Q1 earnings show resilience as demand, cost headwinds prove less severe than expected: ICRA

Ratings agency ICRA said India’s corporate earnings cycle kicked off FY27 on a stronger-than-expected note, with aggregate revenues of 838 listed companies in its sample growing 22% year-on-year in Q1.

This is sharply higher than the 13% YoY growth reported in Q4 of FY26. ICRA said this was driven by commodity and bullion price-led value inflation, demand lift from the GST rate cuts last year that continued to spur the automobile sector, and resilient overall consumption volumes, despite the West Asia flare-up and El Niño worries.

However, the ratings agency noted that headline aggregate operating profit margin contracted by over 200 basis points YoY in Q1 FY27, and net profits remained flattish mainly because of the oil-refining sector, where elevated crude prices and under-recoveries on LPG and petroleum products weighed on profitability. Excluding oil and gas, operating profit margins were stable at 19% and net profits grew by over 20% YoY, ICRA said, adding that the IT services sector was a soft spot where constant-currency growth stayed subdued. Revenue growth also lagged in domestic cyclicals such as cement and sugar, and export-focused companies in sectors like textiles and auto components.


Commodity price inflation critically influenced profitability during April-June quarter of the ongoing financial year 2027, although the extent of impact varied across sectors depending on pricing power, contractual structures, and the ability to offset input-cost pressure through operational efficiencies, the ratings agency said, explaining it with an example. While passenger vehicle OEMs reported strong double-digit revenue growth of more than 25% in Q1, their EBITDA margins contracted by 200 bps as they chose not to pass on the entire burden of cost increases (raw materials, energy, labour, and freight) to customers.

The beginning of the upcoming festive season will likely be the point when the auto OEMs will look to increase vehicle prices to leverage the potentially lower price elasticity of demand during that period, ICRA said. In contrast, it noted that several FMCG companies and electrical and electronics manufacturers passed on almost the entire cost increases to customers, safeguarding their margins.

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Another factor that weighed on the credit profile of entities in Q1 2026-27 (as also in the preceding quarter) was the sharp depreciation of rupee against the US dollar, according to ICRA. Several entities reported forex losses because of the substantial increase in their cost of imports as well as the impact of ineffective hedges.

ICRA highlighted the investment cycle as a key positive during the quarter under review. The government’s capital expenditure rose by 24% YoY to Rs. 3.4 trillion in Q1, and accounted for 28% of the full-year budgeted target, with spending focused on railways, defence and capital transfers to states. New project announcements reached a multi-quarter high, driven by emerging sectors such as data centres, electronics manufacturing, and nuclear power.

Private sector investment activity remained selective, with traction concentrated in defence, electric mobility, and the data-centre value chain. “India Inc’s balance sheets remain comfortable. While the latest debt figures for the quarter ended June 2026 are not available, the improving trend in the interest coverage ratio suggests a steady credit profile of mid-to-large-sized entities. Around two-thirds of the 116 sectors in ICRA’s sample set reported an improvement in their interest coverage ratio in Q1 2026-27 vis-à-vis Q1 2025-26,” it added.

Commenting on the findings, ICRA Senior Vice President and Group Head of Corporate Ratings Jitin Makkar noted that despite concerns over a demand-and-cost shock weighing on sentiments at the beginning of the quarter, the eventual impact was limited. Consumption-led sectors were among the key growth drivers, he said, adding that while automobile original equipment manufacturers (OEMs) recorded the strongest revenue growth, several other consumer-oriented sectors including FMCG, consumer durables, apparel and grocery retail, jewellery retail and quick-service restaurants also reported healthy performance.

“Growth was supported by market penetration and calibrated pricing actions along with improved value propositions, which translated into stronger same-store sales growth for many players. The pressure was concentrated in sectors such as oil refining and aviation, where elevated and volatile crude prices compressed margins. In contrast, commodity-linked sectors, particularly metals and non-ferrous metals, benefited from firmer global prices, driving the increase in both revenues and margins. The chemicals sector, after an extended period of weakness, also showed early signs of cyclical improvement. IT services remained the principal soft spot, with constant-currency growth staying subdued amid cautious technology spending globally,” he further said.

Looking ahead, Makkar feels that renewed geopolitical tensions in West Asia, the consequent volatility in crude oil and commodity prices, and an uncertain global trade environment will remain key monitorables. “Nevertheless, healthy balance sheets and comfortable credit metrics of Indian corporates provide a meaningful cushion against potential earnings volatility and near-term external shocks,” Makkar added.

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