India Inc’s Q1 FY27 Earnings: A Tale of Two Recoveries Amidst Widening Disparities
NEW DELHI – August 20, 2024 – India Inc has delivered a robust, albeit uneven, earnings performance for the June quarter of fiscal year 2027, surpassing market expectations. While the headline figures paint a picture of significant recovery, a deeper dive reveals a clear bifurcation: large and mid-sized companies are surging ahead, fueled by a confluence of favorable factors, while smaller firms grapple with persistent challenges, struggling to maintain pace.
The bellwether Nifty 50 index witnessed an impressive nearly 18% year-on-year profit growth, almost double the Street’s conservative 9% estimate, signaling a sharp acceleration in overall earnings momentum. This resurgence is largely attributed to several key drivers benefitting the larger players.
Driving Forces Behind the Surge:
Large and mid-sized companies capitalized on the global commodity upcycle, which boosted revenues for sectors like non-ferrous metals and upstream oil. Strong credit growth, resilient exports, and a weakening rupee further bolstered their financial performance. These entities also demonstrated superior pricing power and leveraged operating efficiencies alongside low-cost inventories, amplifying their gains. A favorable base effect from the previous year further accentuated this growth. Importantly, accelerated volume growth suggests that the recovery isn’t solely price-led, indicating a genuine uptick in demand.
Mint’s extensive analysis of 2,774 non-financial companies underscores the exceptional top-line recovery in Q1 FY27. Nominal revenue soared by 21% year-on-year, while real (inflation-adjusted) revenue growth accelerated to nearly 17% – both marking their strongest growth in three years. This disparity between nominal and real revenue highlights the significant contribution of pricing and realization gains, alongside a sharp pickup in volumes, to the reported revenue growth.
Much of this uplift came from key players such as Hindalco and Oil and Natural Gas Corp. (ONGC). Hindalco’s revenue surged 26% year-on-year, benefiting from a sharp rise in aluminium prices driven by supply deficits and robust demand from the renewable energy sector. ONGC saw a nearly 46% jump in revenue as geopolitical tensions in West Asia pushed crude prices to $90-100 a barrel during the quarter. Consequently, Hindalco’s profits nearly tripled, and ONGC’s doubled from a year ago, significantly propelling the Nifty 50’s earnings growth.
Beyond commodity-driven gains, the top-line recovery was also underpinned by a sharp pickup in volumes, bolstered by improving domestic consumption. The government’s FY26 consumption stimulus continued to yield positive results. Lokesh Manik, senior analyst at Vallum Capital, noted strong demand across consumer tech platforms, jewellers, durables, and quick-service restaurants throughout the quarter. Pranay Aggarwal, director and chief executive officer of Stoxkart, added that government infrastructure spending propelled volume growth in manufacturing and capital expenditure-linked sectors. Export-oriented companies also benefited from resilient overseas demand for specialized goods.
The Widening Chasm: Small Firms Lag Behind
Despite the seemingly broad-based top-line growth, the quality of incremental profits remains uneven. Experts highlight that commodity-linked sectors and a handful of large corporations disproportionately account for the majority of the gains. This disparity is particularly stark when examining the performance of smaller companies.
Higher raw material costs, limited pricing power, and constrained operating leverage squeezed the margins of smaller firms, significantly hindering their earnings growth. While large companies, with revenues exceeding Rs. 10,000 crore, saw their revenue growth hit a three-year high of 17%, their profits rose a modest 2%, partly due to substantial losses incurred by Oil Marketing Companies (OMCs), which collectively posted an Rs. 18,100 crore loss in Q1 FY27, a significant swing from a Rs. 16,200 crore profit a year prior.
A report by Motilal Oswal Financial Services revealed that giants like ONGC, Hindalco, Reliance, JSW Steel, and Bharti Airtel alone contributed 60% to the incremental Nifty profit accretion.
In contrast, medium-sized companies, with revenues ranging from Rs. 1,000-10,000 crore, witnessed a 16% revenue growth and a strong 24% surge in profits, reaching a six-quarter high. However, small companies, which constitute nearly 90% of India Inc by number but only 10% of its profits, saw their profits grow by a mere 5%. This stark difference underscores the concentrated nature of earnings, particularly within a few dominant sectors.
Sectoral Dominance and Future Outlook:
The analysis further highlights the continued dominance of specific sectors in driving India Inc’s profit gains. Banks remained the largest contributors for the 17th consecutive quarter, followed by non-banking financial companies. Together, these two sectors accounted for nearly 40% of India Inc’s profit pool in Q1, bolstered by robust credit growth nearing 20% year-on-year in June – the highest in two years.
Information Technology emerged as the third-largest contributor, with a sharp depreciation of the rupee against the US dollar (almost 2.5% in the June quarter) boosting its profits by 21%. Banks, financial services, and IT consistently serve as the anchors of India Inc’s earnings, while cyclical sectors continue to drive seasonal shifts. This quarter saw non-ferrous metals, oil and gas distributors, and steelmakers enter the top 10 profit contributors, benefiting from the global commodity upcycle and strong export demand.
However, the commodity upcycle also translated into increased input costs for a broader segment of India Inc. While the cost burden was not as severe as during the Russia-Ukraine war, India Inc’s total expenditure stood at 86% of net sales in Q1 FY27, a rise from previous periods. Consequently, net margins fell sharply to 8.7% from 12.1% in Q4 FY26, largely due to OMC losses and the persistent margin pressure faced by smaller companies.
Despite these challenges, there was a silver lining: only one in five companies reported losses in Q1, a decrease from one in four in the previous quarter and the lowest share in three years. This indicates stronger earnings among large and mid-sized companies, even as smaller firms continue to navigate margin pressures.
Following a strong showing in Q1, the Street now anticipates an 18% profit growth for the Nifty 50 in FY27. However, brokerages view this as ambitious, as much of the current momentum is still reliant on low base effects, government consumption stimulus, rupee depreciation, commodity price gains, and margin recovery. Nuvama Institutional Equities cautions that these tailwinds could dissipate as FY27 progresses. With limited scope for further price hikes and margin expansion, the June quarter may represent the peak of earnings acceleration, leaving future earnings heavily dependent on volume growth and underlying demand.
For further insights into India Inc’s performance, refer to the original source: India Inc.
