Consumer durables, financial shine most in Q1; growth could normalise by Q4

Disclaimer: This article is written by Amar Ambani, executive director, YES Securities. Views expressed are his own. Readers' discretion is advised.

 

The Q1 FY27 earnings season has delivered an even more encouraging message than the headline numbers suggest. The key takeaway is not simply that earnings have grown, but that revenue growth is accelerating versus previous quarters. This makes the underlying demand picture particularly important.

 

For the NSE 200, excluding financials and oil marketing companies, topline growth accelerated to 20.7 per cent Y-o-Y in Q1 FY27. This is a sharp improvement from 14 per cent in Q4 FY26, 10 per cent in Q3 and just 8 per cent in Q2. In fact, companies had been reporting revenue growth of only 7-9 per cent for nearly 8-10 quarters before this acceleration. The current number is therefore more than just a favourable base-effect story.

 

 

What makes this more interesting is the backdrop. Inflation surged sharply during the quarter following the US-Iran conflict, with wholesale prices moving into double-digit territory after remaining relatively subdued for several months. Normally, such a supply-side inflation shock should have resulted in a meaningful demand slowdown. That has not happened so far.

 

There is a possibility that some of the resilience reflects inventory stocking. Inventories in segments such as air-conditioners and medium and heavy commercial vehicles were relatively low going into the quarter, and companies and channels may have built inventory in anticipation of better demand and the festive season. Importantly, however, channel checks in automobiles and consumer durables also point to comfortable inventory rather than excessive stock, while demand momentum has remained resilient.   

What awaits India Inc next?

 

We therefore expect demand to remain reasonably strong through Q2 and Q3. The combination of a supportive base and high wholesale inflation should keep reported topline growth elevated. However, investors should not extrapolate this 20 per cent growth rate. By Q4, the base effect will kick in, and revenue growth could normalize back to single digits.

 

The other side of the story is margins. EBITDA margins for the NSE 200, ex-financials and OMCs, declined by around 85 basis points Y-o-Y, attributed largely to the supply-side disruption and higher input costs. We believe there could be another quarter of margin pressure, but thereafter the comparison should turn more supportive. The interesting point is that despite the margin squeeze, EBITDA still grew 15 per cent, while PBT rose 11.3 per cent. More importantly, excluding the decline in other income, PBT growth was closer to 18 per cent.

 

The decline in other income is worth watching. It fell 7 per cent year-on-year after seven quarters of strong growth and still represents about 16 per cent of PBT. This could be interpreted positively as corporations may increasingly be deploying surplus cash towards growth and capex rather than simply parking it in financial investments.

 

The quality of the earnings is also reasonably healthy. Depreciation-to-sales has fallen to around 5 per cent, below its normal 5.5-6.0 per cent range, while interest coverage remains broadly stable. This suggests that the acceleration in revenues has not yet been accompanied by a disproportionate deterioration in balance-sheet servicing capacity.

 

One unusual feature was the lower tax outgo despite higher profits. The effective tax rate was around 24.6 per cent, and tax outgo declined 12 per cent Y-o-Y. This is somewhat unusual for the first quarter and could partly reflect a more cautious corporate view on the earnings outlook for the coming quarters.

 

Overall, the season was healthier than it initially appeared. Our FY27 Nifty EPS estimate remains around Rs 1,240, and importantly, Q1 did not result in material earnings downgrades. Around 30 per cent of NSE 200 companies saw earnings upgrades of more than 2 per cent, the strongest upgrade ratio in the last eight quarters. That breadth is encouraging because earnings recoveries become more durable when they are accompanied by a widening set of companies participating in the upgrade cycle.

 

Interestingly, small caps emerged as the strongest performers, delivering a sizeable beat relative to mid and large-cap companies. This suggests that the earnings recovery is not restricted to the index heavyweights. 

Sector-specific outperformers

 

There were some notable sector-specific surprises. Consumer durables saw particularly strong growth in wires, cables and kitchen appliances, with companies such as Polycab and RR Kabel recording very strong revenue growth, while rural demand showed signs of improvement. 

 

Financials, especially NBFCs and smaller lenders, also surprised positively, with improving collections, lower credit costs and stronger disbursements.

 

Overall, we would characterize Q1 FY27 as a revenue-led recovery with temporary margin pressure. The next two quarters should benefit from favourable bases and resilient demand. The real test will come later: whether companies can convert this topline momentum into margin expansion once commodity pressures ease. If they can, FY27 could ultimately prove to be the year when India's earnings cycle moved from recovery to a broader, more sustainable growth phase.