2 August 2016

Economy

Diving into Trending Themes

Explaining the divergence between corporate performance and GDP data

Value addition of corporates growing faster than sales

In this note, we attempt to bridge the gap between the strong national gross value added (GVA)/gross domestic product

(GDP) data and the weak corporate sector topline by distinguishing between GVA and sales of the corporate sample. We

establish that GVA of the corporate sample, which matters for national GVA, has grown faster than sales.



Further, an analysis of the broader corporate sample covering unlisted companies (from the Ministry of Corporate Affairs

(MCA)) shows that listed companies are losing market share. Interestingly, the current situation echoes the trends

witnessed during the early 2000s.



We argue that listed companies can regain market share if (1) they reduce prices, or (2) the goods & service tax (GST) is

implemented, which will hurt unlisted companies. While the former will help to reduce general inflation further, the latter

implies higher inflation.



is Motilal Oswal’s new

product in which we deep-dive into trending macro-

economic themes. This new product complements

our existing “Ecoscope” product, which is reserved

for regular updates on macro-economics.

One of the key contentious issues in the Indian economy,

which has been debated on significantly over the past 18

months, is the large divergence between the topline of

India Inc and the GDP numbers. According to the

quarterly data released by the Reserve Bank of India

(RBI) on the private corporate sector, net sales have

been decelerating for the past few years. Topline growth

averaged 3.5% in the past four years and contracted 2%

in FY16. In contrast, total domestic activities (in nominal

terms) in the economy have increased at an average of

~10% in the past four years, with a growth of 8.7% in

FY16. The exhibit below shows the sharp divergence

between the listed corporate sector sales data and GDP

numbers

(Exhibit 1).

Exhibit 1: Divergence between GDP data and India Inc’s data

30

20

10

0

-10

India Inc sales

Nominal GDP

Real GDP

“EcoKnowLedge”

The arguments primarily began from January 2015, with

the release of new series of GVA/GDP (shifting base from

2004-05 to 2011-12). It is believed that new GDP

numbers are exaggerating the level of economic activity.

As per new series, India’s real GVA (GDP at factor cost, as

per old series) grew 6.3% YoY between Q1 FY13 and Q2

FY15, while the growth rate was 4.8%, as per old series.

Exhibits 2-3

on the next page show that the key reason of

difference in GVA growth is the industrial sector, for

which growth rates were increased significantly. In this

note, we try to establish the sanctity of new GVA/GDP

data. We argue that gross value addition by the

corporate sector has grown faster than their sales. The

former is used to calculate national GVA.

In a conference held by the Central Statistics Office

(CSO), Mr T C A Anant, India’s Chief Statistician said that

policy decisions in developed economies are based on a

tripod of GDP growth, corporate sector and labor market

indicators. In India, because of poor availability (or

altogether unavailability) of the latter two, the entire

onus of explaining the dynamics of the economy lies on

GDP, which, many a times, seems unfair, and thus,

perplexing.

(% YoY)

Gross value addition by the corporate sector

has grown faster than their sales. The former

is used to calculate national GVA

Motilal Oswal values your support in

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India Research, Sales and Trading team.

We request your ballot.

Source: Reserve Bank of India (RBI), Central Statistics Office (CSO), MoSL

Nikhil Gupta

(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Exhibit 2: Difference between nominal growth rates

as per old and new series (% YoY)

Exhibit 3: Difference between real growth rates

as per old and new series (% YoY)

Average growth during Q1 FY13 and Q2 FY15

Source: RBI, CSO MoSL

To understand the divergence between GDP and

corporate sector data, let’s begin with understanding the

tree of the corporate sector in India, as per data

availability

(Exhibit 4).

Exhibit 4: Understanding the Indian corporate sector tree based

available (from the MCA) in the Indian economy covers

about 0.5m units, which mostly comprises large

companies. Thus, MSMEs, which are a significant part of

Indian economy, are not covered under any regular

database. However, since listed companies provide

Source: MOSL

Comprehensive data is not available for the entire

corporate sector in India. According to the recent

Economic Survey

2

, 36m units of micro, small and

medium enterprises (MSMEs) contribute 37.5% to the

country’s GDP. Notably, the largest corporate sector data

1

regular data on their activities, most of the times, such

large companies are considered a proxy to gauge

performance of the Indian corporate sector. This,

however, does not always convey the true picture. As we

show in this note, the gap between the listed companies’

Please note that the RBI sample is not a perfect sub-set of the MCA sample. However, given the lack of data on individual companies and the fact that

majority of the RBI sample is included in MCA sample, we exclude the entire RBI sample aggregate data from the aggregate data of the MCA sample to

gauge performance of the ex-RBI MCA (or unlisted) sample.

