As the ruling NDA seeks its third term, there is no doubt that the economy is firing on multiple cylinders and is much better placed than most others. But how has the performance of the listed companies, forming the creamiest layer of Indian companies, been? Have the government policies helped them? Have they fulfilled their ask — of increasing capital investments to contribute to growth?

businessline analysis of the financial data of companies forming the CNX Nifty 500 basket, which are the largest listed companies based on market capitalisation, shows that India Inc has done quite well for itself. While the first NDA term between 2014 and 2019 was a little lacklustre, profitability improved dramatically in the second term. The ongoing bull-run in Indian stock market is a reflection of the healthy balance sheets and improving profitability of these companies.

Much of the improvement in the second term is due to the advantages gained by larger companies during the Covid-19 pandemic. But the large corporate tax cut in 2019, implementation of GST and the large government capex spending over the last few years have also helped improve operating profits of corporate India.

While the companies have seen their fortunes improve in the last five years, numbers show that they have not deployed the additional cash generated in capital investment; choosing to repay debt or increase the cash on their books instead.

Tale of two terms

India Inc was buffeted by multiple challenges in the first term of the NDA. There were problems on the global front with slowdown in China causing commodity prices to crash, hurting commodity producers. Banks were still saddled with large non-performing assets which kept credit growth in single digits. The demonetisation in 2016, introduction of GST in 2017 and the IL&FS crisis in 2019 impacted consumption and credit growth, affecting corporate bottom-lines.

The profit margin of CNX Nifty 500 companies declined sharply from 10.4 per cent in 2015 to 7.9 per cent in 2016. Profitability remained subdued until 2020. The earnings per share of the top 500 companies recorded tepid growth in the first term (see table) as high leverage and accompanying interest cost impeded growth.

But the Covid-19 pandemic, which raged between March 2020 and March 2022 turned out to be a blessing for India Inc in many ways. One, with smaller businesses facing the brunt of the Covid lockdowns and supply-chain disruptions, larger companies were able to garner more business. Two, with operations of construction and infrastructure companies getting hit, these companies were able to deploy the surplus cash to decrease the debt on their books. Total debt to total equity of listed companies reduced from 139 in 2014 to 108 by the end of 2023. Three, balance sheets of banks also became healthier as they shed the non-performing assets and as retail borrowers stepped in to fill the gap left by companies.

The profitability of CNX 500 companies has been very healthy since 2021, with profit margin standing at 11.5 per cent in December 2023, according to Bloomberg. Earnings per share of these companies have also grown from 458 in December 2019 to 752 in December 2023, recording an annual growth of 13 per cent in this period. The growth in EPS in the first NDA term was less than half this number.

The tax-cut bonanza

The most significant help from the government to India Inc came in the form of the large corporate tax cut in 2019. This was done to help companies reeling from demand slowdown post the IL&FS crisis and to nudge them to spend more on capital investments.

The tax cuts were huge — effective income tax on companies was slashed to 25.17 per cent, down from the highest rate of 34.94 per cent, and the rate for minimum alternate tax was lowered from 18.5 per cent to 15 per cent. Companies had to let go of some of the deductions and exemptions to pay at a lower tax rate. But most of the larger companies have elected to shift to the concessional tax regime under section 115BAA, according to the Union Budget of 2023, thus lowering their tax burden.

The implementation of GST has helped simplify the complicated indirect tax, reducing the compliance burden for companies. Faster movement of trucks on highways post-GST has helped bring down fuel bills for companies. The country’s ease of doing business rank has improved significantly from 142 in 2014 to 63 in 2019.

Further, the large spending on capex by the Central Government since Covid has helped construction companies and commodity producers and has had a cascading effect on the demand in the economy, which in turn has helped business’ revenue.

Sluggish capex

The impact of the large tax rate cut in 2019 is visible in the decline in tax rate for the top 500 companies from close to 30 per cent in FY16 to 22 per cent in FY23. The reduction in tax has helped boost net profit, improving the net profit margins of companies, post-Covid. Companies have also reduced their debt burden.

But they have not really unleashed the ‘animal spirits’ and spent big on capital investments, as expected. Additions to fixed assets (gross block) of the top 500 companies was around 8 per cent in FY22 and FY23. Investments had spiked in FY20, showing a growth of 17 per cent largely due to the large capital investment by Reliance Industries. In other years, PSU oil companies, power producers and distributors, and telecom companies have been spending on annual maintenance and additions. But there haven’t been any material capex by most other sectors.

This is also reflected in the price to book value increasing from 2.7 in 2015 to 4 in 2023. While part of this is due to increasing stock prices and lower leverage, additions to assets have also been slower.

In the last 10-years of NDA rule, companies have had it good and enjoyed the benefits of the government’s fiscal policies and spends. The next government will have to put on their thinking caps to get better payback from these larger companies.