Shrinking profits

 

Charting the declining fortunes of India Inc.

Report | June 2016 | Kanvic Grey Matter

by Deepak Sharma, Ravindra Beleyur, Vlad Flamind, Gehan Wanduragala, Guillaume Santesmases

The last five years have witnessed a dramatic decline in profitability at India Inc. despite the country’s rapid economic growth

Today India Inc. finds itself in difficult terrain. Revenue growth has stagnated and profits have hit at an all time low1. This is despite the fact that India’s headline growth rate today marks it out as the world’s fastest growing large economy.

 

In 2010 India’s GDP growth hit its highest point reaching over 10%. Although it fell back in the years that followed as fiscal stimulus gave way to a period of policy paralysis and low global growth, India continued to outpace most other economies. GDP growth rose steadily from a low of 5.6% in 2012 to 6.6%, 7.2% and 7.6% by 2015, surpassing even China.

 

However, the strength of the country’s economic growth has not been reflected in corporate performance. The Kanvic Performance Navigator shows that over the last five years top line growth at India Inc. as expressed through EBITDA2 fell from from 8.7% of GDP to 7.2%.

 

The fall in profitability has been much more dramatic. The net profit of India’s leading companies as a share of GDP more than halved from 2010 to 2015, falling from 4.1% to only 2%3.

These falls followed an extended period of rising corporate profits in India, as the country’s rapid growth propelled it into the club of emerging BRIC4 economies. Corporate profit in India as a percentage of GDP rose every year from 2001 to 2008. It then fell in 2009 before increasing again in 2010. However, over the last five years it has steadily fallen.

 

This trend has continued into the most recent financial year, compounded by a deterioration in the financial strength of companies in sectors like metals - particularly steel - which have come under acute financial pressure following a global supply glut brought about by a slowdown in Chinese growth5.

 

The decline in profitability at India Inc. is also reflected in the stock market valuations of the country’s largest companies. Eight years on from the global financial crisis, the market capitalisation of around one third of the companies in the BSE 5006 is still lower than it was in January 2008 - just prior to the Lehman collapse. Back in 2008 these companies represented over two-thirds of the entire market capitalisation of the BSE 5007.

 

The scale of the profit squeeze clearly illustrates the extent of the challenge confronting India Inc. as it tries to plot a new path to prosperity in the years ahead.

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