Corporate India is still a global minnow in terms of profits

At $69.5 billion, combined net profit of BSE 500 a fifth of China's 300 biggest firms

A strong rally on Dalal Street has made India one of the biggest in terms of market capitalisation globally but corporate India is still a global minnow in terms of actual profits.

During the 12 months ending September this year, the combined net profit of BSE 500 companies at around $69.5 billion was a fifth of the combined net profit of China’s 300 biggest companies and a ninth of that at the euro zone’s 500 biggest listed companies.

The gap with America is more. During the year ending September, S&P 500 index companies reported combined net profit at $1,101.7 billion, about 16 times more than the combined net profit of India’s top listed firms.

India has been the top performing major market in dollar terms, with the combined market capitalisation (m-cap) of the BSE 500 up 29.3 per cent in those 12 months. In the same period, it was up 25.2 per cent in China, 28 per cent in Europe and 22 per cent on average globally. India is now the second largest emerging market in terms of m-cap, behind China and Hong Kong. At nearly $2 trillion, the combined m-cap of BSE 500 companies is 40 per cent that of the combined one of China’s top 300 firms that are part of the Shenzhen/Shanghai CSI300 Index.

America, Britain, Germany, Japan, France and Canada are all ahead. 

The analysis is based on the quarterly or half-yearly net profits and quarter/half year-end m-cap of companies that are part of the broad-based indices in the world’s major markets — the US, China, Japan, the euro zone and India. All numbers are in dollar terms, converted at the exchange rate at the end of a quarter or half-year.

In all, BSE 500 index companies account for 4.2 per cent of the combined m-cap of the world’s top companies, ahead of their 2.8 per cent profit share. A year earlier, Indian companies accounted for four per cent of the combined m-cap. In comparison, top companies in China, Japan and Europe account for 10.8 per cent, 10.5 per cent and 24.7 per cent of global m-cap. 

Analysts attribute this to poorer earnings growth in India, besides the relatively smaller size of the Indian economy with respect to China and the developed countries. “Earnings growth in India has been in the slow lane, due to economic slowdown and stress in the banking sector. In contrast, global economic growth has been on an upswing, benefiting firms in major economies,” says Dhananjay Sinha, research head at Emkay Global Financial Services. 

In constant currency, combined net profit of BSE 500 companies was up only 0.8 per cent during the 12 months ending September this year, slowest in the sample. In comparison, corporate earnings were up 10.5 per cent year-on-year in China during the period, 12.9 per cent and 9.1 per cent in the euro zone and the US, respectively. Japanese companies were laggards in the developed world, with two per cent year-on-year growth in the combined net profit of the Nikkei 500.

Analysts, however, say equity investors in India are bidding up stock prices in anticipation of faster earnings growth, opening a gap between corporate profitability and m-cap. “The Indian equity market is now one of the most expensive globally, giving large market value to Indian companies, relative to their profitability. This is largely due to huge fund inflow from domestic investors in the past few quarters,” says G Chokkalingam, head of Equinomics Research & Advisory.  

At the current stock valuation, BSE 500 companies trade at 28.6 times their net profits in the trailing 12 months, more than double the current earnings multiple in China (14.1). The US is the next most expensive market, with a trailing price to earnings multiple of 21.2, ahead of the global average valuation ratio of 19.1.

 

*on trailing 12-month basis; Note: Based on data of companies that are part of broad-based indices in respective markets. Compiled by BS Research Bureau