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Earnings review 2QFY26: Midcaps standout in a flattish quarter; Nifty EPS sees modest upgrade

Global Cyclicals outperform

* Corporate earnings – a third consecutive quarter of double-digit earnings growth: The 2QFY26 corporate earnings concluded on a healthy note, with overall earnings growth driven by OMCs, Telecom, Metals, Technology, NBFCs – Lending, Cement, and Capital Goods. Conversely, Oil & Gas (ex-OMCs), Automobiles (led by Tata Motors), and Banks (Private and PSU) dragged overall profitability.

* Metals and OMCs propel earnings growth: The aggregate earnings of the MOFSL Universe companies grew 12% YoY (vs. our est. of 9% YoY) in 2QFY26. Excluding financials, the earnings jump 18% YoY (vs. our est. of 16% YoY), whereas, excluding global commodities (i.e., Metals and O&G), the MOFSL Universe grew 6% YoY (vs. our est. of 6% YoY). The earnings growth was powered by O&G (OMC’s profit up 8.9x YoY), which grew 38% YoY, Telecom (loss-to-profit), Metals (profit surged 25% YoY), Technology (8% YoY), and NBFC - Lending (13% YoY). These five sectors contributed 90% of the incremental YoY accretion in earnings in 2QFY26.

* A sixth successive quarter of single-digit PAT growth for the Nifty-50: The Nifty delivered a 2% YoY PAT growth (vs. our est. of +5%). Nifty reported a single-digit earnings growth for the sixth consecutive quarter since the pandemic (Jun’20). Five Nifty companies – Bharti Airtel, Tata Steel, HDFC Bank, Reliance Industries, and TCS – contributed 300% of the incremental YoY accretion in earnings. Conversely, Tata Motors, ONGC, Coal India, Axis Bank, SBI, Interglobe Aviation, Adani Ent., Power Grid, Sun Pharma, Eternal, HUL, Kotak Mahindra Bank, and Tech Mahindra contributed adversely to the earnings.

* Large-caps deliver in-line performance, while mid-caps outperform; small-caps report a miss: Within our MOFSL coverage universe, large-caps (88 companies) posted an earnings growth of 10% YoY – similar to the overall universe. Mid-caps (97 companies) have extended their streak of the past three quarters and yet again delivered a strong earnings growth of 34% YoY (vs. our est. of 23%). Multiple mid-cap sectors clocked impressive growth; 16 of 22 sectors under coverage delivered a double-digit PAT growth. Oil & Gas, Metals, NBFC – Lending, PSU Banks, and Real Estate were the major growth drivers, which contributed 70% of the incremental YoY accretion to earnings. In contrast, small-caps (142 companies) continued to experience weakness and a broad-based miss, with Private Banks, NBFCs (lending and non-lending), Insurance, Oil & Gas, and Retail posting a YoY earnings dip. The small-cap earnings dipped 5% YoY (our est. of 3% growth), with 40% of the coverage universe missing our estimates. Conversely, within the largecap/mid-cap universes, 19%/22% of the companies missed our estimates.

* The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was favorable, with 36% of the companies exceeding our estimates, while 29% reported a miss at the PAT level. For the MOFSL Universe, the earnings upgradeto-downgrade ratio has been largely balanced at 0.9x in 2QFY26 (for FY26E), with the earnings of 84 companies having been upgraded by >3%, while the earnings of 98 companies have been downgraded by >3%.

* A story of two halves – 1HFY26 and 2HFY26E: The MOFSL/Nifty Universes delivered +11%/+5% YoY earnings growth in 1HFY26. Excluding Metals and O&G, MOFSL/Nifty reported 7%/5% YoY earnings growth. For 2HFY26, we expect MOFSL/Nifty earnings to report a growth of 15%/11% YoY. Excluding Metals and O&G, MOFSL/Nifty is expected to report a growth of 16%/11% YoY.

* FY26E earnings highlights: The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 6%/12%/15% YoY in FY26. The Financials, Oil & Gas, and Metals sectors are projected to be the key growth engines, with 10%, 24%, and 9% YoY earnings growth, respectively. These three sectors are likely to contribute 58% of the incremental YoY accretion in earnings. Further, we categorized the coverage stocks, based on market capitalization, into large-cap, mid-cap, and small-cap segments. Notably, our large-cap universe is anticipated to deliver a 12% YoY earnings growth in FY26E, while mid-cap is estimated to deliver 29% YoY growth, and small-cap is estimated to deliver a 25% YoY growth in FY26E.

