It said that corporate profits in India declined almost continuously to 1.6% of GDP in FY20 from its peak of 6.3% of GDP in FY08, the pandemic helped reverse the adverse trend.
"After falling sharply in 1HFY21, listed corporate profits have more than doubled to 4.0% of GDP in 1HFY23, following 4.5% of GDP in FY22," said Motilal Oswak in its report.
The brokerage pointed out that brokerage forecasts India’s nominal GDP to grow 7.3% year-on-year in FY24, marking its lowest growth in almost half a century prior to the pandemic. The deceleration in economic activity is likely to have an adverse impact on macroeconomic variables.
"A simple analysis confirms that nominal GDP growth does not share a very strong positive relationship with corporate earnings, unlike corporate sales," the report said.
The revenue growth has been slower for f non-financial companies (NFCs), so it will adjust its expenses maintain earnings.
The financial sector accounted for about two-thirds of the improvement post-covid, said Motilal Oswal.
"Post- 50% growth in FY23E, financial sector profits (based on MOFSL Coverage) are likely to grow another 17% YoY in FY24E, implying a projected rise in PAT-to-GDP ratio to 1.2% of GDP next year from 1.1% in FY23E. With the deposit rates being re-priced in FY24 and the risk that credit growth could moderate more than expected, there could be some downside risks to their profits," it said
"Commodity price correction and related contraction in total expenses may drive EBITDA margins higher next year. Based on MOFSL Coverage (accounting for ~78% of profits of all listed NFCs), EBITDA margin could expand to 15.7% in FY24E, from a decade-low level of 13.8% in FY23E," it added.
The listed companies have also benefitted by gaining market share in the past couple of years. Since formalization is a long-drawn structural change in a society, this trend may continue in the future as well, albeit at a slower pace than in the past couple of years.
"It means that notwithstanding weak economic growth, listed companies may continue to record better profitability led by further market share gains," it said.
The Sensex closed 37.08 points lower at 60,978.75, while the broader Nifty was flat at 18,118.30.
