Markets
Savers financed 10-yr high corporates profits
Summary
- Listed firms’ net profit rose 69% y-o-y in FY22 on lower operating costs, interest expenses
- As interest rates rise in FY23, a repeat of FY22 performance would be tough this year
Earnings of listed corporates touched 4% of gross domestic product in FY22. The sample comprises around 4,900 companies for which results are currently available. These companies form a bulk of sales and profits for listed firms in India. The results of companies which are yet to be declared won’t make any material difference to this calculation.
The last time net profits of listed corporates to the GDP ratio was anywhere as high was in FY12 at 4% of GDP. The ratio was 2.8% of the GDP in FY21, and has seen a significant jump of 120 basis points. One basis point is one-hundredth of a percentage. Interestingly, for non-finance listed firms profits jumped from 2% of the GDP in 2020-21 to 2.8% in FY22, again a decadal high.
In absolute terms, net profits of listed corporates in FY22 stood at ₹9.5 trillion, against ₹5.6 trillion in FY21, a jump of more than 69%. What explains this?
After staying flat between FY20 and FY21, companies’ net sales jumped by around 25.6% as post-covid demand picked up. How did the 25.6% rise in sales lead to a 69% jump in profit? Primarily, the overall expenditure went up by 21.7%, at a rate lower than the overall growth in sales. This clearly added to the profit. Thanks to inflation, raw material costs went up by 46.4%. Nonetheless, the salaries and wages grew by just 11%. There can possibly be three reasons for this. One is that increments of salaried employees have been lower than the increase in sales and productivity. Second, companies have managed to control the wages growth of contract workers. Third, the Indian industry has been plagued by low capacity utilization for a while. According to the Reserve Bank of India (RBI), capacity utilization in the December quarter, the latest data available, stood at 72.4%. This means companies can produce more without necessarily having to recruit more people.
The biggest cut in expenditure was on interest expenses on debt. The total interest bill of listed corporates fell 8.4% from a year earlier, or a trillion rupees, to ₹11.5 trillion in FY22.
The total interest expense to GDP ratio in FY22 dropped to 4.9% from 6.3% in FY21. This was a major reason behind the jump in profits.
The interest expenses fell primarily because of RBI cutting the repo rate during the pandemic and banks reducing lending rates. RBI also printed money to drive down interest rates. Listed corporates benefitted tremendously because of this.
Nonetheless, the savers had to bear this cost in the form of lower interest rates on their savings. As the cliché goes, there is no free lunch in economics. Finally, the performance of the large corporates has been the best of the lot. A study by the economics research department of the Bank of Baroda studied 2,108 listed firms. It said net sales of large corporates grew by 27.5% in FY22 and net sales of small and medium corporates grew by 7.2% and 20.5%, respectively.
On the other hand, the net sales of micro corporates contracted by 25.3%. They had contracted by 69.6% and 34.7% in FY21 and FY20, respectively. This points to a larger trend of smaller firms finding it difficult to continue doing business in the aftermath of covid. This has allowed larger corporates to enter their space, and has given them increased pricing power as well.
To conclude, listed corporates will find it difficult to repeat this performance in FY23, as RBI raises the repo rate and banks, in turn, increase their lending rates. Also, households are feeling the heat of inflation much more this year than in the previous one. This is bound to impact sales negatively.
