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MOSL: INDIA STRATEGY-Corporate profit to GDP: Analyzing growth across cycles; 2018 mirroring 2003 bottom

India Strategy: Corporate profit to GDP: Analyzing growth across cycles; 2018 mirroring 2003 bottom

 

As part of our continued effort to provide a broad and informative perspective of the market and the economy, we, in this note, take a close look at the corporate profit contribution of various sectors/companies in Nifty-500 to GDP. As a lot has changed over the last 15 years, we step back and analyze trends in retrospect to come up with some interesting observations.

Interpreting the corporate profits to GDP metrics over 2003-18

• India's corporate profit to GDP ratio dropped from 7.8% to 3% over 2008-18. For the Nifty-500 universe, the ratio has declined from 5.5% to 2.8% - a-15 year low - over the same period. Earnings have lacked resilience over the last decade due to a multitude of macro-micro factors. In this note, we analyze 'corporate earnings as a percentage of GDP' in greater detail. We use Nifty-500 as a proxy for corporate earnings as it contributes 93% of India's market-cap.
• Notably, the corporate profit to GDP ratio has been on a downward spiral since 2010, barring 2017, when profits of global cyclicals like Metals and O&G had rebounded and losses at PSU Banks had reduced over the preceding year.
• However, we expect the trend in corporate profits/GDP to turn better, led by normalization of profits at Corporate Banks and gradually improving trends in the capex cycle. Even Telecom and Utilities - the two sectors that have witnessed huge investments over the years without any commensurate returns - should start contributing to earnings over the next five years, in our view.
• In our analysis, we look at the 2003-18 period in two parts: [1] 2003-08 and [2] 2008-18.

 2003-08: The Golden Phase…

• The corporate profit to GDP ratio doubled from 2.8% to 5.5% over 2003-08, with Nifty-500 profits growing at a substantial 31%, 2x the pace of underlying GDP growth (CAGR of 14.5%).
• This surge was driven by the export-, investment- and capex-oriented sectors. Over 2003-08, the global economy was growing at a faster clip, helping the export-oriented players. Capacity investment across sectors was also significant as investment cycle took off.

Of the 2.7% improvement in the profits/GDP ratio over this period, 1.6% was contributed by Metals, Telecom, Technology, Capital Goods and Cement.