West Asia conflict to weigh on corporate earnings in first half of FY27: Report

Corporate profit margins across various sectors are likely to face pressure in the first half of fiscal year 2027 due to the ongoing conflict in West Asia, although a rebound is expected in the second half. A research report by Nuvama indicates that the specific impact on sectoral earnings will depend on how companies distribute the oil shock, the intensity of competition within their industries, and evolving demand dynamics.

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Our strong belief has been that profit margins tend to revert to the mean.

The report highlights that the energy shock's distribution varies significantly. Some automobile manufacturers have absorbed higher costs, directly impacting their profit margins. In contrast, consumer-focused companies like paint manufacturers have passed these costs onto consumers, potentially slowing sales volumes. Industry competition will be a key factor in determining whether corporate earnings can recover once the initial oil shock subsides.

Nuvama's analysis suggests that profit margins tend to revert to the mean, making it useful to examine sectors at cyclical bottom margins for potential post-war rebounds. However, widespread demand challenges are anticipated to continue into the latter half of the fiscal year. The supportive effects of previous Goods and Services Tax (GST) cuts are expected to diminish on a year-on-year basis, while the El Nino phenomenon poses a risk to agricultural output and rural consumption.

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Thus, a good way to gauge the impact is to look at sectors that are at cyclical bottom margins and expect them to rebound post war.

Furthermore, weak income dynamics across households, corporations, and government entities are contributing to cautious capital expenditure. Low credit multipliers and a shift in leverage towards households and micro, small, and medium enterprises (MSMEs) facing weak income growth, or towards working capital funding, add to the economic headwinds. While a competitive Indian Rupee and some spillover effects from the global AI capital expenditure boom offer minor offsets, they are deemed insufficient to accelerate earnings growth.

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A competitive INR and some spillovers of global AI capex boom are some of the offsets.

This projected slowdown is likely to fall short of current market expectations. The consensus forecast anticipates a 19% profit after tax growth for the BSE500 index (excluding oil marketing companies), a significant increase compared to the 9% year-on-year growth recorded in FY26. Nuvama predicts that the gap between these expectations and the actual economic realities will lead to continued downward revisions of earnings estimates. The report concludes that earnings acceleration remains unlikely, even when considering a return to pre-war trends, as tailwinds like GST and rate cuts fade, and income dynamics remain subdued.

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However, it is insufficient to accelerate earnings.