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Corporate profit to GDP ratio hits 10-year high in FY2022; will the momentum sustain?

India’s corporate profit to GDP ratio bounced back to a decade high of 4.3 per cent in FY2022, according to Motilal Oswal Financial Services. The brokerage believes that the ratio was driven by the expansion in the economy, as the denominator (GDP) grew 19.5 per cent YoY in FY22 after a contraction in 2021 due to Covid-induced lockdowns. On the other hand, corporate profit grew at a faster rate of 48 per cent year-on-year (YoY) (for the Nifty500 Universe). The corporate profit-to-GDP ratio in the case of Nifty500 stood at 4.5 per cent.

However, data highlighted that the growth in profit was hardly broad-based and driven only by three sectors including BFSI, oil and gas and metals. “More than half of the incremental growth was steered by BFSI, underpinned by a modest revival in credit growth and improvement in asset quality trends,” Motilal Oswal Financial Services said adding consumer, insurance, logistics, consumer durables, infrastructure, and media were the only sectors to see deterioration in the profit-to-GDP ratio.

Motilal Oswal Financial Services further believes that the improvement in corporate profit to GDP will sustain going ahead despite the current adverse macroeconomic backdrop with heightened worries on rising interest rates, elevated crude oil prices and liquidity tightening.

“The domestic earnings continue to remain healthy and provide a silver lining, notwithstanding the challenges faced on multiple fronts. After 15 per cent and 35 per cent growth in Nifty EPS in FY21 and FY22, respectively, we are building in 18 per cent growth for FY23. The risks to earnings are tilted towards downside, we however expect the profit to GDP ratio to improve both in the short as well as medium term,” the brokerage added.

Earlier, the country’s total corporate profit (listed plus unlisted) to GDP ratio fell to 2.2 per cent from 7.8 per cent over 2008-20. For the Nifty500 universe, the ratio has declined to 2.2 per cent from 5.1 per cent, at a two-decade low, over the same period.

Going ahead, Motilal Oswal Financial Services expects the structural trend of a shift from public to private in the share of corporate profit to GDP to continue, given PSUs’ eroding competitive advantage in several sectors such as banking and insurance. “While monopolistic businesses, such as the upstream and downstream processes of oil and gas and utility players, do enjoy a certain size of absolute profits, growth has been a perennial challenge for them,” the brokerage said.

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