India Inc's profit-to-GDP ratio rebounds to highest in a decade

Listed companies’ net profit as a percentage of gross domestic product (GDP) has hit a decadal high and is expected to edge even higher over the next two financial years.

According to an analysis by ICICI Securities, India’s Inc net profit stood at Rs 8.4 trillion, or 4 per cent of GDP of Rs 210 trillion for the trailing 12-month period ending September.

This is the highest since financial year 2011-12 (FY12), when it was at 4.6 per cent.

Interestingly, the ratio has seen a remarkable turnaround since FY20, when India Inc’s profit contribution to the country’s GDP had plunged to 1.6 per cent—in what was the lowest reading since at least 1999-00.

So, what has led to the improvement in profit share?

The biggest driving factor is the shrinkage in the loss pool.

In FY20, India Inc’s losses stood at a massive Rs 3.54 trillion.

This was on account of heavy losses posted by telecom companies such as Vodafone Idea, Bharti Airtel, and also financial sector firms such as YES Bank, DHFL, and IDBI Bank, and auto major Tata Motors.

While losses haven’t completely vanished, the loss pool of listed companies shrank by more than half to Rs 1.63 trillion on a trailing 12-months basis ended September (June for companies that haven’t disclosed their latest quarterly results).

“Two key factors are behind the rapid improvement.

"The sharp bounce in the commodity cycle from its bottom, and tapering of losses at telecom companies and banks.

"Also at play are structural themes such as greater formalisation and new listings,” said Siddharth Gupta, analyst at ICICI Securities, who co-authored the study with Vinod Karki.

ICICI Securities expects the profit share to improve to 4.2 per cent in FY22 (full year) and further to 4.5 per cent in FY23.

This is on the back of healthy consensus net profit estimates of 54 per cent and 22 per cent for the current and next fiscal, respectively.

“Going further, one can expect cyclicals to have a higher share in the profit pool.

"Capital-intensive sectors are likely to come into play going ahead if the investment cycle picks up,” adds Gupta.

If growth projections materialise, India Inc’s profit-to-GDP ratio will move closer to the global average of about 4.7 per cent.

Over the last few years, India’s ratio was among the lowest in the world.

At its peak in FY08, the contribution stood at 6.7 per cent.

Since then, it has been on a downward slope.

In the last five years, corporate earnings growth has largely remained stagnant.

Gupta says in FY08 the higher share was driven by massive financial leverage and capacity utilisations.

“An interesting aspect of this profit recovery is decreasing financial leverage and low operating leverage. In 2008, we had very high financial leverage and capacity utilisations,” he added.