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ICICI Securities Report
Cyclically the ‘profit after tax to gross domestic product' ratio of listed companies has significant headroom to expand. After rising significantly from FY20 onwards, the aggregate profit of listed India Inc. stood at Rs 11.2 trillion, or 4.5% of GDP on a trailing twleve months basis.
Bulk of the profit expansion came from the mean-reversion of depressed profits and loss pools. Aggregate profit includes a loss pool, which stood at 0.6% of GDP, down from a two-decade high of 1.8% in FY20. Loss pools have further scope to reduce as the peak earnings cycle ‘loss/GDP' ratio was at 0.2% in CY07.
Overall profit/GDP has further scope to expand as the leverage effects (operating and financial leverage) are yet to kick-in given that the trailing return on equity of the Nifty50 index has only reached ~15% versus the peak RoE of 25-30% in FY07-FY08. Lower operating and financial leverage effects are also evidenced from:
capacity utilisation on TTM basis till March 2022 being suboptimal at 69% (Reserve Bank of India's order books, inventories and capacity utilisation survey) and;
industry credit growth (10.5% YoY in July-22) still at a nascent stage of recovery – along with the private capex cycle.
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