The June quarter has turned out better than what the market was expecting. Corporate earnings were mostly stronger, financials remained healthy, metals made a sharp comeback, and several consumer-facing businesses showed that demand has not completely disappeared. At the same time, the quarter also tells us why the earnings recovery should not be taken at face value.
A large part of the improvement came from a handful of sectors and companies. Oil marketing companies, aviation, parts of pharmaceuticals, staples and infrastructure remained weak. Commodity-linked earnings also played a disproportionately large role in the improvement. Therefore, the headline number is much better than the underlying economy may suggest.
The most useful number is not the headline 18% growth. It is the fact that earnings beat expectations across a broad spectrum of the market. In the large-cap universe, the proportion of companies beating expectations was materially higher than in mid- and small-caps. This is important because it suggests that the recovery is not merely a small-cap phenomenon.
Where did the growth come from?
Financials remain the backbone of the earnings cycle. Bank credit growth has been strong, asset quality is benign and lower provisioning has helped profits. NBFCs have also continued to grow their loan books, particularly in secured retail, gold loans and vehicle finance. The important change is that growth is increasingly coming with better asset quality.
Metals were another major contributor. The sector moved from being a relatively small contributor to incremental earnings to one of the largest. This is good for aggregate profits, but it is also a reminder that commodity earnings are cyclical. A strong quarter does not automatically mean a durable structural improvement.
Consumer discretionary was a pleasant surprise. Paints, jewelry, quick-service restaurants and premium alcoholic beverages showed resilience. Real estate also continued to report healthy collections and profitability, even though the absence of large launches affected quarterly presales.
Technology was better than the headline commentary might suggest, but not strong enough to become an earnings leader. Revenue growth remained modest, decision-making cycles were long and deal sizes were under pressure. AI-related work, vendor consolidation, utilization and currency helped margins.
And where was the weakness?
Oil marketing companies were a major drag. Revenue was strong, but marketing losses and LPG under-recoveries hurt profitability. Aviation was another conspicuous weak spot. Pharmaceuticals delivered healthy domestic volumes, but US pricing pressure and lower contribution from key products kept profits subdued.
Infrastructure remains the weakest link in the investment story. Project awards, particularly in roads, were weak and delays in appointed dates affected execution. At the same time, elevated costs and working-capital pressure hurt margins. Capital goods had better order flows, but commodity costs, freight and execution expenses continued to prevent a clean margin recovery.
Automobiles sit somewhere in the middle. Demand is healthy, helped by affordability, exports and a favorable product mix, but commodity inflation has squeezed margins. The second half of FY27 will be important because the benefit of GST rationalization will have to be measured against a higher base.
What do the FY27 and FY28 estimates say?
The broad market consensus after the 1QFY27 earnings is remarkably similar: FY27 and FY 28 are expected to be decent years with 14-15% earnings growth for Nifty 50. The Nifty 50 EPS is estimated to be in the range of 1230-1240 for FY27e and 1415-1450 for FY28e.
There is therefore no earnings recession in sight. The more conservative sector work also points to healthy earnings growth in lenders, metals and telecom, while consumer discretionary, real estate and capital markets retain strong medium-term growth characteristics.
But there is an important qualification. One set of estimates implies that the Nifty needs about 16–17% earnings growth in the remaining nine months of FY27 to deliver the full-year forecast. That is possible, but it is not a low hurdle.
The
catch: quality of earnings
This is where I would be slightly careful with the celebration. The earnings recovery is real, but the quality of the incremental earnings is not uniformly high.
Commodity sectors are doing a lot of the heavy lifting. Metals, non-OMC energy and some chemical businesses have benefited from favorable prices, inventory effects or a low base. These can make the aggregate Nifty number look better without necessarily telling us that the domestic economy has entered a powerful earning upcycle.
The second issue is the gap between revenue growth and profit growth. In several sectors, companies are still fighting input-cost inflation, freight costs, wage costs or weak pricing power. A good part of the improvement is therefore coming from operating efficiency, lower provisions, currency benefits or a favorable base rather than a broad-based expansion in pricing power.
The third issue is that the market already knows about the earnings recovery. The forecasts of roughly ₹1,230–1,240 Nifty EPS for FY27 and ₹1,420–1,450 for FY28 are no longer a surprise. If earnings merely meet these numbers, investors will still have to contend with the valuation they are paying for them.
What I take away from Q1
The June quarter has materially reduced the fear of an earnings slowdown. That is important. The financial sector is healthy, domestic consumption has not collapsed, metals have recovered, telecom earnings are improving and several investment-linked businesses continue to have strong order visibility.
However, I would not read the quarter as confirmation of a broad-based economic boom. Infrastructure execution is still weak. IT demand is not yet robust. Staples remain soft. Pharma has issues in the US market. And commodity-linked profits are doing more work than one would ideally like.
My reading is therefore simple. FY27 is likely to be a better earnings year than FY26. FY28 could be better still. The estimates of 14–16% earnings growth are credible, but they leave less room for disappointment than the headline Q1 numbers might suggest.
For investors, the important question is no longer whether earnings will grow. They probably will. The more difficult question is whether earnings will grow fast enough to justify the prices being paid for them.