India’s Profit-to-GDP hits 4-Year High, But Best is Yet to Come

MUMBAI: In one of the most concrete signs of the robust recovery in the formal sector of the Indian economy post the onset of the Covod-19 pandemic, India’s net profit-to-GDP ratio surged to a four-year high, according to data compiled by NSE.

The brokerage firm said the profit pool of listed Indian companies as a percentage of GDP surged to 2.6 per cent in the financial year ended March 31, 2021, after hitting a multi-year low of 11.6 per cent at the end of the previous financial year.

The staggering recovery in the metric is a reflection of the turnaround that some of the less well-to-do parts of the economy such as metals, manufacturing and other sectors have seen since the end of the national lockdown in June.

ICICI Securities said the “look through earnings” of Nifty200 index have more than doubled in the March quarter so far driven by cyclical sectors and the shrinking net loss pool of companies.

That said, the brokerage is of the view that the best is yet to come, as it sees the net profit-to-GDP ratio rising further in the current and next financial year.

“Significant contribution to earnings pool trajectory by cyclicals will boost PAT-to-GDP further over FY21-23 (2020-23) as Nifty50 earnings growth will outpace nominal GDP growth,” the brokerage firm said in a note.

The brokerage firm’s optimism stems from the resilience that corporate earnings expectations have remained resilient in the face of the worst phase of the pandemic that crippled the country over the past two months.

The consensus estimate for Nifty50 companies’ earnings per share has remained largely unchanged at Rs. 730 despite more than two-thirds of the economy being under lockdown. “This is in contrast to FY22 GDP downgrades seen so far by various agencies,” the brokerage firm said.

Economists and analysts are confident that the worst of the second wave may be behind for the time being and Nomura Securities India believes faster vaccinations after June, strong global growth and easy financial conditions are likely tailwinds to the ongoing business cycle recovery.

However, the rising contribution of listed companies’ profits to the GDP also shines a somber light on the divergent states of different parts of India’s economy. The pandemic has accelerated the trend of ‘big getting bigger’ that was set into motion during the adoption of the uniform indirect tax regime in 2016.

“We believe the key reason for resilient headline index earnings outlook compared to GDP is that much of the economic impact has been in the unorganised sector and largely limited to economic activities like leisure, travel and retail which have relatively lower earnings weight in the headline NIFTY50 index,” the brokerage said.

Source: ET