Recently there was a very interesting note from your team which says that the corporate profit to GDP number is standing tall at a 17-year high. Help us understand what this ratio really implies and also what implications it can have on the Indian equity markets.
Gautam Duggad: We just put out a note on corporate profit to GDP which is our annual signature note. Allow me to explain it in a little bit granular fashion. Corporate profit to GDP basically reflects on the underlying earning cycle. In 2020, in the middle of COVID, we had a corporate profit to GDP ratio of 2.1%, which is where it bottomed out. In 2008, at the previous peak of earnings, the corporate profit to GDP was somewhere close to 5.1%. Right now, from 2.1% in 2020, we have already reached 4.7%. This is at a new high post the 2008 peak. This does not include unlisted names. This is just the Nifty 500 companies.
If you add up all the listed companies, this ratio is somewhere close to 5.1%. And last year, the corporate profit to GDP performance was trending close to 4.7% and then, if you added the unlisted and listed, it was about 6.7% or 6.8%. The previous peak of corporate profit to GDP, summing up the entire listed and unlisted universe, was 7.9% in 2008. We bottomed out at somewhere around 1.92% in 2020. Right now, just the listed data is available for FY25 within which 4.7% is Nifty 500 companies and the rest of the listed companies put together is 0.4%, so we are at 5.1% in FY25.
As the unlisted data comes by September, we will update that. For reference, in FY24, the listed plus unlisted stood at 7.3%. So, I would think that this year that number would have moved closer to 7.5%, but we are still 40-50 basis points below the previous peak. So, the interesting thing to note here is that while we are already in the middle of an earnings up cycle which began in 2020, there are still a couple of years left for this entire up cycle to play out. Given that there is a preponderance of a lot of sectors which were hitherto not listed and they are listed now, so possibility of this ratio in the foreseeable future crossing even 8-8.5% is very much there.
The other interesting thing to note from this report is that the underlying nominal GDP as such does not have too much of a bearing basically on the profit or corporate India’s earnings performance. If you look at 2003 to 2008 which was the previous big bull cycle on earnings, the underlying nominal GDP compounded at close to 15%, earnings compounded at 30%.
From 2008 to 2020, the 12 years saw an earnings recession where the underlying nominal GDP compounded at somewhere close to 12.5% CAGR but the corporate earnings compounded at a miserly 4%. We were obviously impacted with so many issues in that 10-year period. Now again from 2020 to 2025, the nominal GDP has compounded at 10.5%, but the earnings have compounded at 30%.
So, the underlying GDP has broadly trended in that 10%, 12%, 14% band over a 15-17-year period. But corporate earnings have had a massive cycle of 30%, then 4%, and is now back at 30%. A lot of the high beta cyclical sectors have compounded this rise from 2.1% to 4.7% in the five years including metals, oil and gas. The biggest contributor has been financials which is where the earnings up cycle has been massive post 2020. If I look at the contribution of BFSI alone, the BFSI profit to GDP ratio has moved from 0.46% to about 1.84%. So, almost 40% of the incremental increase in corporate profit to GDP ratio has come at the behest of BFSI. Those are the broad points I wanted to highlight from this report.
What do you think is aiding corporate profitability? What are the factors at play and where could it head next if these factors continue to hold through from India Inc.?
Gautam Duggad: Like I mentioned, during 2020-2025, cyclicals have made a huge contribution. The BFSI profits have crossed close to Rs 6 lakh crore right now. If you look at Nifty also, in FY18, the Nifty profitability in BFSI bottomed out somewhere close to Rs 45,000-48,000 crore. That number has reached Rs 3-3.5 lakh crore. So, that is the level of increase that we have seen.
In FY25, if I look at the broader coverage universe, in the 65 financial companies that we track, we had a total profit pool of Rs 50,000 crore in FY18 and somewhere close to Rs 1,10,000, 1,15,000 crore in FY20. That number is now Rs 5 lakh crore. For context, this Rs 5 lakh crore was the total profit pool of all 300 companies that we used to track. So, what was the profit pool of the 300 companies has now become the profit pool of just financials. So, they have made a huge contribution. Then, there are global commodities like metals, oil and gas. They have gone through their upcycle between 2020 and 2025. Then, there are a host of other sectors which have come and contributed.
The capital goods sector, which was absent from 2012 to 2020, has made a huge comeback and we have seen how the stock prices have done. Going forward, we expect the nominal GDP to compound at 10% to 11%. We expect the earnings performance of corporate India will be in mid-teens. So, somewhere about 14-15% is what we are projecting between 2025 and 2027 and I would not be surprised if that magnitude of growth continues beyond 2027 to 2030 also.
So, that is our expectations from a medium-term earnings point of view. We have come a long way from 2020 to 2025. What used to be a profit of just Rs 4 lakh crore for Nifty 500 companies has turned into Rs 16 lakh crore in 2025. Even if this were to compound at 14-15% over the next five years, there is a lot of wealth still to be created in the Indian equity market.
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