The contribution of India Inc’s profitability to the India GDP dipped to a 15-year low in fiscal 2018, thanks mainly to the below-par performance by public sector banks. From a high of 5.5% in 2008, the ratio of corporate profitability to India’s GDP is presently at 2.8% — the same level it was in 2003.
The other sectors that contributed to this decreased significantly were the metals and oil & gas sectors, where prices are dictated mainly by global factors, along with the telecom sector, which saw huge competition in the past few years. On the other hand, the sectors that cushioned the fall were private banks, NBFCs, autos, and technology, all of which put up a good show, as per to a report by domestic brokerage major Motilal Oswal Securities.
“Over the last decade, the corporate earnings distress in India has translated into corrosion in the Nifty 500 profit-to-GDP ratio from 5.5% to 2.8%,” the report noted. “Sectors that have been most stable and rising to important over these 15 years are technology, NBFCs, private financials, autos, and metals. Profits of these sectors as a percentage of GDP has increased by three-four times over 2003-18.”
The report pointed out that profit contribution to GDP of NBFCs is at a new high (0.40%), while that of PSU banks is at a new low (-0.44%). Auto has seen a 3.5x jump in profit-to-GDP ratio over 2003-18 to 0.28%. This high level of contribution from this sector was seen in 2013 too.
The good news is that the broking house believes that the recent low could be the bottom and expects the corporate profit-to-GDP trend to improve from fiscal 2019 onward, “even as we do not foresee acceleration like 2003-08”. Banks (both PSU and private) — one of the largest contributors to the down-trend in corporate profit-to-GDP ratio — are expected to drive the expansion as asset quality bottoms out, fresh slippage generation moderates, provisioning cost normalizes and loan growth recovers, the report said.
Analysts at Motilal Oswal Securities noted that in every cycle, new sectors evolve and contribute to the profit-to-GDP metrics. “This is a reflection of the change in the underlying economy. In the earlier upcycle of 2003-08, sectors like infrastructure, cement, capital goods, and construction evolved, even as investments — as a proportion of the GDP — galloped. A few sectors that were not listed a decade back are now listed and growing well. They also have a strong long-term growth path ahead of them, given the under-penetration in their respective segments,” it noted.