A stronger-than-expected earnings growth reported by India Inc in the second quarter of FY26 has set the stage for the momentum to extend into the third quarter, with geopolitics and crude price movements emerging as key monitorables for the latter part of the fiscal year following US aggression in Venezuela.
Market observers said the benefits of deferred purchases after the goods and services tax (GST) rate cut announcement, along with supportive domestic macroeconomic factors such as lower taxes and easing interest rates, are expected to flow into the second half of FY26, aiding growth in corporate profitability across sectors.
Profitability indicators already suggest a significant improvement in the September quarter. Net profit margin — profit after tax as a percentage of total income — of BSE 500 companies rose to 13.37 per cent in Q2FY26 from 11.37 per cent in Q1FY26 and 10.75 per cent in Q2FY25. Similarly, NSE 500 companies reported a net profit margin of 13.47 per cent in Q2FY26, compared with 11.32 per cent in the preceding quarter and 10.49 per cent in the year-ago period.
“Quarter 2 results were better than expected, even as it was impacted by long monsoons and purchase deferment on account of GST cuts. The effects of the strong monsoon and the GST cut may be reflected in quarter 3,” said Prateek Agrawal, MD & CEO, Motilal Oswal AMC. He added that management commentaries during earnings calls largely pointed to a robust demand outlook, which could underpin positive outcomes in the December quarter.
Agrawal also highlighted that while concerns around US duties have dominated discussions, currency depreciation could provide a silver lining, particularly for export-oriented sectors, potentially supporting margins during the quarter.
Echoing the optimistic tone, George Heber Joseph, CIO & CEO – equity, ASK Investment Managers, said corporate earnings momentum had recovered sharply after a subdued start to the year. Improved margins, stable demand conditions and supportive commodity prices are likely to sustain earnings growth through the remainder of the fiscal year, he said. “We expect H2FY26 earnings to strengthen amid rate-cut transmission, festival season consumption, rural demand normalisation and sustained public capex,” Joseph said.
However, certain segments could see a more muted performance in Q3FY26. In IT services, macro-tariff uncertainty continues to weigh on discretionary spending decisions and furloughs and wage hikes could further pressure margins.
The hospitality sector may also see moderation after a strong start to the quarter. While October and November witnessed upbeat sentiment driven by business travel, weddings and MICE activity, large-scale flight cancellations by IndiGo in December have impacted hotel occupancies and average room rates, partly offsetting expectations on overall Q3 performance.
On valuations, market experts said earnings growth amid range-bound equity markets has resulted in a correction in valuation multiples, particularly for large-cap stocks. “With the market being in a range and earnings having seen an expansion, there has been a valuation correction. Large-cap earnings have grown at around 10 per cent, resulting in a valuation correction of that order for large caps,” Agrawal said.
Geopolitical risks remain a key variable for markets. “If production in the Caribbean or the Gulf of Mexico were to be impacted by conflict, oil prices would likely rise,” said Ana Maria Jaller-Makarewicz, lead energy analyst, Europe, at the Institute for Energy Economics and Financial Analysis.
