India Strategy : 1QFY26 results: Okay-ish present, weaker future by Kotak Institutional Equities
1QFY26 results: Okay-ish present, weaker future
1QFY26 earnings season shows (1) continued weakness in consumption, (2) muted IT services demand and (3) weak loan growth for banks. Aggregate earnings were broadly in line with our estimates and consensus estimates. However, a muted outlook across sectors resulted in further cuts in KIE/consensus earnings estimates.
Disappointments in details in 1QFY26 earnings prints
Aggregate earnings in 1QFY26 for the Nifty-50 stocks were broadly in line with KIE and consensus estimates (see Exhibits 1-2). Companies reported decent revenue growth (see Exhibit 3-4), but the bulk of the beat in revenues came from (1) non-interest income growth of banks (large treasury income), (2) one-time gain from investment income for HDFCB and (3) O2C business of RELIANCE. Furthermore, we expect the final aggregate earnings growth for the Nifty-50 Index to be in mid-single digits, given the likely sharp earnings decline in the case of ONGC and TTMT.
Downshift in earnings continued, but at a slightly slower pace
The FY2026E/27E EPS of Nifty-50 Index has seen further cuts over the past one month, reflecting the weakening growth outlook (see Exhibit 5), with FY2026E Nifty-50 EPS cut by 2% in the past one month. As such, we currently expect 10%/17% growth in net profits of the Nifty-50 Index in FY2026E/27E (see Exhibits 6-7). We note that quality of earnings of the Nifty-50 Index for FY2026 remains poor, with construction materials and metals & mining companies in aggregate contributing 32% and 25% of the incremental net profits of the Nifty-50 Index and KIE universe in FY2026. We note a similar trend in consensus earnings estimates for the Nifty-50 Index companies (see Exhibits 8-9).
Consumer companies continue to struggle with weak volumes and profitability
Consumer companies saw weak volume growth in 1QFY26 too (see Exhibit 10). The increase in RM prices has further dented profitability over 1QFY26 (see Exhibits 11-12). Consumer companies have continued to attribute weak urban demand and increasing competitive intensity behind the frail volume prints (see Exhibit 13). Meanwhile, major auto companies witnessed a weak demand environment and a decline in margins (see Exhibits 14-15).
Banks and IT services reported weak trends in line with expectations
Most major banks have delivered a broadly in-line quarter, with most banks reporting slowing credit growth, weakening NIMs, but broadly stable asset quality (see Exhibits 16-18). We note that most banks were comfortable with their asset quality, with only a select few banks highlighting weak asset quality in the unsecured retail and MSME segments (see Exhibit 19). Meanwhile, IT services companies continue to face challenges around growth and margins, given the persistent weak discretionary spending environment (see Exhibits 20-21). IT services companies cited uncertainties from (1) macro headwinds, (2) delayed decision-making by clients and (3) soft discretionary spending.
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