Profits of listed Indian companies have remained stagnant for some time now. On the other hand, nominal gross domestic product (GDP) has increased. The upshot is corporate earnings expressed as a percentage of GDP has declined.
Corporate profit as a percentage of GDP for the year to March may drop to 3.9%, the lowest since 2003-04, Motilal Oswal Securities Ltd estimates (see chart). In fact, the measure has consistently declined since 2009-10. What’s more, it is also lower than the long-period average of 5%. Aggregate profit of Indian firms is likely to be stagnant at around Rs.4 trillion over 2013-16 even as nominal GDP continues to grow, the brokerage firm said in a report.
In addition to weak demand, the sharp fall in commodity prices has been a major problem this year, taking a toll on the earnings of many firms. What offers comfort, however, is that things are expected to improve in the next fiscal year. “There could be improvement in the days to come,” says Dhananjay Sinha, head (institutional research) at Emkay Global Financial Services Ltd. “The low base could be helpful for FY17 earnings.”
Further, implementation of the Seventh Pay Commission recommendations is expected to boost consumption demand. Lower interest rates, some economic recovery and stabilization of the impact of disinflation are few factors that could make earnings for 2016-17 look better, says Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
Sure, there are factors that suggest corporate profits as a percentage of GDP could well bottom out this year. However, the improvement may be small. For one, outlook on commodities is still muted, at least from a near-term perspective, which should weigh on corporate profits. Investors must also watch out whether there is a meaningful pickup in the investment cycle.
Larger government spending and the rupee’s depreciation should also boost earnings, according to Sinha of Emkay Global. So yes, there are some marginal triggers here and there, but the overall scenario will not bring too much joy, he says.