* MOFSL Universe estimated PAT experiences an upgrade of 2.3%/0.9% for FY26E/FY27…: The MOFSL Universe witnessed a rise of 2.3% for FY26, led by Oil & Gas, PSU Banks, Telecom, Insurance, and Metals. The MOFSL Large-cap Universe experienced an upgrade of 2.5% for FY26, while the MOFSL Mid-cap Universe stood out with a 3.4% earnings upgrade for FY26. In contrast, the small-cap universes experienced earnings cuts of 3.9% for FY26.

* …and Nifty EPS witnesses an upgrade of 1.2%/0.5% for FY26E/FY27E: The Nifty EPS estimate for FY26 was raised by 1.2% to INR1,109, largely owing to SBI, HDFC Bank, ONGC, Bharti Airtel, and Hindalco. FY27E EPS was also raised by 0.5% to INR1,280 (from INR1,274) due to upgrades in SBI, Tata Steel, Bharti Airtel, HDFC Bank, and ICICI Bank.

* The top earnings upgrades in FY26E: SBI (9.3%), ONGC (7.6%), Hindalco (7.2%), Bharti Airtel(7.1%), and Tata Steel (5.8%).

* The top earnings downgrades in FY26E: Eternal (-37.9%), Interglobe Aviation (- 23.2%), NTPC (-9.2%), Coal India (-6.3%), Power Grid Corp. (-6.1%).

* Key sectoral highlights – 1) Banks: The banking sector posted a steady quarter, supported by better NIM performance and a healthy pickup in credit growth. Margins were ahead of expectations for most banks, aided by a faster decline in the cost of funds. Several banks have guided for further NIM improvement in 2HFY26, driven by the benefits of the CRR cut, continued deposit re-pricing, and increased loan growth. 2) NBFC-Lending: NBFCs reported a mixed performance in 2QFY26 in terms of loan growth and asset quality, with early signs of demand revival visible across the vehicle (PV, Tractors, and 2W) and consumer durables (electronics) segments, while seasonal asset quality pressures persisted, which were more product-specific in nature. 3) Consumer: Staple companies witnessed stable demand trends; however, the GST transition and an extended monsoon adversely affected the overall performance during the quarter. The GST impact was more pronounced in personal care categories compared to packaged foods. 4) Oil & Gas: Revenue came in line with our estimates. EBITDA was 8% above estimates (up 33% YoY). Excluding OMCs, EBITDA remained in line (up 8% YoY). Adj. PAT was 11% above estimates (up 38% YoY), primarily as OMCs reported strong profitability. Excluding OMCs, APAT was 6% below estimates (-4% YoY). 5) Technology: IT companies (within the MOFSL Universe) offered some respite on the already beaten-down expectations in 2QFY26, with median revenue growing 1.5% QoQ CC (-1.1%/-0.6%/+1.7%/+1.6% in 1QFY26/4Q/3Q/2QFY25). 2QFY26 earnings offered some respite, as expectations were already beaten down and the quarter was seasonally strong. 6) Metals: Overall earnings remained decent during 2Q. Ferrous companies' revenue rose 12% YoY despite softer realizations (better-than-expected NSR led the earnings beat), while EBITDA jumped 41% YoY on healthy volume and lower costs. This led to a 2.2x YoY surge in APAT in 2Q for ferrous companies. Non-ferrous companies posted earnings growth led by favorable metal prices and steady volumes.

* Our view: The 2QFY26 earnings have generally been in line with our expectations, with the intensity of earnings cuts moderating. Although Indian equities have registered a lackluster performance over the past one year, we continue to emphasize that the Indian markets now appear healthier compared to last year. The earnings cycle is bottoming out, with growth expected to accelerate into double digits. Valuations remain reasonable, with the Nifty trading at 21.2x, near its LPA of 20.8x. Any signs of accelerating earnings growth should support valuation expansion. We believe that the cavalry of measures by the government will help reset the trajectory of corporate earnings, as domestic reforms are expected to continue. Additionally, any resolution of the tariff stalemate will be a key external catalyst, in our opinion. Our model portfolio is more aligned towards domestic names, driven by expectations of a domestic economic rebound. While SMID stocks trade at expensive valuations, we continue to focus on this segment, selectively picking high-conviction SMID names in our portfolio.

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