2

“…With 3.6 crore units spread across the country, that employ 8.05 crore people, Micro, Small and Medium Enterprises (MSME) have a contribution of

2 August 2016

2

37.5 per cent to the country’s GDP…”,

Economic Survey 2015-16.

sample (from the RBI) and the larger corporate sample depreciation

3

. According to CSO data, (nominal) GVA for

(from the MCA) explains the divergence between the the total industrial sector grew 9.2% in FY14 and 7.6% in

GDP and corporate sector sales.

FY15. In contrast, GVA growth for the RBI sample

(comprises of about 2,700 NGNF listed companies) was

1.7% in FY14 and 13.3% in FY15. If CSO’s GVA data is

The gap between the listed companies’

correct, it implies that GVA growth in ex-RBI corporate

sample (from the RBI) and the larger

sample eased from 11.1% in FY14 to 6.8% in FY15. Does

corporate sample (from the MCA)

this look unrealistic?

explains the divergence between the GDP

and corporate sector sales.

Comparing gross value added (GVA) data:

For the first

time, the Reserve Bank of India (RBI) released

aggregated detailed data on ~254,000 companies for

three years (2012-13 to 2014-15). It includes listed and

unlisted

non-government

non-financial

(NGNF)

companies. The RBI has compiled data based on audited

accounts of select 16,923 NGNF public limited companies

and 237,398 NGNF private limited companies from

Ministry of Corporate Affairs (MCA). Let’s call this entire

sample “the MCA sample”. Separately, the RBI releases

quarterly data on some 2,700 listed NGNF companies.

Let’s call this “the RBI (or listed) sample”. Since the MCA

sample includes the companies under the RBI sample,

we calculate “the ex-RBI MCA (or unlisted) sample” by

excluding the RBI sample from the MCA sample (please

see footnote 1 on the previous page). Finally, “ex-RBI

sample” is the difference between CSO’s industrial GVA

and RBI’s (or listed) sample.

Exhibit 5

below compares the GVA growth for different

corporate/industrial samples. In order to calculate GVA,

we simply add employee costs, profit after tax (PAT) and

Exhibit 5: GVA of different corporate samples

A part of this is explained by MCA sample, which shows

that GVA growth for the broad corporate sample was

10.4% in FY14 and 13.6% in FY15. If so, it implies that

GVA growth in the unlisted MCA sample (or ex-RBI MCA

sample) was 21.9% and 17.2% in the past two years.

Assuming that industrial GVA, as reported by the CSO, is

correct, it implies that (nominal) GVA growth in ex-MCA

sample (including unorganized companies) had more

than halved from 8.6% in FY14 to 4.1% in FY15. Is this

number so unbelievable to doubt the CSO’s GVA data?

We don’t think so.

As far as FY16 numbers are concerned, the data seems

extremely robust. The industrial GVA, as per CSO data,

has improved to 8%, in line with GVA growth of 7.9% in

the RBI (or listed) sample in FY16.

Exhibit 6

compares the GVA of the listed sample with

that of total industrial sector released by the CSO. It

shows how closely these two series have moved in the

past few quarters. This chart addresses doubts over the

‘worrying’ divergence between these two series.

Exhibit 6: GVA of listed companies’ sample v/s industry GVA

GVA = staff costs + PAT + depreciation

@ Difference between industry (GVA) and RBI sample

3

Source: RBI, CSO MoSL

Industry (nominal) GVA from CSO

Please note the strict definition to calculate GVA is staff costs + (rent paid – rent received) + (interest paid – interest received) + current taxes paid +

(dividends paid

2016

2 August

– dividends received) + profit retained + depreciation. Since RBI’s quarterly data do not provide details on rent, interest and dividends

3

received, we have simplified the definition to staff costs + PAT + depreciation.

GVA growth in the

unlisted MCA sample

(or ex-RBI MCA sample)

was 21.9% and 17.2%

in FY14 and FY15.

The industrial GVA, as per

CSO data, has improved

to 8%, in line with GVA

growth of 7.9% in the RBI

(or listed) sample in FY16.

It shows how closely

these two series

have moved in the

past few years.

Market share of listed companies is declining…:

Another

way to calculate gross domestic product is through the

expenditure approach, which looks at the total spending

of different participants on goods and services produced

in an economy. This approach implies the relevance of

the topline (sales) data of the corporate sector.

companies’ sample. Similarly, the interest coverage ratio

for the broader sample is over 3x that for the listed

sample.

