The previous four years have seen the highest levels of corporate earnings in a long time, but the same cannot be said for corporate capital spending.
Since FY20, the total net profits of India’s top listed firms, excluding BFSI sectors (banks, financial services, and insurance), have grown at a compound annual growth rate (CAGR) of 32.4%, a significant rise over the 7.4% in corporate earnings between FY14 and FY19. However, this did not result in a proportionate increase in business investment in fixed assets such as plants and machinery.
Non-BFSI enterprises’ total net fixed assets, including capital work in progress, expanded at a CAGR of 8.6% over FY20-24, slightly higher than the fixed asset growth rate of 8.4% during FY14-19. However, yearly net earnings have increased more than thrice in the previous four years. During the same period, the aggregate net fixed assets of companies climbed by 39.3%, from roughly Rs. 51 trillion at the end of FY20 to around Rs. 71 trillion at the end of FY24.
Financial experts link the gap between profits growth and capex to a slowdown in sales growth. The recent increase in earnings has done nothing to enhance overall consumer demand in the economy, resulting in low revenue growth. Furthermore, year-on-year revenue growth has been erratic in recent years, making it difficult for businesses to forecast future growth and hence profit expectations. This discourages corporations from making significant expenditures in fresh endeavors, and hence reduced capex costs being incurred.
According to the stats, firms exploited the post-Covid profits boom to bolster and de-leverage their balance sheets, reward shareholders with increased dividends and share buybacks, and build their balance sheet cash reserves.
The overall gross borrowing of the corporations increased at a CAGR of only 4.8% during FY20-24, a significant decrease from the 7.5% growth in borrowings during FY14-19. Net debt (gross debt adjusted for cash) increased at a CAGR of only 1.9% over FY20-24, an enormous drop from 9.4% growth in FY14-19.
In comparison, the enterprises’ aggregate net worth increased at a CAGR of 12.5% over FY20-24, up from a CAGR of 9.5% in FY14-19.
As a result, India Inc’s Gross debt-to-equity ratio fell to a 14-year low at the end of FY24. The faster growth in net worth was mostly attributable to a rapid increase in retained earnings, which is the share of net income that corporations preserve as reserves-and-surplus on their balance sheets. The profit and loss account’s carry forward to the company’s reserves increased at a CAGR of 20.2% over the previous four years and has more than quadrupled in value since FY20. These cumulative gains amounted for 46.9% of total balance sheet reserves in FY24, the greatest level in the previous 14 years of corporate data.
