The profits of top Indian companies have grown much faster than the country’s nominal gross domestic product (GDP). That’s the conclusion thrown up by a Mint study of the top 500 companies by net sales. We’ve taken GDP at current prices rather than at constant prices to make them comparable with net profits.
The results are shown in the accompanying chart. As the data show, the net profit of the top 500 companies (sorted by sales) as a percentage of GDP at current prices has been steadily rising. To be sure, given that growth in agriculture, a segment hardly represented in corporate India, has grown at a much lower rate, it’s natural for corporate profit growth to outstrip GDP growth. But it didn’t in the late 1990s and early 2000s.
Also See Changing trend (Graphics)
The percentage of net profits to nominal GDP, which was at 2.5% in 1996-1997 and 1997-98 went down to around 2% in the next two years, but increased rapidly thereafter. The boom years saw a sharp rise in the percentage, but what is interesting is that, in spite of the crisis and the downturn in the economy, the percentage of net profits to GDP fell to 4.5%, which is more than what it was during the boom year of 2005-06. The numbers seem to show a structural change in corporate profitability, so much so that the bottom of a cycle is now much higher than at the bottom of earlier cycles.
What’s more interesting, though, are the projections. If we take the conservative projection of GDP growth of 7% for 2009-10, then nominal growth should be in the region of 14%—taking inflation at 7%. Net profit growth, on the other hand, is expected to be flat this fiscal. That would result in a net profit to GDP percentage of around four, even lower than in 2008-09.
But 2009-10 is nearly over and the markets are looking ahead to 2010-11. The government’s chief economic adviser has said that 9% growth in that year is achievable. Taking inflation at 6%, that would mean a nominal growth rate of 15%.
Profits, on the other hand, are expected to grow above 20%, with some brokerages predicting an earnings per share growth of 29% for the companies on the Sensex index on the Bombay Stock Exchange. Even if we assume that high figure, that means the net profit to GDP percentage would be around 4.5%, the same level as in 2008-09.
In short, it’s merely a reversion to conditions that prevailed last fiscal and do not seem to indicate inflated expectations.
Graphics by Yogesh Kumar / Mint