India Inc, which posted a stellar rise in profitability in the third quarter defying the pandemic slowdown is likely to continue on the path in the coming years.
Corporate India today is leaner, fitter and poised to do better in the coming years as their operating leverage will be far greater on a reduced cost base, said Ruchir Sharma, Chief Global Strategist at Morgan Stanley Investment Management.
“Any top line growth you get will have a multiplicative effect as far as profits are concerned. I do feel more optimistic about the corporate profitability, as far as India is concerned or emerging markets in general,” said Sharma at the ET Awards 2020.
So what is driving India Inc profits?
With India’s daily new Covid-19 infections slowing and the vaccination drive gaining pace, analysts are betting on a stronger rebound in the economy and corporate profits in the months ahead..
The aggregate profit growth of BSE 500 companies has accelerated to nearly 46% on-year in the fiscal third quarter, hinting at broad-based recovery and not just in a select few big names. Along with a jump in profits, cost optimization has resulted in EBITDA growth.
This has led to major brokerages upgrading earnings estimates for FY21-23 for major firms.
Consensus now expects 14% growth in FY21 Nifty EPS against the earlier expectation of 5 per cent growth. FY22 and FY23 EPS estimates have been upgraded by 6 per cent since September 2020, led by metals, information technology, private banks, non-banking finance companies and autos.Credit Suisse analysts said in earnings review.
The pro-growth budget has seen strategists from Morgan Stanley to Jefferies Financial Group Inc. adding to their bullish views on cyclicals.
Materials have seen the biggest average earnings growth among sectors in the third quarter, boosted by JSW Steel’s profit and sales surge.
Strong loan growth at banks such as HDFC Bank saw most of them beat estimates, even as they continued to set aside more money for bad loans.
This year, “forward earnings will grow much faster than market appreciation, so the PE multiples will come off,” Neelkanth Mishra, India strategist at Credit Suisse, had earlier said. Earnings estimates will keep getting upgraded and “cyclical can still outperform the rest of the market,” he said.
All top five technology companies beat earnings forecasts amid a global shift toward digital services during the pandemic.
Automakers made a comeback with top carmaker Maruti Suzuki India posting a 24% profit jump, thanks to recovering consumer demand.
Sun Pharmaceutical Industries and Cipla saw profits double as the health-care sector benefited from an uptick in prescriptions and doctor visits.
While banks did well, insurance firms and non-banking finance companies had a tougher time reviving net interest income, with SBI Life Insurance Co and Bajaj Finance missing estimates.
The years ahead
The contribution of India Inc’s profits to gross domestic product (GDP) is predicted to treble by FY23 from being the lowest in two decades in FY20. The long-term average of profit-to-GDP is about 4.4 per cent. This is based on the likely sharp recovery in corporate earnings for the next two financial years.
Aggregate consensus profit after tax of the top 360 stocks is expected to rise from Rs 4.6 trillion in FY20 to Rs 9.6 trillion (about 5 per cent of GDP) in FY23, at a CAGR of 27 per cent.A note by ICICI Securities
Most of the incremental profits will come from sectors banks followed by oil & gas and automobiles due to the normalisation of depressed earnings.
The sustainable trajectory of profit-to-GDP will depend on how the demand environment pans out, it said, adding aggregate demand will get a boost from a classical ‘countercyclical fiscal policy’ unveiled in the Union Budget 2022, with a focus on capital outlay, which has a higher multiplier effect (3.6x) on-demand and a longer impact (4-5 years). “Progressive reforms done in the recent past and in the Budget will create an enabling environment for growth,” it said. .
The narrowing of losses is also likely to boost the profit-to-GDP ratio of India Inc. Despite the pandemic, the cumulative loss of listed companies is forecast to fall this ear to 0.7%; it had ballooned to 1.8% of GDP in 2018. The drop is due to the reduction in losses in telecom, industrials and PSU banks.
Cut in corporate tax
The reduction in the base corporate tax rate to 22 per cent from 30 per cent will make the corporates more competitive globally and lead to improvement in profit-to GDP ratio.