India Inc sees first earnings upgrade after a gap of 5 quarters

India Inc Sees First Earnings Upgrade After a Gap of 5 Quarters

India Inc has witnessed its first aggregate earnings upgrade in five quarters, a significant development driven predominantly by mid- and large-cap companies. This marks a crucial turnaround in the corporate profit cycle, following a lengthy stretch of downward revisions.

Highlights of the Earnings Upgrade

– Aggregate Earnings Upgrade: This is the first upgrade after consistent estimate cuts in previous quarters, highlighting a potential shift in market dynamics.
– Mid- and Large-Cap Influence: The uplift is primarily due to mid- and large-cap companies, while small caps continue to face downward pressures.

Earnings Estimates: A Detailed Insight

According to Motilal Oswal’s research, the profit after tax (PAT) estimate for FY26 has been raised by 2% during the three months leading up to the September 2025 earnings season. This upgrade follows four consecutive quarters of cuts—6%, 3%, 4%, and 2%—indicating a notable inflection point in earnings revisions.

– Mid-Caps: The leading sector with earnings upgrades is mid-caps, boasting a 3.1% increase in FY26 estimates.
– Large Caps: Healthy upward revisions are observed in large caps, which have seen about a 2% rise.
– Small Caps: Conversely, small caps experience significant downgrades, with aggregate FY26 PAT estimates slashed by 5.5%, reflecting ongoing market stress.

Sector Analysis: Leaders and Laggards

Within the broader market landscape, larger sectors have displayed favorable revision trends, showcasing significant upgrades in key profit areas:

– Notable Upgrades:
– Oil & Gas: FY26 PAT up 13%
– Telecom: Up 30%
– PSU Banks: Up 5%
– Insurance: Up 3%
– Non-lending NBFCs: Up 2%

– Sectors Under Pressure:
– Utilities: Experienced an 8% downgrade in FY26 PAT
– Autos: Reduced by 3% (notably affected by Tata Motors; excluding this, the sector has improved by 3%)
– Healthcare: Also down by 3%
– Among small sectors, chemicals, media, and cement have faced significant downgrades, with small-cap private banks and insurance seeing double-digit cuts.

Future Outlook: Sustained Growth Despite GDP Pressure

Motilal Oswal projects earnings growth for FY26/FY27 at 12%/15% for the Nifty 50 and 15%/16% for its coverage universe. This suggests that the current earnings upgrade phase has the potential for sustainability without drastic fluctuations.

– Economic Indicators: Despite a nominal GDP growth expected to remain below 10%, mid-teen corporate profit growth appears achievable. Factors such as leverage, pricing power, cost trends, and competition contribute to PAT performance, which is less influenced by macroeconomic growth alone.
– Historical data indicates that nominal GDP growth accounts for only about 20% of Nifty 50 PAT growth, and an even lesser proportion for broader market performance.

The Profit-GDP Dynamics

India Inc’s profit pool remains relatively small compared to the overall economy, adding to the cyclicality of earnings alongside a smoother GDP trajectory.

– Profit Trends: Nifty 500 PAT accounted for 4.7% of GDP in FY24 and FY25, while total corporate profits (listed and unlisted) reached about 7.3% of GDP. This contrasts with the US, where corporate profits averaged around 11% of GDP from 2020 to 2024, demonstrating that macro growth doesn’t solely dictate earnings trends.

Valuations and Investment Themes

Motilal Oswal maintains a constructive view on equities, predicting a recovery for Indian markets after their underperformance in 2025, driven by healthier earnings and improved domestic conditions.

– Valuation Insights: Large caps are less demanding, with the Nifty 50 trading at a one-year forward price-to-earnings multiple of 21.3 times, slightly above the long-term average of 20.8.
– Investment Focus: The brokerage is overweight on diversified financials, automobiles, capital goods, IT services, and telecom while being underweight on energy, metals, utilities, and staples.

Preferred Stocks

Large-Cap Picks:
– Bharti Airtel
– ICICI Bank
– SBI
– Infosys
– Larsen & Toubro
– M&M
– Titan
– Bharat Electronics
– IndiGo
– TVS Motor
– Tech Mahindra
– Indian Hotels

Mid-Cap Selections:
– Swiggy
– Dixon Technologies
– Suzlon
– Jindal Stainless
– Coforge
– Kaynes Technology
– Radico Khaitan
– V-Mart
– VIP Industries

In conclusion, India Inc’s recent earnings upgrade signals a potential dawn in corporate profits after numerous quarters of downgrades. This shift, largely led by mid- and large-cap companies, suggests a more optimistic outlook for the future, despite the challenges posed by a lower GDP growth rate.