India Inc earnings downgrade drought shows first signs of breaking: Will Q2 mark the bottom?

India Inc's earnings nightmare may finally be approaching its end game. After four brutal quarters of relentless downgrades, Q1 delivered the weakest downgrade cycle in a year, sparking hopes that the corporate earnings bloodbath could bottom out within the next 1-2 quarters as larger companies show surprising stability.

"The share of stock downgrades in Q1 is the lowest in the past four quarters—hinting at potential earnings stabilization ahead," said Yes Securities lead analyst Hitesh Jain, though cautioning that "43% of stocks saw earnings cuts of more than 2% for FY27, indicating that aggregate downgrades persist."

The relief, however, comes with stark disparities. Largecaps, where institutional money is most concentrated, have seen fewer downgrades at 32%, while smaller companies continue to bear the brunt with micro-caps suffering a punishing 50.3% downgrade rate as they remain most vulnerable to economic headwinds.

Nomura's comprehensive analysis of 232 companies reveals the mixed reality beneath the surface optimism. Aggregate PAT growth came in at 13% year-on-year for Q1FY26, with earnings beating Bloomberg consensus estimates by 5%. But strip away the Oil & Gas sector's heavy lifting, and the underlying earnings growth drops to a modest 7.2%, indicating a clear slowdown in momentum versus previous quarters.

"Half of the year-on-year earnings growth was attributed to the Oil Gas sector. Ex O&G earnings growth was at 7.2% YoY, which in our view indicates a slowdown in earnings growth momentum vs the previous quarters," Nomura noted, highlighting how the headline numbers mask underlying weakness.

The sector rotation tells its own story of economic stress. Construction materials emerged as a clear winner with 59% of stocks upgraded, while telecom led net upgrades. In stark contrast, textiles and consumer durables face severe headwinds with over 60% of stocks downgraded due to tariffs and slowing economic activity.

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Prabhudas Lilladher's tracking shows Nifty EPS has endured gradual cuts of 11.2% and 6.5% for FY26/27 since August 2024. The number of Nifty stocks seeing FY27 EPS downgrades corrected sharply from 32 in April-July to 18 in August 2025, offering the first concrete evidence of stabilization.

"Nifty EPS has seen a change of -1.4/-0.4% for FY26/27 with 13.2% CAGR over FY25-27," the brokerage noted, with Nifty currently trading at 18.9x 1-year forward EPS – at just 1% discount to the 15/10-year average PE of 19.1x.

Nomura remains structurally cautious, maintaining that "corporate earnings growth is unlikely to outpace the nominal GDP growth in the near term." The brokerage points to adverse factors including weakness in investments, household savings and external trade, leading them to factor in mid single-digit cuts in consensus earnings.

Yet hope springs from multiple quarters. Good monsoon conditions, healthy reservoir levels and promising kharif crop sowing are expected to support rural consumption revival. Proactive RBI policy steps including potential interest rate cuts and liquidity loosening, coupled with GST rate rationalization, should aid growth recovery.

Kotak Mutual Fund's fund manager Mandar Pawar struck an optimistic note, suggesting that while "fears that this weak earnings trend may continue into Q2" persist, "H2 of FY26 is likely to see pick-up in growth on the back of consumption revival, festive period tailwinds, benefit of low inflation and interest rates and pick up in construction activities."

"Touching double digit earnings growth in H2FY26 is not a certainty but chances are bright," Pawar added, pointing to the lower base effect from last year as an additional tailwind.

The verdict appears increasingly clear: while the earnings winter isn't over yet, the first green shoots of spring may finally be emerging from the corporate wasteland.

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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)