…which has nothing to do with the new GDP base:

The

second step in our analysis is to compare the topline of

the MCA sample of about 254,000 NGNF companies with

GDP. Since the GDP base was changed from 2004-05 to

2011-12 last year, we look at the share of sales of the

listed sample as a percentage of (old and new) GDP.

Exhibit 7

below looks at the sales growth of the listed

companies (or RBI sample) and the ex-RBI MCA (unlisted)

sample in the two years – FY14 and FY15, and

exhibit 8

looks at their share of these two samples in total MCA

sales in the three years beginning from FY13.

As per the old (2004-05 base) GDP series, the market

share of the listed sample doubled from ~15% in early

The above exhibits show that the unlisted companies 2000s to ~30% in FY12 before falling to ~27% in FY14.

have performed much better than listed companies in Since we have overlapping data from FY12 to FY14 on

terms of sales growth. Consequently, the share of the ex- the new (2011-12 base) GDP series also, it helps us to

RBI MCA sample, in terms of sales, has increased from gauge if the nominal GDP data is exaggerated.

~20% of the total MCA sample in FY13 to ~28% in FY15.

Further, the unlisted companies have not only

performed better in terms of sales but are in much

better shape than the listed companies on other key

parameters as well. While the PAT margin for the ex-RBI

MCA sample has fallen from ~30% to 24% in the past

three years, it is still about 4x of that for the listed

Exhibit 7: Sales growth in the unlisted space much higher

than in the listed space…

Notably, the market share of the listed sample is not too

different, irrespective of which GDP series is chosen

(Exhibit 9 on the next page).

As per the old GDP series,

the share of the listed sample was 29.5% of GDP in FY12,

29.3% in FY13 and 26.6% in FY14. The corresponding

numbers as per the new series were 30.4%, 29.8% and

26.8%, respectively. In the last two years, the share has

Exhibit 8: …due to which their share has increased

significantly in the past few years

Source: RBI, MoSL

2 August 2016

4

Exhibit 9: Listed companies are losing market share…

Exhibit 10: …to unlisted companies and unorganized sector

Based on RBI’s quarterly data releases on private corporate sector

Net sales of different samples as % of nominal GDP

* Calculated as the residual; Nominal GDP – sales of MCA sample

Source: RBI, MoSL

fallen further to 25% in FY15 and 22.4% in FY16. Thus, a On an average, sales of the listed companies’ sample

look at the broader corporate sample shows that the grew 9.1% per annum between FY97 and FY03 as against

listed companies are losing market share, which is not the growth of 11.4% seen in the ex-RBI sample. The

affected by the change in base for GDP.

trend was then reversed during the next decade, when

Further, a look at the entire MCA sample released by the the RBI sample posted an average growth of 23% per

RBI shows that the market share of the ex-RBI MCA annum till FY13, as against ~13% by the ex-RBI sample.

sample has actually increased from 6% of GDP in FY12 to Since FY14, the trend seems to have reversed once

~10% in FY15 (FY16 data not yet released). Deriving the again, as the topline of the RBI sample seems to have

share of other corporate sector (including the grown slower than the unlisted companies’ universe

unorganized sector) in the economy as the residual of (including unorganized sector).

GDP and MCA sample, we find that the share of ‘other’

has inched up slightly from ~63% in FY12 to 65% in FY15 Since the ex-RBI sample (or unlisted universe) is derived

by deducting the topline of the RBI sample from the

(Exhibit 10).

nominal GDP data, we also confirm that the change in

Is this a repeat of pre-2003 period?:

Importantly, the

base year for GDP does not affect our analysis.

Exhibit 12

market share of the listed companies’ sample has fallen

on the next page shows that the growth in the unlisted

to the lowest level in 11 years. In FY16, it is less than

universe was broadly similar to trends in FY13 and FY14,

what it was in FY06

(Exhibit 9 above).

It is important to

for which we have overlapping data on two bases. In the

note that this is not the first time that the unlisted space

past two years, growth in the unlisted universe has also

(including unorganized sector) has grown faster than the

eased towards 13%, the lowest since FY10.

listed space (or RBI sample). Interestingly, similar trends

were witnessed during the previous slowdown in the

early 2000s

(Exhibit 11 on the next page).

The topline of

the ex-RBI sample grew faster than the topline of the RBI

sample during the previous slowdown.

