We are in the FY 25 corporate earnings season. Corporate profitability has always been of interest to me, since I believe it to be a key lever in building sustainable, scalable institutions.

I therefore requested data from a couple of sources to examine what has been happening with corporate profitability over the last two decades. And here’s what I found:

1. Corporate profitability in India (as measured by the listed universe) has broadly stayed between 4 and 5% of nominal GDP between fiscal years 2004 and 2024. So, while there are different companies in the mix in the various years, aggregate corporate profitability has been growing broadly in line with nominal GDP. Our corporate sector should be a larger proportion of our GDP and that requires a focus on growing corporate profits faster.
2. The top 100 listed companies in India by profitability account for the bulk of the overall listed corporate profit pool. This number was over 90% in FY04 and FY14 and has come down to just over 80% in FY24. Clearly therefore, there is a high degree of concentration in terms of profitability and, considering we have thousands of listed companies, there is a very long tail of companies making low to negative profits. This suggests that building and sustaining profitable scale in India seems to be a challenge.
3. The US too has some concentration of profitability in its top 100 companies, with that number being about 37% for CY24.
4. Within the top 100, the ratio of the profitability of the top 10 to the bottom 10 has improved, meaning the smaller companies in the list are growing profit faster than the larger ones. That’s good news.
5. If one looks for continuity, we find that there are close to half the companies common in the top 100 profit list between FY04 and FY24. In comparison, 30 companies are common to the NIFTY 100 between March 04 and March 24. Market cap variations seem more pronounced than profit variations.
6. While the top 100 do represent a range of sectors, there is a greater proportion coming from oil and gas, BFSI and IT.
7. The above analysis only covers listed companies. There are some large unlisted companies which are very profitable, be it NSE or Haldiram. As and when more of these companies get listed, the data will change.
8. Valuation, being a discounted cash flow of expected future earnings, is obviously different to profit in a year and so we find there are companies with high profitability but lower valuation than others with much lower profitability (or even losses) but higher expected growth, hence valuation.

As we look to the corporate eco system for companies – including the younger, newer ones – to grow, the old adage “ Revenue is vanity, profit is sanity but cash is king” rings loud and clear.

@growthfiniti @Sameer Mistry