It’s raining profits for India Inc. In a stunning performance that effectively puts the ghost of Covid to rest, 4,175 listed companies have posted a profit after tax of ₹2.47 lakh crore (See: Peak Performance) in the second quarter of FY22. This is a result of better margins and improved demand, lower corporate tax, and better cost efficiencies.

Even as profitability scaled a new high, topline, too, broke all records at ₹22.54 lakh crore in Q2, after crossing ₹20 lakh crore in the March 2021 quarter. India Inc. crossed the ₹10-lakh-crore mark in the December 2010 quarter. Since then it has taken 40 quarters to double that number.

Though not strictly comparable because of the pandemic-truncated year, profit for the first half of the current fiscal is now over 80% of the full-year profit of ₹5.37 lakh crore in FY21. Listed companies have never seen such profit margins in the past and the only period when they were consistently above 10% was during three quarters of 2007, hitting a high of 10.59% in quarter-ending September 2007, according to CMIE data.

These results reflect how India Inc. managed to overcome the pandemic blues even though the possibility of a third wave has not been ruled out. The record profit comes on improved profit margins, which hit a 12-year high of 10.35%. The last time such meaty margins were seen was in the quarter-ending September 2010 at 10.53%. It was the same quarter when the cumulative quarterly profit pool of India’s listed companies touched ₹1 lakh crore for the first time. Though profits more than halved in the quarter-ending June 2012 to ₹0.45 lakh crore, it crossed the ₹1-lakh-crore mark again in the following quarter only to hit an all-time low of ₹0.30 lakh crore in the June 2020 quarter. Since then it has been a record run as the next four quarters saw the profit pool crossing ₹1.52 lakh crore for two consecutive quarters, then hitting ₹2.02 lakh in March 2021 and racing to a record high in just concluded second quarter.

On a trailing 12-month basis, the profit-to-GDP ratio hit a new high of 3.99%, surpassing the FY11 high of 3.2%. While FY21 was a record year despite the pandemic, the consensus seems to be that FY22 will prove to be a much better year with earnings growth expected to trend higher. Raamdeo Agrawal, chairman, Motilal Oswal Financial Services, believes India’s corporate profit to GDP will hit new highs in the coming years. “In the US, the same ratio is 10-12%. If it goes to 6%, then at 13% [nominal growth rate] GDP might double. If corporate profit to GDP goes to 6% in five years, then corporate profits, per se, will have to rise 5-6X. When that happens, it will give a lot of taxation to the government and that is why getting that 8% growth rate is important,” believes Agrawal.

Though FY21 was a truncated fiscal, thanks to the lockdown impacting Q1, the last quarter of the year did see a significant surge in inflation. The wholesale price index-based inflation, on the back of soaring energy costs and those of manufactured products, hit an eight-year high in March 2021. The WPI surged to 7.4% by the end of the fiscal, compared with 4.17% in February and 2.51% in January. That spurt in inflation also had a rub off effect on earnings as well. A view endorsed by S. Naren, chief investment officer, ICICI Prudential MF. “One of the most important factors for profits to come back is inflation. The moment WPI inflation comes back, you have earnings growth kicking in,” says Naren.

The other big contributor could be the impact of lower corporate tax rate, which was reduced from 35% to 26% in September 2019. Naren, however, points out that a confluence of factors helped companies deliver better. “While tax rate did come down, a benign rate regime resulted in lower finance costs, cost structures improved and, pertinently, in the absence of a huge capex cycle, depreciation rates didn’t rise,” elaborates Naren.

Around 471 additional companies are yet to publish their financial statements for the quarter, as per data sourced from the CMIE. But since most of these companies are smaller in size they may not have a significant impact on overall numbers.

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