Why are the largest Indian companies contributing lesser to economic growth

 [CAPTION] The aggregate corporate profit of Nifty 500 companies grew at a slower pace of 8.7 percent year-on-year (YoY) in FY23. Image: Shutterstock[/CAPTION]
 
The contribution of India’s biggest companies to the macroeconomic growth has reduced in year ending March. A data analysis shows that corporate profit to gross domestic product (GDP) ratio of Nifty 500 companies declined marginally to 4.1 percent in FY23, mostly dragged by commodities prices. However, rise in profitability of companies in the banking, financial services and insurance (BFSI) sectors helped to some extent.
 
The indicator, corporate profit as a share of GDP, which typically evaluates the contribution of listed companies to economic output, had hit a decade-high of 4.3 percent in FY22. Nifty 500 companies cover more than 90 percent of market capitalisation of all listed firms, and reveal the picture of bigger companies in the listed space.
 
_RSS_The aggregate corporate profit of Nifty 500 companies grew at a slower pace of 8.7 percent year-on-year (YoY) in FY23. This compares to a surge of 49 percent YoY in FY22 and 50 percent (YoY) in FY21.
 
Similarly, even for listed companies, corporate profit to GDP ratio fell to 4.3 percent in FY23 after hitting a decade high of 4.5 percent in the previous fiscal, based on data analysis by Motilal Oswal Financial services, sourced from Capitaline and the Reserve Bank of India.
 
“In FY23, nominal GDP jumped 16.1 percent (YoY) faster than FY23 profit growth, preceded by 18.4 percent YoY GDP growth in FY22 and a contraction in GDP recorded in 2021,” says Gautam Duggad, head research, institutional equities, Motilal Oswal Financial Services. He adds that reduction in the 2023 profit to GDP ratio for Nifty 500 was led by metals (0.4 percent decline) and oil & gas (0.3 percent decline), while that of BFSI improved by 0.4 percent.
 
Aggregate profit of Nifty 500 companies leaped to Rs11.1 trillion in FY23, from Rs10.2 trillion in FY22 after remaining range-bound at Rs4-5 trillion over 2014-20. “Corporate profit CAGR of 17.6 percent was much higher than the GDP CAGR of 9.8 percent over 2018-23. During 2020-23 too, corporate profit CAGR at 34.3 percent was significantly higher than the GDP CAGR at 10.7 percent,” Duggad adds.
 
Historically, except 2017, listed companies’ contribution to economic output had consistently declined since 2010. In 2017, revival in the profits of global cyclicals such as metals and oil & gas, and a reduction in losses for PSU banks helped companies to widen their business and hence better profitability.

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Duggad expects Indian companies’ contribution to the overall economic growth to sustain going ahead. “India’s earnings cycle has seen a smart turnaround after almost a decade. Nifty exited FY23 with an 11 percent earnings per share (EPS) growth on a high base of 34 percent growth in FY22. Earnings though remained lopsided with BFSI driving almost the entire incremental earnings in FY23. With healthy macros, range-bound oil prices, robust fiscal balance sheet and moderating inflation, the market outlook is quite optimistic,” he explains.
 
He sees 20 percent YoY profit growth of Nifty companies in FY24, likely to be driven by BFSI, oil & gas, metals and automobiles, estimated to contribute 82 percent to the incremental earnings.
 

Commodity dents margins and profitability

The revenue CAGR of Nifty 500 companies was at 14.8 percent, primarily contributed by global commodities and automobiles in the period from FY20 to FY23. However, revenue CAGR was moderate at 12.5 percent over 2018-2023 due to a combination of factors like correction in commodity prices and softening in revenue growth in the consumer-oriented sectors.
 
Both operating and profit margins of Nifty 500 companies contracted 310 basis points (bps) and 220 (bps) YoY respectively in FY23 due to a spike in commodity prices because of global macro headwinds. Sectors related to global commodities have suffered the most due to major price volatility that had a cascading effect on corporate India’s margins.

However, Vinod Kari, equity strategist, ICICI Securities, feels that the commodity sector will revive itself in fiscal 2024. According to him, net profit to GDP ratio of listed commodity-related companies will increase in FY24. “Going into FY24, commodity profit pool is expected to show mean reversion and expand by Rs70,000 crore, as per consensus estimates, and will be the biggest contributor to aggregate profit pool expansion in the listed space. Consequently, PAT/GDP ratio is expected to resume its expansion and reach 4.7 percent by FY24,” Karki adds.

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In FY23, aggregate net profit of commodity companies fell by Rs1.3 trillion to reach Rs2.5 trillion, thereby resulting in the aggregate net profit /GDP ratio dipping to 4.3 percent. Surge in nominal GDP (15.9 percent YoY) due to high inflation in FY23 further exacerbated the effect of contraction in the profit pool of commodities, resulting in a decline in PAT/GDP ratio to 4.3 percent from 4.5 percent in FY22, shows data.
 
“The significant profit pool contraction of commodities in FY23 resulted in offsetting a large part of the profit pool expansion seen in sectors such as financials, auto and most other non-financial sectors,” Karki says.
 
According to Karki, in FY24, the effect of inflation will be much lower resulting in a nominal GDP growth of 10 to 11 percent, while aggregate profit pool is expected to expand by 20 percent to reach Rs14 trillion, resulting in a net profit/GDP ratio of 4.7 percent. Commodities are likely to be a large contributor to the profit pool expansion with a growth of 28 percent YoY while discretionary consumption to have the fastest growth in the profit pool at 46 percent.