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Friday, January 27, 2023

Publicly traded company margins may improve in FY24 despite weak GDP growth

Margins for publicly traded companies may improve in FY24 as corporate profits measured by after-tax profit have nearly doubled from the pre-Covid period average (FY18-20) of FY2 .1% of GDP to 4-4.5% of GDP over the last nine quarters. Motilal Oswal said in a brokerage report.

He said corporate profits in India declined almost continuously to 1.6% of GDP in FY20 from its peak of 6.3% of GDP in FY2008, the pandemic helping to reverse the adverse trend.

“After falling sharply in 1HFY21, listed corporate earnings have more than doubled to 4.0% of GDP in 1HFY23, after 4.5% of GDP in FY22,” Motilal Oswak said in his report.

The brokerage noted that the brokerage forecasts India’s nominal GDP to grow 7.3% yoy in FY24, marking its lowest growth in nearly half a century before the pandemic. The slowdown in economic activity is likely to have an adverse impact on macroeconomic variables.

“A simple analysis confirms that nominal GDP growth does not share a very strong positive relationship with corporate profits, unlike corporate sales,” according to the report.

Revenue growth has been slower for non-financial companies (NFCs), so it will adjust spending to maintain earnings.

The financial sector accounted for about two-thirds of the post-covid improvement, Motilal Oswal said.

“After 50% growth in FY23E, financial sector earnings (based on MOFSL coverage) are likely to grow another 17% yoy in FY24E, implying a projected increase in the PAT ratio -GDP from 1.1% to 1.2% of GDP next year in FY23E With deposit rates revalued in FY24 and the risk that credit growth may moderate more than expected, there could be some downside risks to their earnings,” he said.

“Commodity price correction and related contraction in total expenses may boost EBITDA margins next year. Based on MOFSL coverage (representing ~78% of earnings of all listed NFCs), margin EBITDA could expand to 15.7% in FY24E, from a decade-low level of 13.8% in FY23E,” he added.

Publicly traded companies have also benefited by gaining market share in the past two years. Since formalization is a prolonged structural change in a society, this trend may continue in the future as well, albeit at a slower pace than in recent years.

“It means that despite weak economic growth, publicly traded companies can continue to post better profitability driven by higher market share gains,” he said.

The Sensex closed 37.08 points below 60,978.75, while the broader Nifty was flat at 18,118.30.


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