Cyclicals lift India's profit-to-GDP ratio to 5.3% post-Covid: ICICI Sec

Defensive sectors like IT and FMCG see market-cap share slip to 18 per cent as cyclical sectors like industrials and financials lead profit expansion

India Inc’s profitability has staged a post-pandemic turnaround, according to ICICI Securities. The corporate profit after tax to gross domestic product (PAT/GDP) ratio has ascended from a lowly sub-2 per cent to a mid-cycle level of 5.3 per cent. However, this expansion is being driven almost entirely by cyclical sectors, leaving traditional defensive stocks, such as information technology (IT), fast-moving consumer goods (FMCG), and healthcare, trailing at near-cycle lows.

Cyclicals did heavy lifting

The report highlights that the surge in India’s profit-to-GDP ratio reflects broader macroeconomic trends, including a rise in real estate demand, government infrastructure spending, and a nascent recovery in private capital expenditure (capex). These factors, combined with a clean-up of bank balance sheets and rising discretionary consumption, have allowed cyclical and capital-intensive sectors to dominate the current profit cycle. 

 

In contrast, defensive sectors have remained stagnant. Their contribution to GDP has stayed flat at approximately 0.8 per cent, consistent with their "low-volatility" nature. Consequently, the share of defensives in the overall profit pie has shrunk to roughly 16 per cent, while their market capitalisation share has followed suit, dropping to 18 per cent—a situation the brokerage notes mirrors the market dynamics of 2007. 

IT and FMCG face valuation pressure

Within the defensive basket, IT services are leading a significant de-rating in price-to-earnings (P/E) multiples. This decline is being fueled not only by cyclical factors but also by growing fears of long-term disruption caused by Artificial Intelligence (AI). Similarly, the FMCG sector has seen a gradual erosion of its valuation multiples as investors shift focus toward high-growth cyclical areas. 

"Equity markets are exhibiting the classical behavior of market cap share following profit share in the economy – driven by cyclical factors such as the capex cycle, credit cycle and discretionary consumption," ICICI Securities noted. 

The Nifty IT index currently trades at a trailing twelve-month (TTM) P/E ratio of 21.5x, compared to its five-year average of 29.5x and its 10-year average of 26.4x. Similarly, the Nifty FMCG index is trading at a TTM P/E of 37.8x, compared to its five-year average of 44.7x and its 10-year average of 43.2x.

Outlook for FY26–28

Looking ahead, the performance gap between cyclicals and defensives is expected to persist. ICICI Securities estimates that defensive sectors will contribute only about 10 per cent to the profit expansion of the Nifty50 index between FY26 and FY28. 

While the broader Nifty50 is projected to grow at a compound annual growth rate (CAGR) of 17 per cent, defensives are expected to grow at a much slower pace of 9 per cent. With their weightage in the index currently at 21 per cent, the report suggests their overall profit share could slip further from the current 16 per cent toward the previous cycle's nadir of 14 per cent.

Investment stance

Reflecting these trends, the firm maintained an "Overweight" stance on domestic cyclicals and capital-intensive stocks, including financials, industrials, and discretionary consumption. Conversely, it remains "Underweight" on asset-light defensives like IT and staples, noting that valuation mean-reversion toward average market levels is likely to continue as the investment cycle gathers momentum.  Disclaimer: Views and recommendations are those of the brokerage/analyst and are not endorsed by Business Standard. Readers should consult a financial adviser before taking investment decisions.