India Inc. has just delivered one of its best earnings seasons in recent quarters. Corporate results have comfortably exceeded expectations, revenue growth has accelerated, and earnings upgrades have begun to reappear. The Nifty50 led a 17% YoY growth in PAT, much above the 10% estimated. Yet, despite these encouraging signals, investors remain cautious, with markets swinging between optimism and nervousness.
Despite the strong vote of confidence in the resilience of corporate India, with 33 Nifty50 constituents surpassing estimates against 17 misses, the disconnect raises an important question: what is preventing a rally in the market? The earnings recovery was not confined to a handful of sectors. Metals emerged as one of the strongest performers, benefiting from improved realisations, while retail companies continued to gain from premiumisation-led demand trends. Telecom companies also reported improving profitability, supported by higher average ARPU. In contrast, FMCG, pharma and automobiles lagged expectations due to margin pressures and higher input costs. Market-wide earnings data reinforce that growth was broad-based, with mid- & small-cap PAT growth reaching a multi-quarter high. It is estimated that mid-caps have provided a PAT growth of 15-20% while small caps are at plus 30%.
The market scepticism stems from factoring in the biggest challenge, which is the sharp rise in energy prices, which can drag the performance of Q2-Q3. Q1 has turned brighter due to the lag effect on corporates’ cost of operations and ability to hike product prices due to strong consumer demand. This may not be sustained in Q2-Q3, as a persisting rise in input costs will damage both the consumers’ pockets and corporates’ operational leverage. As companies draw down higher-cost inventories and the GST-cut-led boost to consumer demand fades, both revenue and profit growth are likely to moderate. The end of the temporary U.S.-Iran ceasefire and the absence of a lasting diplomatic solution have kept crude oil prices elevated. For an economy that remains heavily dependent on energy imports, higher crude prices have important implications for inflation, fiscal balances and corporate margins. Hence, there is risk that some set of sectors which benefited in Q1 could be the loser in Q2 & Q3, depending on the strength of the supply issue. Many of these key beneficiaries are cost-based sectors like metals, mining, oil & gas and cement, indicative that the cost of operation is increasing for the nation, which may not bode well for the economy.
Another important development has been the resurgence of investor interest in the IT sector. After witnessing a significant correction earlier this year, valuations have become more attractive, with sector multiples moderating below historical averages. Management commentary across major IT companies points to healthy deal pipelines, continued digital-transformation spending and growing opportunities linked to artificial intelligence. Although AI monetisation remains in its early stages, the industry is gradually moving from experimentation to large-scale deployment, potentially creating a new growth cycle for tech companies, both large and mid-tier.
Market outlook
Looking ahead, the medium-term outlook remains constructive with a hope that this energy crisis will not continue in the long-term. The corporate earnings outlook is supportive to domestic fundamentals, healthy credit growth, infrastructure spending, stable monetary policy and expectations of festive-season demand. However, investors should not ignore the risks. Crude oil prices, global bond yields, inflation trends and geopolitical developments remain the key variables that could determine whether earnings upgrades continue or stall. The next phase of market gains may therefore depend less on earnings surprises and more on the ability of companies to protect margins amid an uncertain global environment. In many ways, the market’s current hesitation reflects not scepticism about earnings, but uncertainty about sustainability.
The author Vinod Nair is the Head of Research, Geojit Investments Limited.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
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