Corporate earnings picking up, but growth remains selective

Corporate earnings seem to be gaining momentum in India, with better-than-expected growth in the October-December quarter, driven by oil and gas, metals, and non-banking financial services companies, among other sectors.

In the third quarter of the current financial year, earnings per share of Nifty 50 companies surged 13.4% year-on-year, better than the expectation of 10.1%, according to an analysis by JM Financial Institutional Securities. Excluding earnings of financial services companies, earnings growth was even better at 21% from a year ago, compared with the expectation of 16.9%.

Overall, the earnings per share of 351 companies covered by JM Financial Institutional Securities grew 15.3% in the third quarter. However, growth remains selective, with the proportion of companies missing earnings expectations still more in small and midcaps, compared with large caps.

According to Venkatesh Balasubramaniam, MD and head of research at the broking firm, cement, metals and mining, telecom, hotels, electronics manufacturing services, consumer retail and small finance banks notched up the highest year-on-year EPS growth. Cement sector earnings, in fact, surged 154%, and the metals and mining sector saw 89% growth. Telecom and hotels also saw growth of over 40%.

“Out of the 50 companies in the Nifty, 28% missed estimates in the third quarter, whereas 34% beat estimates, and the rest reported in line. Furthermore, if we split the performance by market cap, we see that the proportion of misses was the largest in small caps, followed by mid-caps and then large caps; 40% of small-cap companies missed expectations, while the misses were fewer in mid-caps and large-caps at 28% and 25%, respectively,” Balasubramaniam pointed.

A study by Nuvama Institutional Equities also pointed to much better earnings growth in the December quarter, but again with pockets of recovery. Overall, compared to the 7-8% revenue growth over the last two years, the BSE 500 universe, excluding oil marketing companies (OMC), saw a topline growth of 10% in the December quarter. Profits too are gaining traction, with adjusted profits of BSE 500 companies, excluding OMCs, up 12%, compared with the 8% growth in the first half of the financial year.

“Overall earnings improvement reported during the quarter is encouraging, but its sustainability is the key monitorable,” noted Prateek Parekh of Nuvama Institutional Equities.

Last September, the Goods and Services Tax (GST) regime saw a huge revamp, with automobile and consumer durables makers benefiting from GST cuts. On the other hand, a surge in commodity prices has aided toplines of metals and jewellery firms.

Parekh points out that topline growth could see revival in the 2026-27 financial year, aided by a credit push, currency competitiveness, and higher commodity prices. However, earnings could lag as profit margins mean-revert lower from elevated levels, he added.

“Topline revival is welcome, but margin mean reversion and global volatility amid high valuations cloud the outlook, still warranting a cautious bias,” he stated.