India Inc's profit-to-GDP ratio dips slightly in FY23; financial pie up

Commodity firms' bottomline taking a hit primary reason

Corporate India’s net profit as a percentage of gross domestic product (GDP) dipped in the 2022-23 financial year (FY23) -- after rebounding sharply in FY22 -- amid a decline in global commodity prices.

Top 500 companies’ combined net profit stood at 4.1 per cent of the GDP for FY23, down from 4.3 per cent in the previous financial year when it had gone up from just 3.5 per cent in FY21.

“The year-on-year (YoY) decline was led by global commodities, which contributed adversely to the ratio, while the financial sector contributed positively. The 20 basis points (bps) reduction in the 2023 profit-to-GDP ratio for Nifty-500 was led by metals (40 bps decline) and oil & gas (30 bps decline). The contribution of the financial sector improved by 40 bps,” said a note by Motilal Oswal Financial Services (MOFSL).

The corporate profit-to-GDP ratio has been contracting since 2010, barring 2017 when profits of global cyclicals (such as metals and energy) had bounced back and losses of PSU banks had reduced over the preceding year, the note added.

Motilal Oswal is expecting the Nifty50 companies to log 20 per cent YoY growth in FY24.

“We forecast FY24 earnings growth to be driven by financials, oil & gas, metals and automobiles – that are likely to contribute 82% to the incremental earnings of Nifty50,” it said.

An earlier note by ICICI Securities had said that the commodity profit pool (of the listed space) had dipped by a staggering Rs 1.3 trillion during FY23 to reach Rs 2.5 trillion.

“Going into FY24, commodity profit pool is expected to show mean reversion and expand by Rs 70,000 crore, as per consensus estimates, and will be the biggest contributor to aggregate profit pool expansion in the listed space. Consequently, the profit after tax or PAT-to-GDP ratio is expected to resume its expansion and reach 4.7 per cent by FY24,” said ICICI Securities in a note.

In FY23, commodity companies faced multiple negative headwinds after a stellar FY22. These include “declining realisations, windfall tax, and export duties, while elevated input cost impacted profitability,” the note added.

ICICI Securities is projecting the aggregate profit pool of India Inc. to expand by 20 per cent to reach Rs 14 trillion in FY24.

The corporate profit for the Nifty-500 universe grew at a slower pace of 8.7% YoY in FY23 after surging 49% YoY in FY22 and 50% YoY in FY21. MOFSL notes that FY23 nominal GDP jumped 16.1% YoY – faster than FY23 corporate profit growth – preceded by 18.4% YoY GDP growth in FY22 and a contraction in GDP recorded in 2021.