West Asia conflict to weigh on corporate earnings in first half of FY27; Rebound expected in second half: Nuvama

NEW DELHI: The ongoing conflict in West Asia is anticipated to pressure corporate profit margins across sectors in the first half of FY27, though a reversal of this trend is expected in the subsequent half. According to a research report by Nuvama, the exact impact on sectoral earnings will vary based on how companies distribute the oil shock, the competitive intensity within their industries, and shifting demand dynamics.

The report stated that the distribution of the energy shock differs significantly among industries. Certain automobile manufacturers have largely absorbed the higher costs, a move that directly compresses their profit margins. Conversely, consumer-centric peers, such as paint manufacturers, have passed on the costs to consumers, which could consequently lead to a slowdown in their overall sales volumes.

Industry competition will ultimately determine whether corporate earnings can successfully rebound once the initial oil shock begins to fade. “Our strong belief has been that profit margins tend to revert to the mean,” the Nuvama report stated. “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.”

However, broader demand challenges are expected to persist into the second half of the fiscal year. The report noted that the supportive impact of previous Goods and Services Tax (GST) cuts will likely fade on a year-on-year basis, while the El Nino threatens to hurt agricultural output and dampen rural consumption.

Income dynamics also remain weak across households, corporates, and the government, making these economic agents increasingly cautious about capital expenditure. Furthermore, credit multipliers remain low as leverage shifts toward households and micro, small, and medium enterprises (MSMEs) facing weak income growth, or toward working capital funding.

“A competitive INR and some spillovers of global AI capex boom are some of the offsets,” the report added. “However, it is insufficient to accelerate earnings”. This projected slowdown is likely to fall short of the current market expectations. As per the report, the consensus forecast currently stands at a lofty 19 per cent profit after tax growth for the BSE500 index, excluding oil marketing companies, compared to the 9 per cent year-on-year growth recorded in the financial year 2025-26.

Nuvama indicated that this gap between expectations and ground realities will likely result in continued downward revisions of earnings estimates. “Thus, from the overall discussion above, it appears that earnings acceleration is still unlikely even if one reverts back to pre-war trends as some of the tailwinds (GST cuts, rate cuts) fade on YoY basis, while income dynamics remain subdued,” the report stated.

The report mentioned that while a weaker domestic currency should offset some of these operational headwinds, the consensus estimates remain high and vulnerable to future downgrades. (ANI)