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The brokerage highlights how the share of Nifty companies’ profit in GDP and GVA (gross added value) has been meagre and falling. From a share of 2.8 per cent of GDP, it is now at 2 per cent.
“Our argument is companies
that represent just the top 2 per cent (and falling) share of the economy hardly represent the entire economy,” says Tirumalai.
Furthermore, the dependence of Nifty companies
on domestic sales has gone up in the past decade, but it is still lower than the 2000 levels. During the start of the millennium, nearly 86 per cent of the sales for Nifty companies
came from the domestic market. This is now down to 65 per cent (up from 57 per cent in 2010), the Emkay data shows.
“While there was high dependence on the domestic economy for the Nifty stocks
in the 2000s, the link broke significantly in the 2010s with the onslaught of the IT services and pharma sectors (into the Nifty). The profits of these companies, of course, depend a lot on external factors than the domestic economy,” Tirmualai says.
The brokerage says one should not look at Nifty stocks
to take cues on economic activities in the country.
“With doubts being raised on whether the Nifty stocks
can show such a sharp rise in earnings in FY22 when the economy still be recovering from the pandemic shock… we conclude that it is pointless to establish a link between the economic activity levels and Nifty earnings growth. A bottom-up approach will be appropriate,” says Tirmualai.