Come January each year, few things happen like clock-work in the business world — for instance, the Budget wish-list of India Inc. While the Finance Minister Nirmala Sitharaman had once likened India Inc to Hanuman for not being aware of its own strength, the long Budget wish-list from India Inc and its associations though sometimes has the semblance of being as long as the tail of Vali’s son, Angada.
For sure, some sectors require big support – like textiles, facing the brunt of the tariff war, or some in chemicals that face the issue of imports getting dumped into the country at or below cost price. But does India Inc, in general, need more incentives to invest and grow, especially when it enjoys highest profitability across major economies in the world?
At a pre-tax and post-tax profit margin of around 14.8 per cent and 11 per cent for the Nifty 50, the profitability of India Inc ranks right next to that of the Dow Jones Industrial Average (DJIA). The DJIA has a pre-tax and post-tax profit margin of 19 per cent and 16 per cent respectively. But if you exclude the four Big Tech companies in the index (Apple, Microsoft, Nvidia and Amazon ) that dominate the technology sector globally from this, the margins shrink even lower than/or on par to Nifty50-levels of pre-tax margin of 14 per cent and post-tax margin of 11 per cent.
Further, profit margins in India are significantly superior to those in other big economies such as Germany, the UK and Japan. Germany’s DAX 40 has pre-tax and post-tax margin of 8 per cent and 5 per cent, while the UK’s FTSE 100 has pre-tax and post-tax profit margin of 11 per cent and 7 per cent.
Japan’s Nikkei 225, which has a higher cluster of 225 stocks, posts pre- and post-tax profit margin of 10 per cent and 7 per cent.
Even if this is extended to a much larger grouping of stocks of India Inc, companies in our country are getting quite a rosy deal. The pre- and post-tax profit margin of Nifty 500 is at 13 per cent and 9.5 per cent respectively. For a similar number of companies, the profit margins for S&P 500 are at 15 per cent and 12 per cent respectively. Excluding the Magnificent Seven companies from S&P 500, the pre- and post-tax margin for S&P 493 is at 12.17 per cent and 10 per cent respectively.
Thus, adjusted for the most innovative tech companies in the US, India has the best pre-tax profit margin globally and post-tax profit margin on par with the US.
What more incentive is required from the Budget or even outside of it to invest?
Margin trap
Rather, India Inc should now worry about the consequences of not putting its surplus cash flows and strong balance sheet to good use to innovate and grow. The higher the profitability, the more challenging it gets to grow your profit margins. Veteran fund manager Jeremy Grantham once made a profound statement on this: Profit margins are probably the most mean-reverting series in finance. And if profit margins do not mean-revert, then something has gone badly wrong with capitalism. After all, free enterprise means industries with high profitability will attract more competition (unless protected by regulation) as the rest, too, try to get their share of the pie, and this in itself will result in the profit margins trending down.
Signs of this are already visible; say, for example, in the FMCG sector. Net profit margin of Hindustan Unilever and Nestle India today at 17.3 and 14.2 are far superior to that of their parent companies at 12.3 and 12.9 respectively. The advent and growth of quick commerce is nibbling away at this superior margins as their clout over the supply chain weakens. The IT services sector, too, serves as a good reminder of this. The larger players, with their obsessive focus on profit margins, have lost market share to the mid-cap players in the last five years.
Part of the growth problem in India Inc’s revenue, which has only grown in the last six years at a CAGR of around 10.5 per cent (from pre-Covid FY19), can be attributed to the lack of innovation and investments.
This has implications for shareholders, too, in the long run. Every year, double-digit earnings growth forecasts for India Inc are conjured up out of Excel models. But without better revenue growth, this is going to become challenging with each year. If revenue growth trends inline with the growth over the last few years of 11 per cent CAGR, then assuming not much improvement in profit margins, earnings growth too can at best be at 11 per cent. For earnings to grow at 15-17 per cent as is projected by consensus, profit margins will have to expand by around 50 basis points to 11.4 per cent from the current 10.9 per cent. In the absence of acceleration in revenue growth, profit margin improvement would require more squeezing of expenses like on employee costs or more pricing leverage with households whose savings levels are already at multi-year lows.
Better way to grow profits
Hence, a better way to grow profits in double-digits would be via a combination of acceleration in revenue growth and sustaining or gradually improving upon the current profit margins. The former will require investments in R&D and innovation. Investment activity is required to spur growth, while innovation is required to unleash productivity and capture a greater global market share.
A good example to consider here is how investments in innovation have paid off for the US Big Techs. The superior profit margin for US indices is solely driven by the Big Techs, as can be observed in the charts. The contribution of high-margin IT companies to total profits of S&P 500 is 33 per cent. The big companies from this sector dominate their respective industries globally. The moat of their intellectual property combined with global scale is driving the high profit margins. To the contrary, the contribution of IT companies to total profits of Nifty 500 companies is only 8 per cent. Nearly 40 per cent of profits of Nifty 500 companies is contributed by financials. The high cyclicality of financial services implies that the volatility can impact margins for Nifty 500. While a good year can help stretch the margins a bit further from here, a tough year can result in net profit margins shrinking and impacting earnings growth.
Hence, on a medium- to long-term basis, without investments and innovation, profit margin of India Inc can hit a brick wall. Any doubts, check out how TCS has been aspiring for 26-28 per cent EBIT margins for the last 9-10 years but failed.
While this is the case at the aggregate level, keeping these in mind, long-term investors need to consider one more thing in making their investment decisions. Long-term wealth creation requires sustainable profit growth. There are some sectors which might be sitting on high margins right now and look attractive, but might have limited moats, and hence in the medium term the profit margins can get driven down by competition. There are some where margins can scale up driven by innovation. Companies that fit in the latter will be better bets for the long term. At a time when India Inc’s margins are near-peak levels and the easy upswing is behind us, this factor in stock selection will begin to matter even more.
Published on January 24, 2026
