Tuesday's Talking Points
Rising Corporate Profitability bodes well for India’s Growth Story!
What’s the Point? (A Brief Summary)
Post-Q2FY2024 results, the listed corporate space’s ‘PAT/GDP’ (Profit After Tax / Gross Domestic Product) ratio rose to 4.7% on a trailing 12-month basis, and is on course to exceed 5% by FY2025 (ICICI Securities). This rise in corporate profitability has come on the back of a certain structural growth drivers and a broad-based improvement in profitability across various sectors in the recent past. Higher corporate profitability and well capitalised Corporate and Bank balance sheets bode well for the private capex outlook, which could further improve the growth rate in the economy!
Rising Trend in Indian Corporate Profits!
Source: ICICI Securities
Profit as a % of GDP is high despite Low Leverage
India’s rise in corporate profitability has come at a time when the leverage ratio of large listed companies has been at 15-year lows. During such conditions, companies would have a higher confidence in taking on leverage for funding their private capital expenditures for potential expansion. Considering that business prospects are improving and there is sustained demand in the economy, adding leverage could lead to a higher profitability at similar rate of return on capital employed.
Source: Jefferies
Conclusion
As per Morgan Stanley, the upcycle in India’s corporate profitability is in progress, and this ratio could exceed 8% within the next 5 years. Furthermore, with India’s Nominal GDP expected to grow at 7.9% (CAGR) during the same period as per International Monetary Fund, India’s fundamentals look to be comfortably placed.
As on October 31, 2023, NIFTY 50 was trading at ~17.7x FY2025E price to earnings multiple. While moderated from its peak, valuation multiples are at an elevated level vis-à-vis the historical averages. However, one should view these valuations in the context of structurally attractive nominal GDP growth, a robust economic recovery, a healthy corporate earnings outlook and robust de-levered corporate and banking balance sheets. One should therefore consider participating in India’s growth story by starting a Systematic Investment Plan (SIP) via mutual funds.
Sources: ICICI Securities, Press Information Bureau, Jefferies, Reserve Bank of India, Morgan Stanley, Bloomberg, Kotak Institutional Equities, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here please write to us at [email protected]
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