Mumbai, Dec. 15: All is not hunky dory for companies despite the stock markets staging a smart rebound — the ratio of corporate profits to the gross domestic product (GDP) is projected to fall to a ten-year low in the current fiscal.
Profits of companies have been under pressure. The second-quarter numbers show cement, capital goods and public sector banks feeling the heat of the ongoing slowdown in the domestic economy.
Though the IT, pharma and auto sectors surprised with their good numbers, experts feel the overall picture is unlikely to change.
According to the 18th Annual Wealth Creation Study by Motilal Oswal, corporate profits during 2013-14 is likely to grow lower than the nominal GDP growth rate.
Further, the ratio of corporate profit to GDP is likely to be at 4.5 per cent, which is nearly a 10-year low. In 2004, the ratio stood at 4.7 per cent. Though it grew to 7.8 per cent in 2008, there has been a continuous decline.
The worries over profits come at a time investors are apprehensive about the next move of the Reserve Bank of India and the US Federal Reserve (Fed).
Both the domestic key indices — the BSE Sensex and the NSE Nifty — recently hit record highs on hopes that the BJP would perform well in the general elections next year.
However, subsequently the BSE benchmark Sensex fell about 770 points from its all-time intra-day peak of 21483.74 on concerns that the central bank may raise policy rates after retail inflation soared to 11.24 per cent in November.
On the other hand, the Fed is expected to announce its taper plan after its meeting on December 18.
“Given the corporate performance, the Fed taper, the fact that interest rates are unlikely to be reduced any time soon, not to mention the uncertainty with regard to who forms the next government, the stock markets are likely to trade in a narrow range over the medium term,” the analyst said.
However, the report says that the ratio is bottoming out and earnings growth has started to recover.The market cap to GDP ratio, which hit a peak of 100 per cent in 2008, has crashed to 44 per cent in 2009. It is now trading at around 61 per cent of the current GDP and by this measure, valuations are not stretched.