Financial Daily from THE HINDU group of publications
Monday, Apr 26, 2004

News
Features
Stocks
Cross Currency
Shipping
Archives
Google

Group Sites

Home Page - Economy
Industry & Economy - Economy


Higher GDP doesn't mean more profits — Good only for levies and employees

Suresh Krishnamurthy

STOCK market axioms have it that higher GDP (gross domestic product) growth leads to even higher growth in profits of listed companies. Or do they?

An analysis of the financial performance of 125 major companies over the period between 1995 and 2003 suggests that it is not the case. Profit growth of these companies, if anything, has lagged GDP growth.

These have implications for stock price valuations that now factor in earnings growth that is higher than GDP growth. GDP is a measure of value of output in a year.

In the period between 1995 and 2003, industry's nominal GDP has grown at an annual average of 10.6 per cent. Profit growth has, however, lagged behind at 9.1 per cent.

In contrast, duties and taxes have grown at a compounded rate of 10.7 per cent. Similarly, employee costs have grown at 11.7 per cent.

This suggests that growth in output of the industry (GDP growth) may be good for growth in government levies (income-tax and excise duties) and employees and not necessarily for profit growth of listed Indian companies.

There have been exceptions.

In 2001 and 2003, profit growth was indeed substantially higher than that of GDP growth. This, however, was mainly due to compression of interest cost, and to lower government levies and reduced depreciation charges. Going forward, if interest costs do not decline further and depreciation charges mount because of higher investments, profit growth will remain muted even if GDP grows at a higher rate.

Besides, earnings growth of listed Indian companies has been more volatile than that of GDP industry growth.

In three of the past eight years, profits of listed Indian companies have declined.

In contrast, GDP of the industry has never declined, although growth rates have dipped.

These numbers indicate that listed Indian companies have to break from the past if they have to satisfy stock market aspirations.

More Stories on : Economy | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page



Stories in this Section
Votebank politics hits Mumbai realty issues


Bharti, VSNL in Rs 500-cr pact to share STD network
Higher GDP doesn't mean more profits — Good only for levies and employees
PFC slips over Jindal loan due to yen-dollar fluctuation — Loss put at Rs 4 crore
RBI fiat: Bankers see no hitch in paying dividends
If all goes well, T+1 by Oct: Bajpai



The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2004, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line