Corporate loss to GDP ratio near decadal low, will help boost PAT/GDP: ICICI Securities

Loss pool to GDP ratio is falling to a decade-low level in India and it, along with GDP revival, fiscal push, lower interest and tax rates will further augment PAT/GDP, said a note from brokerage firm ICICI Securities.

In a general sense, the loss pool-to-GDP ratio is the ratio between the losses of India's corporate sector to the country's GDP.

"Loss pool/GDP in listed corporate India ballooned to a two-decade high of about 1.8 percent in FY18 largely driven by cyclicals such as corporate banks, telecom, metals and NCLT cases," the brokerage pointed out.

"The loss pool has been receding since FY18, and extending into FY21 so far has reached about 0.7 percent of GDP which is the lowest since FY12 and will help in improving the overall PAT/GDP," ICICI Securities added.

Aggregate consensus PAT of nearly 360 stocks, as per the brokerage firm, is expected to rise from 4.6 trillion in FY20 to 9.6 trillion (about 5 percent of GDP) in FY23 which is a CAGR of 27 percent.

ICICI Securities believes the biggest swing in profits over FY20-23 will be delivered by banks, energy, auto and telecom, which is largely a function of normalisation of depressed earnings.

Sustainable trajectory of PAT/GDP will depend on how the demand environment pans out. Base corporate tax cut in 2019 from 30 percent to 22 percent will also boost PAT/GDP in an improving growth environment, it said.

"The aggregate demand will get a boost from a classical ‘countercyclical fiscal policy’ unveiled in Union Budget 2022, with a focus on capital outlay which has a higher multiplier effect (3.6 times) on demand and a longer impact (4-5 years)," said the brokerage.

It believes progressive reforms done in the recent past and in the Budget will create an enabling environment for growth.

Private investments and private consumption are key to sustained growth.

ICICI Securities underscored that the desired effect of crowding-in of private sector investments due to pick up in government spending is yet to be seen while the jury is still out on a sustained pick-up in household consumption given the effects of pent-up demand, higher propensity to save and low current consumer confidence.

Equity valuations are stretched at about 22 times one year rolled forward basis but earnings upgrade cycle and low discount rate will remain supportive of the high valuations, the brokerage firm believes.

To date, Q3FY21 is turning out to be the third quarter in a row to show more beats than misses (beat/miss ratio of 4.6 within the Nifty200 index) indicating corporate profitability continues to be ahead of expectations, which should lead to further upgrades, ICICI Securities pointed out.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.