Corporate India’s Steep Recovery in Earnings Signals Double-Digit Growth in the Next Two Years

Unlike the corporate boardrooms’ ambience at the end of March 31, 2020, an impressive earnings recovery from July to December 2020 points towards a double-digit growth in the upcoming two years. A new growth-cycle now looks imminent for India Inc.

India: A promising economic growth story

The post-lockdown recovery in the Indian economic growth marks a noteworthy optimism. A boost in the corporate earnings stems from the promising last two quarterly net profits of the BS1000 (top 1000 listed companies in India). The non-financial BS1000 companies (which exclude banks, non-bank lenders, insurance companies, credit rating agencies and broking entities) recorded one of the highest broad-based earnings recoveries ever. Analysts say corporate profitability is due to a rise because of significant cost savings and not due to an increase in pricing or sales volume. 

India’s strong corporate financials

In March 2020, while the lockdown was in force for only a week, there was still an impact on companies’ financials. BS1000 companies recorded the lowest ever (since FY2008) combined net profit – down 45.8% Y-o-Y. The combined revenues of BS1000 companies went down 2.3% compared to the preceding year – the lowest in the last two decades.

A sharp V-shaped corporate earnings recovery from June to December fuels optimism. A double-digit corporate earnings growth in FY2022 and FY2023 now seems achievable. India Inc’s earnings expectations seem to be driven by the trailing 12-month basis, repudiating any quarterly earnings volatility.

India Inc: The Economic Data Storytelling

Analysts anticipate a 25%-30% earnings growth in FY2022 earnings growth followed by a 15% growth in FY2023. Experts believe a private capex cycle is imminent, stemming from the government’s signals of fiscal expansion and capex spending. However, a lack of economic certainty looms in consumer and industrial demand. This uncertainty emanates from retail inflation driven by costlier energy and commodity prices and lockdown-led job losses that is a shock to income levels. 

Commodity Producers Headlining Growth

Growth in FY2021 was driven by earnings growth in the metals, cement, tires, chemicals, plastics, and petrochemicals. Many analysts hold the view that recent quarters’ macroeconomic changes could allow leading companies sustain current profits. The pandemic-led disruption in production and supply chain enhanced in these companies’ pricing power, boosting product prices.

Sharp margin improvements plus cost savings are recorded in the September and December 2020 quarters. Future growth looks likely with BS1000 companies achieving all-time-high corporate profitability. Strong consumer and industrial demand with top-line growth will reinforce sustainable financial results for India Inc.

Sources: team analysis, market data, team research, press articles