Beating GDP growth no longer enough for Indian firms: McKinsey

The study covered 837 listed companies, which posted revenues of more than ₹750 crore in FY22. The top quintile (one-fifth) of this set of companies reported a compound annual growth rate (CAGR) of 15% or higher in revenue, while India’s nominal gross domestic product (GDP) growth rate averaged around 10%, McKinsey said.

Based on the findings, McKinsey analysts said companies need to set aggressive growth targets to outperform both peers and the economy. “The biggest top-level insight we got from the analysis is that it is no longer enough for a company to say that they will grow faster than the GDP,” Jaidit Brar, senior partner at McKinsey & Co, said in an interview. “Companies must start with high aspiration and seek to grow 2-3 times faster than their industry.”

Moreover, there is no trade-off between growth rate and profitability, he said. Firms might not need to choose between investing capital for growth or booking profits, he said. This observation stemmed from a strong correlation between revenue growth and profits. “In fact, companies that didn’t grow as fast during the study period actually saw profit erosion.”

Brar said companies must prioritize cost efficiencies and reinvest the surplus accrued. “The biggest growth lever for managements is how thoughtful you are in resource allocation and reallocation.”

While agile resource management is one of the seven levers for high growth in India, others include utilizing digital technologies, enhancing leadership capabilities, pursuing adjacent opportunities, creating new breakout businesses, exports, and engaging in mergers and acquisitions, the report said.

Another key insight from the study, said Brar, is the importance of diversification. In rapidly expanding sectors, it’s crucial for firms to occupy all the positions, including different price points and geography. For firms in slower-growing sectors, he recommended creating adjacencies or establishing breakout businesses in related sectors.

Pursuing adjacencies is one of the most common growth levers used by the fastest-growing firms across sectors, it said. “A lot of growth happens in new categories, Growth depends on how you play and not just where you play. Do not worry if you’re not in a fast-growing sector with tailwinds.”

The study found that top quintile firms even in slow-growing sectors like industrials and real estate achieved high growth rates. The study also found that the size of a firm had limited impact on the growth rate of Indian companies. Smaller firms accounted for the highest share of growth champions among the companies analysed. While part of this growth can be attributed to a low-base, disparity in average growth rates between companies with revenues less than ₹1,500 crore, and those with higher revenues was still significant.

The report also found encouraging evidence for companies trailing their peers. Two in every five companies in the bottom 60% managed to turn around their performance between 2012 and 2017 to feature in the top two quintiles in the latter half of the decade under review.