A study of Corporate PAT to GDP trends: IIFL Capital Services

1 Nov 2022 , 10:21 AM

PAT GDP troughed out

Corporate India’s PAT (aggregated over ~31,500 companies, o/w 80% are unlisted) has bounced back smartly to levels of ~5% of GDP in FY22 after troughing out at 1.2% in FY20 following a decade long profitability erosion phase. This bounce back has been achieved without GDP yet touching pre-COVID levels, and significantly through belt tightening gains, some of which can last.
 
Growth drivers in place

Analysts at IIFL Capital Services feel optimistic that in the coming years, PAT/GDP ratio will comfortably breach its previous peak in FY08 of 7.2%, given that

1) We have yet to see any operating leverage begin play out since GDP (in real terms) has just about reached FY20 levels
2) Services sector has emerged stronger with one-off hits like telecom AGR behind, and e-commerce having taken flight
3) Banks and NBFCs have seen a substantial cleaning up of NPAs, are governed by a much stronger regulatory framework, and are substantially better capitalized than 3 years ago
4) Corporate Debt / GDP has fallen from 41% to 32% in the last 9 years thanks to chronic underinvestment
5) Policy environment is supportive with the government having cut corporate taxes, introduced PLI schemes and driven up tax collections etc.
6) Other domestic clean-up/speed bumps like GST/RERA, COVID are behind us.

These factors can drive a strong domestic growth cycle.

Emphasize domestic growth stories

To be sure, capex cycles are global, and to a large extent synchronous with commodity cycles. Global factors such as green energy investing, de-globalization, supply chain redundancy requirements can keep commodities and capex strong in the medium term. In the near term geopolitics and monetary tightening led by US are serious challenges. Nifty at 19.5x apparently offers little upside, but India’s relatively superior investibility will keep multiple premium intact. Expect domestic growth stories to outperform.