Irrespective of which

GDP series is considered,

the listed companies are

losing market share

It is important to note that this is not the first time

that the unlisted space (including unorganized

sector) has grown faster than the listed space (or RBI

sample). Interestingly, similar trends were witnessed

during the previous slowdown in the early 2000s

5

2 August 2016

Exhibit 11: Sales of listed companies growing slower

than unlisted companies’ universe

Exhibit 12: Change in GDP base does not change the

trend in growth of unlisted universe

Ex-RBI sample = Nominal GDP – sales of RBI sample

Source: RBI, MoSL

Value addition matters for GVA/GDP calculations:

Overall, when we doubt the GVA (or GDP) numbers

released by the CSO, what we primarily have in mind is

the sales growth of the listed companies, which release

data on regular basis. Nevertheless, a comparison of

sales with the gross value added (GVA) for the similar

sample reveals the huge difference between these two

series

(Exhibit 13).

As we had explained in an

earlier

note,

the CSO prepares estimates of national GVA series,

based on which GDP is calculated. And as we showed in

exhibit 6

above, GVA growth of the RBI (or listed

companies) sample is in line with GVA growth of the

industrial sector.

Further, although the topline (sales) of the listed sample

is not doing very well, growing staff costs and profits

have helped GVA. Consequently, the RBI sample has

broadly maintained its share in total industrial GVA,

though it has lost market share (in terms of sales/GDP

ratio) materially

(Exhibit 14).

Although the topline (sales) of the

listed sample is not doing very well,

growing staff costs and profits have

helped GVA.

Exhibit 13: Gross value added has performed better than sales Exhibit 14: …and, thus their share in GVA is broadly intact,

for listed companies (% YoY) …

though down significantly in terms of ‘sales’

Source: RBI, MoSL

*% of nominal GDP; # % of industrial (nominal) GVA

2 August 2016

6

How can listed companies reverse the trend of market

share loss?

If the listed space is losing market share to

the unlisted counterparts, it obviously does not bode

well for the equity investors. It implies that even if the

economy is not doing as badly, the listed space is likely to

remain secluded from any recovery. What may have

been helping the unlisted space to gain market share?

Firstly, the large companies are more capital intensive in

nature. Not only do they spend more on fixed

infrastructure but their capital usage is also

disproportionately higher. This makes the large

companies relatively agile and inflexible to adapt to

sharp changes in economic environment.

Secondly, and more convincing to us, households may

have compromised on the quality of goods & services

demanded in exchange for price benefits. We believe

that the unlisted space is able to provide goods &

services at lower prices than listed companies that have

not transmitted a large portion of cost benefits to

consumers. There could be several factors helping

unlisted companies to keep prices low(er): (a) tax

benefits, as smaller size may have helped them to stay

out of tax net (the threshold for central excise tax is

INR15m today), (b) further, their ability to evade/conceal

taxes where payable (especially true for the unorganized

players) is also higher than large and listed companies,

and (c) smaller companies have limited need to invest in

fixed assets to transact.

Listed companies can reduce prices…:

One way for listed

companies to regain market share is to reduce prices.

However, the downside of this is that their profit margins

may suffer, which may not be welcomed by equity

investors, and hence, the companies may be reluctant to

do that.

…or GST will help listed companies by hurting unlisted

companies:

Implementation of the unified tax on goods

& services (GST) will help

listed companies by hurting

unlisted or small companies.

For example, not only will

the ability of the

unorganized sector to

evade taxes be curtailed,

as a substantial portion

will move into the

organized economy, the

lowering of thresholds

(from

the

current

INR15m

on

central

excise to a debated

INR1m) will also bring a

large portion of the

unlisted space into the

tax net. Accordingly, the

unlisted space will have to increase prices.

Trade-off between households and corporate sector

obscures net benefits to the economy:

Although the

second option would be best suited for the listed

companies, and likely to help them increase their market

share, it would hurt the consumers, who may have to

pay higher prices for the same goods and services. The

first option, however, would benefit consumers at the

cost of the listed corporate sector. Consequently, the net

impact on the economy is unclear.

Implementation of the unified tax on goods

& services (GST) will help listed companies

by hurting unlisted or small companies

Trade-off between households and

corporate sector obscures net benefits

to the economy

2 August 2016

7

NOTES

2 August 2016

8

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Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private

Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not

be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore

Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of

Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers

Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Varun Kumar

Varun.kumar@motilaloswal.com

Contact : (+65) 68189232

Office Address:21 (Suite 31),16 CollyerQuay,Singapore 04931

KadambariBalachandran

kadambari.balachandran@motilaloswal.com

(+65) 68189233 / 65249115

2 August 2016

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com

Motilal Oswal Securities Ltd

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