Q1 earnings suggest an improving earnings cycle, but the recovery remains uneven across sectors

While Q1 FY27 earnings indicate a recovery, the key question is whether the growth is broad-based or concentrated in a few sectors. Despite the inflationary impact of the US-Iran conflict on corporate margins and El Nino on rural sentiment, earnings growth across all equity cohorts positively surprised in the 1Q FY27 reporting season. At an aggregate level, small-cap and mid-cap PAT growth stood at 29% and 31% respectively, outpacing large-cap PAT growth at 16%. Aggregate NSE500 earnings growth stood at 21%, beating estimates by 5%. Additionally, median earnings growth ranged between 16% and 20% across all equity cohorts, suggesting persistence of growth across the cohorts.

Note: Nifty 100, Nifty Midcap 150 and Nifty Small-cap 250 represent large-cap, mid-cap and small-cap respectively.

The persistence of growth was evident across sectors with 12 out of 17 sectors delivering positive earnings surprise and median profit growth on a sectoral basis at 19%.

Among heavy-weight sectors, positive earnings surprises were the highest in Metals, Capital Goods and Healthcare, while the FMCG sector missed estimates by 6% on aggregate. However, despite broad-based 1Q FY27 earnings growth, ~50% of incremental PAT (YoY) was driven by Metals (22%), BFSI (18%) and IT (10%), highlighting concentration risks.

The bigger picture is that, even for large-cap FY27E earnings, concentration risk remains elevated with BFSI expected to contribute ~49% of incremental earnings. Within BFSI, HDFC Bank, ICICI Bank and Axis Bank are expected to account for 73% of incremental earnings, leaving the large-cap EPS outlook particularly vulnerable to sector-specific shocks. While sectoral concentration and in-turn earnings concentration risk is much lower for mid-caps and small-caps, elevated valuations leave little room for error.

Over the past two decades, in addition to BFSI, domestic consumption and IT and Pharma exports have been the key pillars of India's earnings growth. However, all three face near-term uncertainties. Rising inflation and El Nino limit upside to consumption-led FY27E earnings growth, while the limited participation of Indian IT in the AI investment cycle has weighed on the sector in recent quarters. In Pharma, tariff uncertainty remains a key overhang. Government capex has moderated over the past year amid revenue constraints, while private capex remains highly concentrated, with the top 10 conglomerates accounting for 61% of listed private capex and largely catering to domestic demand. The next leg of India's earnings growth will therefore require greater participation from manufacturing and export-oriented sectors, which will require greater R&D intensity and reforms in power and land availability. Additionally, the export-oriented sectors need to grow, and capital expenditure needs to become more broad-based.

Overall, NSE500 companies account for ~90% of listed corporate capex, with the top 100 companies (by market cap) alone forming two-thirds of capex. On an equity cohort basis, while the share of large caps remains elevated at 72%, it has been coming off. Alternatively, the share of mid-caps in incremental capex over FY23 to FY26 stood at 22% as compared to 16% in FY20. The capex growth of large-caps came off from 21% in FY24 to 15% in FY25 and stood at 7.5% in FY26. On the other hand, mid-cap capex growth moderated from 21% in FY24 to 11% in FY25 but rebounded to 19% in FY26.

So, while capex growth of listed corporate entities moderated from 19% in FY24 to 10% in FY26, mid-cap capex remained resilient partly driven by highest-ever SMID profitability (SMID PAT contribution to NSE500 universe is close to highest ever at 25%). Given that small-cap and mid-cap indices are more diversified as compared to large-caps, aggregate capex by this cohort is more broad-based. Over FY23 to FY26, Power (36%), Auto and Ancillaries (9%), Telecom (8%), Non-ferrous metals (7%) and Healthcare (6%) have been the primary drivers of incremental capex of the listed universe.

Similarly, India's earnings growth trajectory has moderated from the post-pandemic 10% to 15% growth seen during FY23 to FY25 to 7% over FY26. For private investment to accelerate and a sustained capex cycle to emerge, capacity utilisation (ranged between 75% and 80% since 2011), would need to sustain closer to 80%. Higher exports are likely to be critical in driving this utilisation-led investment cycle and broadening the next phase of earnings growth.

(Co-authored by Nitin Bhasin, Head of Institutional Equities, Ambit Institutional Equities and Bharat Arora, Lead Equity Strategist, Ambit Institutional Equities.)

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