ICICI Securities says impact of GDP weakness felt more by unorganised sector
Illustration: Ajay Mohanty
Despite the havoc created by the covid-19 pandemic, listed companies’ net profit as a percentage of the gross domestic product (GDP) has hit a four-year high at 2.6 per cent for the financial year 2020-21 (FY21). During the last quarter of FY21, the net profit of India’s top 200 companies more than doubled led by strong earnings posted by cyclical stocks.
In FY20, the profit-to-GDP ratio had dropped to two-decade low of 1.8 per cent. The increase in the ratio for FY21 signals that the unlisted or unorganized players had to bear the maximum burnt of the pandemic.
“The key reason for resilient headline index earnings outlook compared to GDP is that much of the economic impact has been in the unorganised sector and largely limited to economic activities like leisure, travel and retail which have relatively lower earnings weight in the headline Nifty 50 index,”said ICICI Securities in a note.
The brokerage says the listed companies’ earnings growth will outpace nominal GDP growth which will lead to further improvement in the profit-to-GDP ratio in FY23.
“Despite the severe health impact of second covid wave, NIFTY 50 FY22 earnings outlook has remained resilient at Rs 730 so far indicating expectations of limited impact to headline benchmark index earnings. This is in contrast to FY22 GDP downgrades seen so far by various agencies. Q4FY21 results are largely in-line so far with mostly neutral results with beats and misses evenly balanced,” said Vinod Karki and Siddharth Gupta, strategists at ICICI Securities in a note.
At its peak in FY08, the contribution stood at 7.8 per cent.
Since then, it has been on a downward slope. Corporate earnings growth has largely remained stagnated in the last five years. The global average is about 4.7 per cent. India’s long-term average is about 4.4 per cent.
Of the top 100 companies, 19 per cent have managed to surpass Street estimates for the March 2021 quarter (Q4FY21), while 21 per cent have missed estimates.
The brokerage says the earnings boost has come from cyclical stocks
“Impact on the investment and manufacturing side of the economy is limited to the shortage of migrant labourers and supply chain disruptions which have been much lower than during the first wave. Across the board, input cost pressure has not dented earnings outlook indicating the ability to rationalize and pass on cost,” the note says.