India Inc.’s profit growth during the September quarter earnings season remained robust driven mostly by reduction in input costs & by cost cutting measures. Notably, domestic cyclical companies in the automobile, BFSI, and cement sectors led the positive trend, while FMCG and IT sectors failed to make a significant impact on the markets due to subdued growth in both top and bottom-line figures.

In the second quarter of the current fiscal year, net profit growth for a sample of 3,573 companies reached an eight-quarter high at 41.4%, compared to the previous year. Despite a modest 6.2% growth in revenue, which marked a second consecutive quarter of low expansion after nine quarters of double-digit growth, lower commodity and fuel prices, coupled with cost-cutting measures, contributed to profit expansion. Operating margin for this sample improved to 16.3% from 12.2% a year ago, and net margin increased by 210 basis points to 7.5%. The overall sample’s operating margin showed a year-on-year improvement of 360 basis points to 18.5%.

While the top-line growth of small and midcap (SMID) companies has slowed over the past year, it remains higher than that of large caps on aggregate. This can be attributed to a mix of factors, and in terms of profits, SMIDs exhibit a more significant bounce, likely due to their higher sensitivity to input prices compared to large caps.

In specific sectors such as Auto, Durables, and FMCG, SMID profit growth surpasses that of large-cap peers despite a slower top line, thanks to tailwinds from lower input prices. Even in BFSI, especially in PSU banks and NBFCs, SMID earnings outpace those of large caps due to lower credit costs. The brokerage report indicates that in sectors like IT, metals, and pharma, SMID companies are outpacing large caps even in terms of demand.

India Inc.’s net profit as a percentage of the country’s gross domestic product (GDP) is on the verge of reaching 5%, propelled by strong earnings growth over the last three year. The current earnings cycle began during the end of 2019, at a time when this figure was less than 2%. The corporate tax cuts of October 2019 were a seminal event that marked a policy shift towards boosting corporate profits. Analysts interpret the results so far this year as a sign of an ongoing corporate profit upcycle, projecting that this share could exceed 8% within the next five years.