Analysing the earnings trend for India Inc, domestic brokerage Motilal Oswal (MOSL), in a recent report revealed that during FY12-22, India Inc’s earnings multiplied 2.6 times and reported at a compound annual growth rate (CAGR) of 10 percent.
India Inc’s earnings jumped 2.6 times between FY12-22; private financials star performer, says Motilal Oswal
According to the report, India Inc's earnings saw two distinct growth phases:
Phase 1 (FY12-17): In this period, India Inc clocked a muted profit after tax (PAT) CAGR of 6.3 percent underpinned by a GDP CAGR of 7.1 percent, informed the brokerage.
Phase 2 (FY17-22): In this period, as per MOSL, India Inc posted a higher PAT CAGR of 13.9 percent, though, GDP growth slipped to 3.7 percent.
The stock market returns (Nifty-50) posted an 11.6 percent CAGR under Phase 1 and 13.7 percent CAGR under Phase 2, it further pointed out. This translated into a Full Cycle (FY12-22) CAGR of 12.7 percent, broadly in line with the PAT CAGR of 10.1 percent, it added.
Phase 1: During this five-year period, corporate profit grew at a slower pace due to multiple macroeconomic headwinds and high interest rates, said to MOSL, adding that the MOFSL universe profit registered a 6 percent CAGR during Phase 1 primarily led by Technology and O&G sectors.
"Financials’ profit recorded a 2 percent CAGR only due to significant decline in PSBs’ share in MOFSL Profit pool to 1.5 percent in FY17 from 11 percent in FY12. Further, Metals saw significant weakness due to supply-side issues, weak underlying commodity prices and mining bans during the period. Its contribution in MOFSL profit pool dipped to 8 percent in FY17 from 18 percent in FY12," stated the brokerage
Phase 2: During this period, corporate profit growth recovered smartly fueled by tax rate cuts, reduction in the banking sector NPAs and post-pandemic tailwinds that drove profitability of sectors after a weak two-year base, noted the brokerage.
MOFSL universe profit reported a faster CAGR of 14 percent during Phase 2 to ₹7.7 lakh crore. Financials continued to drive profit growth followed by O&G, Metals, Technology and Consumers, it added.
"Private Banks continued to see strong profit growth, contributing 12 percent to the overall coverage universe profit in FY22. Metals clocked a strong recovery in profit share after a weak period (FY12-17) and expanded its contribution in the profit pool to 20 percent in FY22 from a mere 8 percent in FY17. However, Automobiles recorded a very challenging period with its earnings declining at a CAGR of 6.7 percent over FY17-22 and its share in profit pool shrinking to 2.5 percent in FY22 from 9.2 percent in FY17," the data showed.
The brokerage noted that the defensive sectors reported healthy
performance during Phase 1 with 15 percent CAGR over FY12-17 and concurrent increase in profit pool contribution to 30 percent in FY17 from 20 percent in FY12.
"Despite a sharp moderation in growth rates in Phase 2, the Full Cycle earnings growth of the defensive sector is equivalent to MOFSL Universe CAGR of 10 percent over FY12-22," added the brokerage.
Among stocks, TCS, Infosys and ITC continue to remain the top 3 profit contributors among defensives category, noted the brokerage. IT now contributes 63 percent of the profit pool of defensives, which was 50 percent a decade back, revealed MOSL.
Bharti Airtel and Dr Reddy’s Lab, which were within the top 10 list in FY12, were replaced by Indus Tower and Asian Paints in FY22, it stated.
Telecom, which was a positive contributor to profits in FY12 (8.2 percent share), turned a laggard with -10.9 percent share in FY22, it added.
As per the brokerage, Private Financials sector has been a star performer. The sector recorded a PAT CAGR of 14.6 percent over Phase 1 and 18.2 percent over Phase 2.
Among them, Private Banks and NBFCs’ combined PAT share climbed up 760 bps to 17.8 percent in FY22 from 10.2 percent in FY12 and 14.8 percent in FY17, informed MOSL.
While financials' PAT share surged in this period, automobile PAT share slid, highlighted the brokerage. The Auto sector’s profit share moderated to 2.5 percent in FY22; it posted an FY12-22 PAT CAGR of -3 percent versus 10 percent for the MOFSL universe, noted MOSL. Further, the Phase 2 PAT CAGR stood at -12 percent versus +14 percent for the MOFSL universe, it added.
However, a company-level analysis indicated that the sector's performance was not as bad as the aggregates suggested, revealed the report. Tata Motors, which accounted for 30-45 percent of the sector aggregate sector PAT, sharply underperformed since FY17. Excluding Tata Motors, the FY12-22 sector PAT CAGR stood at 7.4 percent, highlighted the brokerage.
Top 10 of the decade
The top-10 profit contributors list in FY12 was dominated by Global Cyclicals which accounted for 7 out of 10 companies. In FY22 – there are five global cyclical, three BFSI and two IT companies in the Top-10 most profitable companies list, noted the brokerage.
According to the brokerage, the top 10 most profitable companies contributed 46 percent to the MOFSL universe profit pool.
Reliance Industries scaled the top spot and has been occupying it for the last eight years while Tata Steel, HDFC Bank, and ICICI Bank which were not part of the Top-10 profit contributors in FY12, have entered the top-10 league over the years, pointed out MOSL.
Coal India, Tata Motors, NMDC and Vedanta were among the top-10 profit contributors in FY12 but are absent in the FY22 list, it said.
JSW Steel’s contribution of profit share climbed to 2.7 percent (from a mere 0.5 percent a decade back), enabling it to enter the Top-10 list, added the report.
Meanwhile, in the BFSI space, SBI was the only stock to be in the top-10 league in FY12 as against three stocks now (HDFC Bank, SBI, and ICICI Bank), reported MOSL. It added that there is not a single consumer company in the top-10 profit contributors in FY22. ITC though has been part of the list for eight years during FY13-FY21.
"Reliance, ONGC and TCS remained among the top 5 profit contributors throughout the decade while Tata Motors dropped from among the most profitable list (under Phase 1), to the top 5 loss-making company list (under Phase 2). Tata Motors now contributes more than 22 percent of the overall reported losses in MOFSL universe. Coal India, which was in the top 10 list until FY20, lost its place in the last two years," stated MOSL in its report.
Loss pool rises
"Loss pools have grown consistently over the last five years. The contribution of loss-making companies has increased over the past decade, which is currently at 6 percent of the profit pool. The Top 5 loss-making companies contributed more than 96 percent of the entire losses of the MOSL coverage universe," the report informed.
Tata Motors had been the new addition among loss contributors over the last five years while Vodafone Idea was the largest loss contributor during Phase 2, it added.
Going ahead, MOSL expects 17 percent earnings growth over FY22-24 and the beaten-down sectors to rebound.
"India’s earnings cycle has seen a turnaround after almost a decade and continues to remain healthy, amid the current adverse macroeconomic scenario with heightened worries on rising interest rates, elevated crude oil prices and liquidity tightening that has kept the market volatile and jittery," it said. MOSL estimates an FY22-24 PAT CAGR of 17 percent, led by BFSI & Automobiles.
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