India Inc’s earnings rebound faces fresh test as commodity costs rise

Indian companies posted their fastest profit growth in over two years in the September quarter, but much of the gain came off a weak base, while surging oil, freight and metal prices threaten to squeeze margins from the December quarter.

Mint’s analysis of 356 companies’ standalone results shows that net profit rose 27% year-on-year in the September quarter (Q2 FY27), compared with a 9% increase in the year-earlier quarter. This was the cohort’s strongest profit growth in 10 quarters, even as input expenses climbed to multi-quarter highs.

Elevated oil, freight and metal prices threaten to push up costs for companies across sectors in the coming months. While some businesses have raised prices to protect margins, their ability to pass on further increases varies, setting the stage for a more uneven earnings performance in the coming quarters.

Experts attribute part of the September-quarter recovery to a sharp turnaround in oil marketing companies (OMCs), which swung from a cumulative loss of nearly ₹13,600 crore in the June quarter to a profit of around ₹12,700 crore in the September quarter. OMCs accounted for 6.7% of the overall Q2 profit pool.

The turnaround was supported by relatively subdued crude prices for much of the quarter, price increases of ₹5-8 per litre for petrol and diesel by state-owned fuel retailers, and government compensation for losses on subsidized liquefied petroleum gas sales.

But this improvement may prove temporary, cautioned Prashant Shah, co-founder and chief executive officer of Definedge Securities, as refiners’ profitability remains highly sensitive to crude oil price movements.

“Crude has been extremely volatile, and managements have said it is difficult to give a clear outlook in this environment,” he said. With Brent crude back near a six-month high of $115 a barrel, the outlook for OMCs and corporate India broadly remains challenging.

Inflated growth

Elevated oil, freight and metal prices have pushed up business costs, prompting companies to raise prices by 10-30% over the past six months through repeated small increases, said Prasenjit Paul, fund manager at 129 Wealth and head of research at Paul Asset. Higher prices and realizations have lifted a significant share of India Inc’s September-quarter revenue, he added.

The 356 companies analysed by Mint reported a 22% year-on-year rise in net sales, their strongest topline growth in at least three years. However, companies’ ability to pass on higher costs varies across sectors and could emerge as a key differentiator between winners and losers, Paul said.

Experts expect airlines, tire manufacturers, OMCs, cement makers and chemical companies to face mounting pressure on profit margins in the coming quarters.

Companies that sell to other businesses under contracts with built-in cost-adjustment clauses are better protected, Shah said. Consumer-facing companies, by contrast, face greater pressure from competition and delays in raising prices, he added.

Auto ancillaries, capital goods
Against this backdrop, auto ancillary companies and capital goods makers linked to power transmission and distribution stand out. Auto ancillary companies have reported an 83% year-on-year rise in net profit in Q2 so far, while electrical capital goods makers have more than doubled their profits.

Despite their exposure to cyclical automobile demand, auto ancillary companies have diversified into segments such as railways, defence and precision engineering, Paul said. The shift towards higher-value, specialised products is creating pockets of structural growth beyond the traditional automotive cycle, he added.

Electrical capital goods makers are similarly benefiting from a surge in data centre investments, which is driving demand for power transmission and distribution infrastructure, Paul said. These structural tailwinds and robust end-market demand appear to be helping both segments sustain earnings growth despite rising cost pressures.

“Both segments could see a further expansion in profitability if commodity prices ease and provide relief on input costs,” Paul said.

Outlook

Companies excluding banking, financial services, insurance and OMCs have reported a net profit margin of 14.4% so far, down from 15.3% in the previous quarter but still above the four-year average of 13.4%, Mint’s analysis showed. The moderation suggests that corporate profitability remains resilient, although rising costs are beginning to weigh on margins.

Managements expect some cost pressures to spill over into the December quarter, as companies have yet to fully pass on earlier increases, Shah said.

“Still, companies are not anticipating another sharp deterioration in profitability and remain confident about passing on higher costs without materially affecting demand,” he said. “A fresh spike in commodity prices, however, could upset that outlook.”