The aggregate corporate profit base of India's top 1,000 companies continues to expand with the might of industrials growing as they account for close to half of the aggregate profit pool, said a note from brokerage firm ICICI Securities.
"On a trailing 12-month basis (TTM), aggregate corporate profits (excluding loss makers) of the top 1,000 companies by market cap is ₹11.3 lakh crore so far during Q4FY22 compared to ₹8.1 lakh crore in FY21. Industrials are accounting for almost half (46 percent) of the aggregate profit pool at ₹5.2 lakh crore, which is the highest share in the past decade," ICICI Securities said.
The highest profit share of industrials on a TTM basis was 57 percent between FY05-FY06.
However, the aggregate profit pool share of ‘services, consumption and healthcare’ has dropped to a two-decade low of 27 percent ( ₹3.1 lakh crore). Financials are back to contributing more than a quarter of the profit pool ( ₹3 lakh crore) after emerging from the NPA cycle which began in 2016, the brokerage firm added.
"The above trend of the rising share of industrials and financials in the corporate profit pool is a positive sign for the nascent investment and credit cycles. However, commodity price led expansion in the profit base of industries will recede as commodity prices show signs of stagnation," ICICI Securities said.
"Nominal earnings base will continue to expand over FY22-24E going by Q4FY22 results which indicate more beats than misses implying earnings growth expectations are not unrealistic. Overall, the number of beats has exceeded the misses during Q4FY22, especially in the midcap space," ICICI Sec added.
The brokerage firm highlighted that the valuations are lofty for a relatively smaller profit pool.
"Aggregate market capitalisation of the profitable companies within the top 1,000 stocks is ₹235 lakh crore which implies a trailing P/E ratio of 20.9 times. Industrials plus financials, which constitute 73 percent of the aggregate profit pool, are reasonably valued at a trailing P/E of 15–16 times compared to historical levels while the remaining 27 percent of the profit pool (services, consumption and healthcare) is still at a high trailing P/E of 33 times," ICICI Securities.
The recent market correction has given comfort on the valuation front as the brokerage firm highlighted that the market correction and profit expansion have resulted in valuations receding to reasonable levels and owing to the possibility of further rate hikes, the valuations of equities will remain down.
"Valuation on forwarding P/E basis has contracted by 21 percent since the peak of Oct’21 (22.8 times to 18 times currently). Fundamentally, valuation contraction due to the impending rate hike cycle by global central banks was a foregone conclusion," said ICICI Securities.
"The speed at which rate hikes were conducted took capital markets by surprise, thereby resulting in aggressive expectations of further rate hikes. In our view, if further aggressive rate hikes do not materialise, then it will be a positive surprise for equities while meeting expectations of aggressive rate hikes will keep equity valuations subdued although the shock and awe situation will recede."
The brokerage firm concluded that the tug of war between expanding nominal earnings base and rising discount rate to continue in the short term. Any signs of peak inflation will tilt the scale in favour of bulls while disappointment in growth and earnings will do the same for bears.
Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.