The Indian middle market segment is brimming with optimism. The segment, comprising companies with revenues ranging between $20 million and $2 billion, has been a major force behind much of the economic growth and employment generation in the country over the past decade. Due to their high growth trajectories, these companies are likely to be tomorrow’s market leaders.

Indian differences

In India’s context, almost 75 per cent of all Indian listed companies classify as middle market companies.

A large number of them are either second-generation family businesses or first-generation entrepreneurial ventures, including start-ups.

Unlike China and Brazil, where these companies are also diversified into high-value manufacturing, the Indian ones predominantly focus on low-end manufacturing sectors such as basic materials, chemicals, pharmaceuticals and auto ancillaries.

Also, their presence in the services sector is far lower than those in China and Brazil.

But due to the ongoing trends toward digital technology and analytics, many companies have emerged in the IT and e-commerce sectors. Rapid urbanisation, greater discretionary spending and improved internet penetration as well as the Digital India initiative will further fuel growth in these segments.

In addition to India’s favourable socio-economic profile, growth has been helped by large-scale investments made by foreign companies.

Competitive labour costs have allowed companies to cater to the export demands from the African and the Middle Eastern markets.

Companies are also forging partnerships and acquiring international businesses, enabling them to become global players. Interest in frontier African markets is particularly high as they offer unexplored mineral resources and have proved relatively easier to enter.

The optimism for Middle Market companies in India has made them hot favourites with the private equity (PE) and venture capital (VC) community. On the PE front, early-stage companies bagged 254 of the total 469 deals in 2014, reflecting increased acceptance of India’s home-grown entrepreneurs, and fair-priced valuations of these firms.

In terms of sectors, e-commerce and technology together received an overwhelming response from PE investors, accounting for nearly 40 per cent of the total deal value and number in 2014.

Small-to-mid-sized deals dominated most of the M&A activity in India in 2014. According to EY’s Transactions 2015: confidence spurs M&A report, of the total number of deals with disclosed value, those below $100 million accounted for 84 per cent, while just 4 per cent had a value greater than $500 million.

Many challenges

However, there are challenges in achieving balanced growth within the various organisational functions — customer, people, technology, operations, finance, alliances and risk. These are particularly challenging issues for small companies that are constrained in their ability to provide a differentiated customer experience and establish a structured approach toward financial controls and risk assessments.

India’s difficult business environment, and its tedious processes and compliance requirements further add to the cost of doing business;

They also typically rely on traditional bank financing for their debt capital, as they face regulatory compliance issues in accessing capital markets. This raises their cost of capital and reduces their competitiveness.

Despite the challenges, the outlook for India’s Middle Market companies remains positive, on account of India’s favourable demographic dividend and increased economic prosperity.

The announcement of the ₹100-billion fund for risk capital investment in start-ups in the Union Budget and the launch of Mudra Bank in April 2015 with a corpus of ₹200 million should also help potential firms.

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