India Inc’s strong Q2 earnings mask a shallow recovery
A low base and booming non-core income amplified India Inc’s steady operational growth in Q2. But with a shrinking cohort of fast-growing firms, corporate India’s earnings recovery carries concentration risk.
India Inc’s September-quarter print was shaped by small- and mid-cap outperformance, and sector-specific boosts for oil marketing companies, cement and consumption niches rather than a broad-based demand upturn. A benign statistical base and strong non-core income turned healthy operational growth into the strongest net-profit results in nine quarters, Mint’s analysis showed.
An analysis of 3,906 listed companies that had reported earnings as of 19 November revealed that India Inc’s aggregate total income rose 7.5% year-on-year in the September quarter. This was the strongest revenue print in four quarters, while net profit jumped 34%, the highest since Q2 FY24.
Meanwhile, operational revenue grew 6.5% year-on-year and 2% sequentially. The year-on-year print is the strongest in the past five quarters and sits slightly above the nine-quarter median of 6.4%. In other words, India Inc’s strong performance in Q2 FY26 involved only a modest uptick in sales volumes.
By contrast, other income surged almost 50% year-on-year and 36% from the previous quarter. This was the largest non-core income print in nine quarters and added disproportionate heft to total income and profitability in Q2.
However, Nuvama Institutional Equities noted that only cement, chemicals and automobiles saw meaningful margin gains, raising the risk that India Inc’s profit margins may have topped out in Q2.
The September quarter saw the first signs of margin pressure across industrials, consumption and service sectors, signalling profit normalisation from here on, said Ajit Mishra, senior vice president of research at Religare Broking.
“Softer inflation, rate cuts and policy support may help, but profitability is unlikely to pull meaningfully ahead of revenues without a stronger demand lift," he added.
N. ArunaGiri, CEO of TrustLine Holdings, an equity research and asset management firm, noted that India Inc’s Q2 profit growth was flattering thanks to oil marketing companies (OMCs), which rebounded sharply from an abnormally low base. “Banks, meanwhile, delivered only low single-digit profit growth. Removing both banks and OMCs offers a truer read of underlying Q2 performance," he added.
Volume revival
Without OMCs, banks, financial services and insurance (BFSI) companies, India Inc’s net profit still rose 45% year-on-year to its highest level since Q2 FY24, the analysis showed. The sharp surge was driven by a near-doubling of non-core income, marking its strongest rise since Q2 FY24’s mild 2% decline, the analysis showed.
This was reinforced by better volume-led operating leverage in certain sectors, softer input costs reflected in falling wholesale inflation, and continued strength in mid- and small-cap companies, according to Manish Jain, head of fund management at Centrum Broking.
“Mid caps have powered a large share of the revenue and profit growth through superior execution," he added. “Post-covid, firms have become leaner and more disciplined on capex, lifting profitability," he added.
Crucially, India Inc’s sales volumes (ex-OMCs and BFSI) climbed 8% year-on-year, well above the nine-quarter median of 5.7%. Consensus indicators point to firm domestic demand for telecom and automobiles, and an unexpectedly resilient jewellery segment despite soaring gold prices, which helped anchor volumes. Stronger-than-anticipated showings in cement and non-ferrous metals further lifted overall volume growth.
Industrials, capital goods and defence-linked companies also delivered positive surprises, supported by strong order books and government capital expenditure momentum, added Mishra of Religare Broking.
However, discretionary categories such as hotels, consumer durables, mass-market fashion, and quick service restaurants saw a patchy recovery, according to Antique Stock Broking. Consumer staples held steady, but without meaningful volume gains.
Jain of Centrum Broking noted that consumer demand held firm but didn’t accelerate in Q2 because households channelled the earlier income tax cuts into deleveraging, with only the GST cuts meaningfully lifting consumption towards the fag end of September. Kotak Institutional Equities similarly flagged volume softness due to GST-related purchase deferrals, even as urban demand has begun to inch up.
Shallow recovery
However, Jain said the latest earnings print signalled a selective recovery, with a broad-based rebound still missing. “Even sectors that look stable are being propped up by their strongest players," he added.
In fact, Mint’s analysis shows that about 38% of ex-BFSI firms saw a year-on-year drop in total income in Q2 FY26, up from near 36% in Q1. This was the highest share of companies reporting falling revenues in at least five quarters.
Around 22% of companies saw only 0-10% total income growth, pointing to a large number of weak-to-moderate performers. Another 13% grew 10-20% year-on-year, reinforcing that the recovery was being driven by many modest growers rather than a broader acceleration in income. Meanwhile, about 27% of firms delivered outsized revenue growth of above 20%.
More importantly, the share of fast-growing companies has been shrinking over the past five quarters, with more firms steadily drifting into the sub-10% or negative-growth bucket. This shows that while aggregate ex-BFSI income has hit its highest level in nine quarters, the recovery remains concentrated among a small set of outperformers.
BFSI struggles
An uneven recovery is visible even within BFSI, Jain noted. “Even with system credit growth stuck near 10%, large banks have managed to grow (loan) advances at 14-15% (year-on-year)," he added.
BFSI’s total income inched up just 2% year-on-year, its slowest pace in nine quarters, while non-core income grew at a modest 7.5%, the analysis showed. This limited operating momentum, dragging net profit growth down to 8%, far short of the nine-quarter median of 15.5%.
Sequentially, the picture was bleaker. Non-core income fell 11% in Q2, pulling total income down 2% from the previous quarter, even as the segment still managed to eke out a 4% profit gain.
BFSI earnings remain subdued as weak rural incomes and soft mass-market consumption have dampened rural credit and personal loan growth. Meanwhile, cautious underwriting and muted private capex continue to restrain overall credit demand, according to experts.
The segment also suffered a 30-80% fall in treasury income over the previous quarter, which dented BFSI’s non-core income, said Rahul Gupta, chief business officer at Ashika Stock Broking.
“The sharp mark-to-market tailwind of Q1 faded in Q2 as (bond) yields steadied or moved slightly higher," Gupta said. “With Q2 marking the trough, treasury gains should improve through H2, supported by the RBI’s anticipated 25-50 bps rate cut."
Hopes of a turnaround
The market is pricing in another 25 bps rate cut on the back of consistently soft inflation, said Centrum Broking’s Jain. With expectations of a festive consumption revival as GST cuts fully kick in, sentiment has strengthened, he added.
The Nifty 50 is trading just below its all-time high of 26,277 from September 2024. Stabilisation in Q2 earnings downgrades has also improved the risk-return setup, Jain said. However, with expectations already sharply reduced over the past two quarters, more companies are simply meeting estimates rather than beating them, he added. Jain expects Nifty earnings to grow about 12% in FY26.
Q2 signals a firm turn in underlying earnings momentum, said ArunaGiri of TrustLine Holdings. “While H2 looks stronger, a real, widespread earnings upswing is expected in FY27."
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