Q1 earnings cheer needs to last, but it may not

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A potpourri of unfavourable factors has soured investor sentiment towards India. Although the MSCI India index is up 3% in the last three months, helped by lower crude oil prices, it is down 2.6% so far this year, lagging key Asian peers.
India is now the least-favoured stock market in Asia, according to the August BofA Securities fund manager survey. Weak economic growth, elevated valuations and a lack of clear artificial intelligence exposure were cited as reasons for this pessimism.
Amid the West Asia war, crude oil prices remain a swing factor. As a net oil importer, India’s macroeconomic parameters—including the current account deficit, balance of payments, inflation and interest rates—are sensitive to oil price movements.
A bright spot
In this gloom, the June quarter (Q1FY27) corporate results were a silver lining. Cyclical tailwinds from tax cuts and monetary easing through liquidity infusion and benign interest rates helped.
Nifty 50 companies saw 4% year-on-year earnings growth, exceeding consensus estimates by 1%, said Nomura Global Markets Research.
The recovery was not restricted to index heavyweights. Nomura’s analysis of 256 companies—BSE200 companies plus stocks under its coverage—showed that normalised profit after tax, excluding extraordinary items, grew 6% year-on-year, beating consensus estimates by 12%.
Excluding oil & gas, which was a significant drag due to losses booked by oil marketing companies, normalised earnings for this universe grew 20% year-on-year, surpassing Bloomberg consensus estimates by 5%.
Normalized earnings growth measures the increase in a company's profit over time after removing unusual, one-off or temporary events.
Consensus is pencilling in steep 19% and 16% earnings-per-share growth for BSE500 and Nifty50 companies, respectively, in FY27.
India’s corporate earnings-to-GDP ratio for FY28E is also elevated at 10.9%, notes Nomura. For earnings growth to sustainably exceed nominal GDP growth, a meaningful pick-up in the investment cycle and domestic manufacturing activity is required.
But that is easier said than done.
Oil overhang
Uncertainty over the West Asia war is likely to keep crude oil prices volatile. Sectors such as chemicals, paints and cement, which benefited from low-cost inventory and calibrated price hikes in Q1FY27, now face the full impact of crude-led commodity cost inflation in Q2FY27.
This blurs profitability prospects, limiting the scope for steep earnings upgrades. A sub-par monsoon season could also hamper rural incomes and consumption while pushing retail food inflation higher.
So, should Q1FY27 results performance be extrapolated?
“The tailwinds of rupee depreciation, GST cuts and low base that propelled top-line growth in Q1FY27 will flow into Q2FY27, but will fade from H2FY27,” said Prateek Parekh, executive director, institutional equities, Nuvama Wealth Management.
Weak incomes have led to subdued capex spending by households and the government, while credit multipliers remain subdued. Systemic credit growth is improving, but it is not translating into an adequate consumption push.
So, Parekh cautions that credit growth is failing to lift nominal GDP growth this time, without which sustaining or accelerating Q1FY27 earnings growth is challenging.
Valuation test
Valuations also need backing from earnings growth.
Despite its underperformance, India is trading at a one-year forward price-to-earnings ratio of 17x, a premium to the MSCI Asia Ex-Japan and MSCI Emerging Markets indices, showed Bloomberg data.
“Q1FY27 did not result in material earnings downgrades. Around 30% of NSE 200 companies saw earnings upgrades of more than 2%, the strongest upgrade ratio in the last eight quarters,” said Hitesh Jain, executive vice president at Yes Securities.
However, despite higher profits, tax outgo declined 12% year-on-year for NSE200 companies. This is somewhat unusual for the first quarter and could partly reflect a more cautious corporate view on the earnings outlook for the coming quarters, he added.

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