Q1 early birds: India Inc finds a silent saviour during demand slump
Aggregate revenue of 182 companies that have declared first quarter results so far showed a marginal improvement to rise 5.4% year-on-year (y-o-y), a Mint analysis showed. Net profits, however, zoomed 23%, as raw material costs fell 14% over the year, the steepest decline in eight quarters.
Raw material costs were also 15% lower than in the March quarter, the sharpest sequential decline since Q1 FY22.
This suggests Indian producers are benefiting from input cost deflation. India's wholesale price inflation index rose 0.4% in April-June, compared with 2.4% in the previous quarter.
Benign crude oil and metal prices due to fears of a global demand slowdown and US-led tariff concerns have lowered production costs for corporations, said Simranjeet Singh Bhatia, senior research analyst at brokerage firm Almondz Global. 'Dumping of cheap chemicals from China has also been a key factor."
For non-financial companies, cheaper raw materials boosted the Q1 FY26 profit margins to 13.8%, a level not seen since Q4 FY21. The analysis had 144 companies outside the banking, financial services and insurance (BFSI) sectors. It revealed a stark contrast: while annual topline growth hit a seven-quarter low of 0.85% in Q1, net profit surged 40%, marking its fastest growth in 12 quarters.
The sequential difference is even more pronounced. Despite a 7% fall in revenue, profits rose 5% over Q4 FY25, aided by a decline in raw material expenses. Expressed as a percentage of net sales, input costs hit a multi-quarter low of 40.6%. This gave companies more financial flexibility in Q1 to absorb higher employee expenses, which rose to a 17-quarter high of almost 18% of net sales, the analysis showed.
While employee costs are typically higher in the first quarter due to yearly appraisals, the increase in their share in total costs over the previous quarter (Q4 FY25) was the highest since the corresponding period in FY21.
These numbers suggest corporate wage growth trends may improve in the June quarter.
Whether the bump in corporate wages would be meaningful enough to provide a much-needed fillip to urban demand is still unclear, but it would definitely offer support to recent measures undertaken to boost consumers' disposable income, said Manish Jain, head of fund management at Centrum Broking.
'Recent policy measures like income tax breaks, interest rate cuts and liquidity injections should lead to demand revival by Q3 (FY26)," Jain said. 'However, we are expecting another two-three percentage point cut in earnings estimates for FY26, based on Q1 results so far."
Experts now anticipate around 10% y-o-y earnings growth for the Nifty 50 companies in FY26 as they factor in at least another quarter of sluggish demand during the year. In such a scenario, 'benign raw material prices are likely to persist for the remainder of 2025 and continue to offer a tailwind to India Inc's profitability," said Harsh Gupta Madhusudan, manager of Ionic Wealth's PIPE fund.
However, with the dollar downcycle on its way, Madhusudan expects commodity prices to rise from 2026 onwards. 'While the raw material tailwinds might not last beyond 2025, India Inc's net profit margin is yet to peak out as their operational and financial leverages have not been fully realised."
That means Indian industry is still underutilising its capacity due to tepid demand and has no incentive to borrow either, even though its debt levels are historically low. While Nifty 500 universe's corporate profit-to-GDP ratio reached a 17-year high of 4.7% in FY25, according to Motilal Oswal Financial Services, experts believe that this has further room to grow once demand picks up meaningfully.
The market expects mid-cap companies to outperform their large- and small-cap peers in Q1, in line with FY25 trend. However, Centrum Broking's Jain said the 'earnings lull for private banks, IT and auto companies should bottom out by Q2. Hence, the large cap Nifty 50 index should benefit soon as well."
Analysts also expect the cement sector to outperform others in Q1 and the broader market to consolidate at the current levels, going by earnings announced so far.
'Current valuations are likely to hold for now," said Ionic Wealth's Madhusudhan. 'But a US-India trade deal, if it happens, and a likely interest rate cut in August (by the Reserve Bank of India) will definitely improve sentiment."
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