biggest airlines in the industry (Interglobe Aviation and Air India-Vistara combine) controlled 92.6 per cent of the combined net sales of all airlines in FY23. Air India and Vistara are owned by Tata Sons and they are in the process of merger. Earlier, Air India merged with Air Asia India.
 

Interglobe Aviation, which operates Indigo Airlines, reported net sales of Rs 54,446.5 crore in FY23 while Air India and Tata SIA Airlines, which operate Vistara, reported combined net sales of Rs 53,045.6 crore in FY23.
 

SpiceJet was at distant third at Rs 8,572 crore followed by Akasa Air at Rs 698.7 crore.
 

It is followed by the paints industry with a score of 3607 and telecom with 3004 in FY24.
 

Iron and steel and tyres had an HHI score of 2175 and 2001, respectively in FY24. The cement industry is moderately concentrated with 1577 in FY24.
 

The HHI is calculated by squaring the revenue market of every player in the industry and then adding them. An HHI score can range from close to zero, when there are too many players each with negligible market share, to a high of 10000 when a single company controls the industry.
 

Analysts attribute the rise in market concentration to the superior profitability of larger firms and a spate of mergers and acquisitions in recent years.
 

“Bigger firms have shown a better ability to generate profits and cash flows in recent years either because of their bigger scale or their ability to adopt newer technologies. In contrast, smaller firms have become uncompetitive, leading to poor profitability, and many of them have either closed down or have been acquired by bigger firms,” said Dhananjay Sinha, co-head research and equity strategy, Systematix Institutional Equity.
 

In 2013, Viral Acharya, economist and later deputy governor of the Reserve Bank of India (now left), had flagged rising market concentration in India in a Brooking paper.
 

“Markups fell gradually from early 1990’s until 2013, but started rising steadily and significantly thereafter, scaling in 2021 the high level of 1.4 in 1990’s, and even when capacity utilisation in the Indian industry was low during the pandemic due to collapse of aggregate demand,” wrote Acharya in the paper titled “India at 75: Replete with Contradictions, Brimming with Opportunities, Saddled with Challenges”.
 

This shows in the financials of listed companies. The operating margins of listed firms excluding banks, financial companies, and insurance rose to 17.8 per cent in FY24, up from the 15.1 per cent a year earlier and close to an all-time high of 18.1 per cent in FY21 and a pre-pandemic average of 15.7 per cent.