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6 factors that will impact India Inc's earnings in the quarters ahead
A significant drag comes from the private banking sector, which is expected to report its second consecutive quarter of declining earnings since March 2020.
Meanwhile, the PSU banking sector is likely to report moderate earnings growth of 5 per cent, the lowest in 20 quarters. The auto sector is projected to see a year-on-year decline of 10 per cent.
Pharma sector is expected to report 11 per cent year-on-year growth, marking a moderation after eight consecutive quarters of 15 per cent+ earnings growth. The chemical sector is expected to record 10 per cent year-on-year earnings growth, marking its second consecutive quarter of growth after seven quarters of decline.
That said, there are six factors that will impact earnings growth in the quarters ahead.
#1: Low inflation is dragging down revenue growth
Low inflation is good for our economy and has resulted in an easy monetary policy as well as lower interest rates. Lower interest rates help higher valuations in the market. However, lower inflation also means lower nominal GDP growth. There is a strong linkage between nominal GDP growth and revenue growth.
While real GDP growth in India will be robust in FY26, we see nominal GDP growth at 9 per cent being amongst the lowest over past 20 years given likely GDP deflator of under 3 per cent. Over the past 20 years, FY20 was the only year which saw a lower nominal GDP growth excluding Covid-impacted FY21.
#2: Banks dragging down overall earnings
The banking sector has a significant impact on overall earnings growth given that it accounts for over a third of the index. Over the past few years, a revival in bank earnings led by lower provisions and rising NIMs helped overall earnings growth. However, with interest rates falling NIMs are coming under pressure and bank earnings are lacklustre. This is dragging down overall earnings growth.
Earnings growth
#3: Margins peaking? Onus on revenue growth
Analysts are forecasting FY26 EBITDA margins at 21.8 per cent, which will be the highest in a decade. While margins may not fall materially, we think margin increase from here will be difficult. Thus bulk of earnings growth will have to be accounted by increased revenue growth.
#4: Trump tariffs can be a mixed bag
We see a greater probability of Trump going ahead with his tariff plans from August 1st. This has the risk of raising inflation in the USA as tariffs seem to average well above the 10 per cent rate currently. Moreover, this could trigger a slow-down in the USA and impact growth across the world including India.
So, while tariffs are overall negative in terms of a slowing global economy, the more specific impact on India depends on the contours of an Indo-US trade pact, if any. The key to watch is the tariffs on Indian goods relative to that on other countries it competes with. We think a tariff of around 15 per cent may relatively be good for India given that most competitors are currently at 20-30 per cent tariffs.
#5: Consumption spend should improve
Three factors will drive consumption spend over the next few months. First, the monsoons. Better monsoons have led to better sowing of crops. Some of this could be due to early sowing relative to last year since monsoons arrived ahead of the normal schedule. But with monsoons looking normal, we think agriculture growth will be strong this year leading to higher rural income.
Second is urban consumption, which will be supported by the tax break of around Rs 1 lakh crores given in the budget in February 2025. Thirdly, lower interest rates and easy monetary conditions will lead to lower EMIs helping urban consumption.
#6: Capex is better than consensus believes
The consensus view is that the Government has done most of the heavy lifting on capex and private sector capex has been missing. The good news is that Government has continued to accelerate capex spend and has rightly front loaded its capex for the year.
But the even better news is that the private sector capex has accelerated over the past 2 years. We still do not see anything like the animal spirits we saw in FY2004-07 phase. But even a more gradual recovery will help the economy and earnings. Listed corporate capex will practically double from FY22 to FY26. Listed corporate capex as per cent of Nominal GDP has moved up from 2.7 per cent in FY22 to 3.3 per cent in FY25.
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