Corporate profit to GDP ratio hits 10-year high of 2.63% in FY21

India Inc's combined net profit was up 57.6% to Rs 5.31 trillion in FY21

The outbreak of the Covid-19 pandemic and the subsequent lockdowns to contain its transmission dented India Inc’s sales and revenues in 2020-21 (FY21), even as the decline in prices of raw materials and cost of capital boosted companies’ profits to a decade high.

The combined net profit of the listed companies was up 57.6 per cent to Rs 5.31 trillion in FY21. As a result, the corporate profit share in India's gross domestic product (GDP) hit a 10-year high of 2.63 per cent in the last financial year. The ratio was at a record low of 1.6 per cent in FY20, while it was the highest in FY11 at 3.2 per cent.

Corporate revenue to GDP also inched up to 34.4 per cent in FY21, up from 33.6 per cent, but the ratio was still lower than 35.7 per cent two years ago. India Inc’s revenue share in GDP had peaked at 41.9 per cent in FY15.

The companies' combined revenue (including other and fee income) was down 2 per cent in FY21 to around Rs 67 trillion. For comparison, India's GDP at current prices was down 4.2 per cent in FY21 to Rs 194.5 trillion, according to the advance estimates by the National Statistical Organisation (NSO).

The numbers suggest that the gains in corporate profits largely came from a sharp decline in operating and capital expenses after the pandemic rather than higher sales volumes and revenues. Commodity producers such metals, cement, and chemicals, however, gained from higher prices for their products, thanks to a global rally.

Owing to a global collapse in commodity prices in the first half of FY21, India Inc’s raw material costs were down 14.1 per cent in the year, while power and fuel costs were down 8.2 per cent. As a result, every Rs 100 worth of net sales cost Rs 51.6 worth of raw materials and power and fuel in FY21, down from Rs 56.4 a year ago and a record high of Rs 65.8 in FY12. The companies’ raw material and energy costs in FY21 were the lowest in at least 13 years.

The analysis is based on annual finances of a common sample of 1,054 companies, which have so far declared their results for FY21 or CY20. These companies had a combined market capitalisation of Rs 186 trillion as on Friday, accounting for 84 per cent of the market cap of the listed companies. The profit and loss figures have been adjusted for the listed subsidiaries of other listed holding-cum-operating companies in the sample.

While the post-pandemic changes in the macro-economy benefitted companies across sectors, the biggest gains accrued to commodity producers and companies in the financial sector -- banks, insurance and non-banking finance companies (BFSI).

The combined net profit of BFSI companies was up 79.3 per cent in FY21 to a record high of Rs 1.49 trillion as banks saw a sharp rise in their margins or spread, thanks to a decline in their interest cost. Lenders’ combined interest cost was down 2.7 per cent in FY21 -- for the first time in at least 12 years -- even as their gross interest income was up 9 per cent. Interest cost accounted for a record low of 46.2 per cent of their gross interest income in FY21, as against 51.8 per cent a year ago and a high of 64.4 per cent in FY09.

Crude oil refining and marketing companies such as Indian Oil, Bharat Petroleum, and Hindustan Petroleum were among other big winners. The combined net profit of these companies more than doubled in FY21, thanks to inventory gains and lower expenses, even though their net sales were down 21.2 per cent last fiscal.

Industrial metals producers such as Tata Steel, JSW Steel, Hindalco, Vedanta, and Hindustan Zinc also gained big. The combined net profit of metals & mining was up 9X in FY21 to a record high of Rs 38,300 crore, while the companies' combined net sales were up 8.1 per cent last fiscal against a 9.2 per cent decline a year ago.

Companies in other commodity sectors such as cement, petrochemicals, sugar, edible oil, and paper also reported a jump in earnings because of higher prices of products and lower expenses.

A sharp rise in commodity and energy prices in the second half of FY21 translated into higher operating costs for non-commodity producing companies. As a result, the earnings growth for general manufacturers and service providers (non-financial companies excluding commodities and oil & gas) was far more muted.  

The combined net profit of companies in these sectors, which include IT, FMCG, consumer goods, automobile and capital goods, was up 20.7 per cent in FY21, while their revenues were flat. The rise in the companies’ profit and revenue share in GDP was also far more muted.

The cost-driven rise in earnings in FY21, however, raises a question mark over its sustainability, given that most of India Inc’s operating costs are likely to be higher in FY22 on a year-on-year basis.