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India Inc’s profit pool – decadal analysis: a PAT on the back!

Profitable journey through the decade – a radical shift

* Post-contraction in FY21 (due to Covid-induced lockdowns), India's GDP revived smartly and grew 8.7% YoY in FY22 – the highest in a decade! Concurrently, India’s corporate profitability has revived post-FY20. In this note, we analyze India Inc's profit pool journey over the past decade as well as its future prospects.

Key findings and inferences:

* A giant leap in 10 years: During FY12-22, India Inc’s earnings multiplied 2.6x and reported at a CAGR of ~10%. There were two distinct growth phases: a) Phase 1 (FY12-17) that clocked a muted PAT CAGR of 6.3% underpinned by a GDP CAGR of 7.1%; and Phase 2 (FY17-22) that posted a higher PAT CAGR of 13.9%, though, GDP growth slipped to 3.7%. The stock market returns (Nifty-50) posted an 11.6% CAGR under Phase 1 and 13.7% CAGR under Phase 2. This translated into a Full Cycle (FY12-22) CAGR of 12.7%, broadly in line with the PAT CAGR of 10.1%.

* Defensives alter their PAT orbit: The defensive sectors reported healthy performance during Phase 1 with 15% CAGR over FY12-17 and concurrent increase in profit pool contribution to 30% in FY17 from 20% in FY12. Despite a sharp moderation in growth rates in Phase 2, the Full Cycle earnings growth of the defensive sector is equivalent to MOFSL Universe CAGR of 10% over FY12- 22.

* Private Financials sector has been a STAR performer: The sector recorded a PAT CAGR of 14.6% over Phase 1 and 18.2% over Phase 2. The Private Banks and NBFCs’ combined PAT share climbed up 760bp to 17.8% in FY22 from 10.2% in FY12 and 14.8% in FY17.

* Automobile PAT share slides: The Auto sector’s profit share moderated to 2.5% in FY22; it posted an FY12-22 PAT CAGR of -3% v/s +10% for the MOFSL universe. Further, the Phase 2 PAT CAGR stood at -12% v/s +14% for the MOFSL universe. However, a company-level analysis indicated that the sector's performance was not as bad as the aggregates suggested. Tata Motors, which accounted for 30-45% of the sector aggregate sector PAT, sharply underperformed since FY17. Excluding Tata Motors, the FY12-22 sector PAT CAGR stood at 7.4%.

* Top 10 of the decade: The Top 10 most profitable companies contributed ~46% to the MOFSL universe profit pool. Reliance, ONGC and TCS remained among the Top 5 profit contributors throughout the decade. Tata Motors dropped from among the most profitable list (under Phase 1), to the top 5 loss-making company list (under Phase 2). It now contributes more than 22% of the overall reported losses in MOFSL universe. Coal India, which was in the top 10 list until FY20, lost its place in the last two years.

* Loss pools have grown consistently over the last five years: The contribution of loss making companies has increased over the past decade, which is currently at 6% of profit pool. The Top 5 loss making companies contributed more than 96%

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