Booming profits of listed companies mask deeper trouble in corporate sector

Headline numbers are painting a rosier picture of a sector that is in effect on extremely shaky ground

Pandemic’s impact on the corporate sector appeared to be positive going by the performance of listed companies in India.

Profits soared, indebtedness reduced and market share gains were aplenty. The resulting stock market boom after the crash in March 2020, aided by global central banks' liquidity gush, added to the allure that India’s corporate sector had finally struck gold after a lost decade of 2010s.

Prior to the pandemic, the share of listed corporate profits in GDP was at a near 20-year low while the share of listed companies in corporate tax collection was also at a two-decade low of 40 percent.

The pandemic, for all its adversities, turned out be a boon for listed companies. The ratio of profits of listed companies to the GDP surged to an eight-year high of three percent in 2020-21 and to 3.7 percent as of the December quarter of 2021-22.

Similarly, shares of listed companies in the corporate tax soared to an 18-year high of 56 percent in 2020-21 before moderating to 46 percent for the first nine months of the previous fiscal year, according to a report by brokerage firm Motilal Financial Services.

Corporate Inequality

Contrast the staggering profit numbers of listed companies with that of the unlisted firms in India and one gets a better picture of the rising inequality or the 'K-shaped' recovery even within the corporate sector.

The ratio of aggregate corporate profits to India’s GDP actually nosedived to a 17-year low of 6.4 percent in 2020-21 before recovering to 7.6 percent in April-December of 2021-22. “This means that while listed companies emerged stronger from the pandemic, profitability for the unlisted corporate sector touched a 17-year low of just 3.4% of GDP in FY21 (almost half from the pre-COVID years) and stayed below 4% of GDP in 9MFY22,” Motilal Oswal Financial said.

Similarly, Motilal Oswal Financial found that not only is the profit trajectory of unlisted companies heading south, they are also taking on more debt to ensure their survival through the devastation caused by the pandemic.

While outstanding debt of top 500 listed companies by market capitalisation fell 8.3 percent in 2020-21, overall corporate debt grew 5.8 percent, which implies that unlisted companies saw their debt levels rise by 10 percent in 2020-21 alone.

“Overall, this diverged performances of the listed and unlisted corporate sectors is very stark and concerning as it implies a deterioration in the aggregate corporate sector,” the brokerage said.

Weak Corporate Sector

The overwhelming conclusion from Motilal Oswal Financial’s deep-dive into India’s corporate sector is that headline numbers are painting a rosier picture of a sector that is in effect on extremely shaky ground.

The government has tried to play its part through several credit guarantee schemes for small and medium business owners during the pandemic. But with demand at the lowest level of the domestic consumption pyramid still suffering due to job losses and now persistently higher prices, recovery for small companies remains elusive.

Anecdotal instance of your neighbourhood mom-and-pop retailer shutting operations are plenty not only in metro cities like Mumbai and Delhi but in Tier-II and Tier-II cities of the country. In light of evidence presented above, it is no surprise that the Reserve Bank of India remains hesitant to tackle the inflation problem triggered by surging commodity prices and supply-side issues.

“Overall, the external developments during the past two months have led to the materialisation of downside risks to the domestic growth outlook and upside risks to inflation projections presented in the February MPC (monetary policy committee) resolution,” RBI Governor Shaktikanta Das said earlier this month.

For Motilal Oswal Financial, the liquidity tsunami released by global central banks to cushion the impact of the pandemic has resulted in higher inequality – the price of preventing a total collapse of the global economy.

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