Cyclicals & strong earnings drive India Inc’s profit-to-GDP to 4-year high

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The ongoing results season demonstrates one thing loud and clear the resilience of the Indian economy and a strong recovery in the formal sector is underway. According to data compiled by ICICI Securities, India’s net profit-to-GDP ratio surged to a four-year high of 2.6%.

The recovery is a reflection of the turnaround that metals, manufacturing and other sectors are witnessing since the end of the national lockdown in June last year.

ICICI Securities said the look-through earnings of the Nifty200 index have more than doubled in the March quarter so far driven by cyclical sectors and the shrinking net loss pool of companies.

But the best is yet to come as the brokerage firm is of the opinion that the net profit-to-GDP ratio rising further in the current and next financial year.

“Significant contribution to earnings pool trajectory by cyclical will boost PAT-to-GDP further over FY21-23 (2020-23) as Nifty50 earnings growth will outpace nominal GDP growth,” the brokerage firm said in a note.

Despite the severe health impact of the second covid wave, the consensus for Nifty 50 earnings per share 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 and beats/misses evenly balanced.

“We believe 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 NIFTY50 index,” the brokerage said.