According to a recent report by domestic brokerage firm Motilal Oswal, the corporate profit to GDP ratio for the Nifty-500 Universe and listed India Inc. slightly contracted in FY23 after rebounding in FY22 to reach a decade high of 4.3% and 4.5%, respectively.
This YoY decline can be attributed to the negative contribution from global commodities, which had an adverse impact on the ratio. On the other hand, the banking, financial services, and insurance (BFSI) sector made a positive contribution to the ratio, the brokerage noted.
In FY23, the corporate profit for the Nifty-500 universe showed a slower growth rate of 8.7% compared to the previous two years, where it had surged by 49% in FY22 and 50% in FY21 respectively.
The brokerage points out that the nominal GDP for FY23 increased by 16.1% year-on-year, surpassing the growth rate of corporate profits. This was preceded by an 18.4% YoY GDP growth in FY22 after a contraction in GDP was recorded in FY21.
India's corporate profit (listed and unlisted) to GDP ratio dropped to 2.0% from 7.8% over 2008–20. For the Nifty-500 universe, the ratio declined to 2.3% (at a two-decade low) from 5.1% over the same period, it said.
Motilal Oswal highlighted that the corporate profit-to-GDP ratio has been consistently declining since 2010, with the exception of 2017.
In 2017, there was a temporary deviation from the downward trend, which can be attributed to the revival of profits in global cyclicals such as metals and oil & gas, as well as a reduction in losses for PSU banks compared to the previous year.
The brokerage analyzed corporate earnings as a percentage of GDP in greater detail. It uses the Nifty-500 as a proxy for corporate earnings since the index contributes 92% to India’s market cap.
The analysis divided the period from 2003 to 2023 into three distinct phases: 1) 2003–2008, 2) 2008–2020, and 3) 2020–2023.
2003–08: The shining phase
During the period of 2003-2008, there was a significant increase in the corporate profit to GDP ratio, which nearly doubled from 2.7% to 5.1%. The profits of companies listed in the Nifty-500 index grew at a rate of 30%, which was twice the pace of the overall GDP growth (with a CAGR of 14.5%) during the same period, according to brokerage calculations.
This surge in corporate profits was primarily driven by sectors that were focused on exports, investments, and capital expenditure. The global economy was experiencing robust growth during 2003-2008, which provided support to export-oriented companies. Additionally, there were substantial investments made in capacity across various sectors as the investment cycle gained momentum. the brokerage noted.
Out of the total improvement of 2.4% in the corporate profit to GDP ratio during this period, 1.6% can be attributed to the Metals, Technology, BFSI (Banking, Financial Services, and Insurance), Capital Goods, Real Estate, and Cement sectors. These sectors played a significant role in driving the overall increase in corporate profits relative to the GDP, it said.
2008–20: Downturn period
During the period from 2008 to 2020, the downturn in domestic corporate earnings resulted in a decrease in the Nifty-500 profit-to-GDP ratio from 5.1% to 2.3%.
Similar to the first phase, the changes in the ratio during the second phase were primarily driven by specific sectors. Among them, Oil & Gas (28%), Metals (23%), PSU Banks (15%), Telecom (15%), and Capital Goods (7%) accounted for 88% of the decline.
However, there were a few sectors that witnessed an improvement in the profit-to-GDP ratio during the second phase, namely NBFC, Technology, Chemicals, and Retail, the brokerage pointed out.
2020-23: Reversion to the mean
Notwithstanding the pandemic-induced gloom and weak economic recovery, corporate profits have recovered smartly from the lows.
Consequently, the corporate profit to GDP ratio rebounded to a ten-year high of 4.3% (long-period average of 3.7%) in 2022 as profits grew at a faster pace (49% YoY). However, the ratio dropped to 4.1% in 2023 as profits rose at a slower pace (9% YoY), said Motilal Oswal.
During Phase 3, the ratio improved for 20 of 25 sectors, of which 76% was driven by PSU Banks (22%), Private Banks (20%), Telecom (11%), Metals (8%), Insurance (8%), and Oil & Gas (7%), it stated.
Cement, Media, and Consumer Durables were the only sectors to witness a compression in the ratio.
Corporate profit to GDP ratio to sustain
Motilal Oswal expects that the earnings ratio will continue to remain stable in the future. After nearly a decade, India's earnings cycle has experienced a significant improvement.
In the previous fiscal year (FY23), the Nifty index achieved an 11% growth in earnings per share (EPS) despite a high base of 34% growth in FY22.
However, the earnings growth was mainly driven by the banking, financial services, and insurance (BFSI) sector. Overall, the market outlook appears positive due to favorable macroeconomic conditions, stable oil prices, strong fiscal balance sheet, and decreasing inflation, said the brokerage.
For the fiscal year (FY24), Motilal anticipates a 20% YoY growth in profits for the Nifty-50 index. This growth, as per the brokerage, is expected to be primarily driven by the BFSI, oil and gas, metals, and automobile sectors, which are projected to contribute around 82% of the incremental earnings for the Nifty-50 index.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.