Energy shock puts FY 2027 earnings forecasts at risk

The fallout from the Iran war is expected to dampen corporate earnings during 1H FY 2027, as soaring energy prices squeeze margins across sectors, as per a Nuvama report (pdf). The brokerage firm assesses that the impact will vary by industry, depending on pricing power, competitive intensity, and the ability of companies to pass costs on to consumers.

The hit varies by sector: Automobile manufacturers have largely absorbed the increase in input costs, directly compressing profitability, while consumer-facing sectors like paints have passed on expenses through price increases, leading to weaker demand and slower sales growth.

India’s next challenge may come from weakening domestic demand. “Income dynamics are weak across agents (households, corporate, and government), making them cautious on capex spending,” the report says, despite Gulf oil and shipping risks receding.

“Nonetheless, a new tailwind that could help is the undervalued INR. Nearly two-thirds of India Inc.’s top line is directly or indirectly linked to global trade. A weaker INR thus boosts earnings,” the brokerage points out.

Meaningful earnings growth is unlikely even in 2H FY 2027, as several growth tailwinds begin to fade. Tailwinds that supported the previous fiscal year’s 9% growth, such as reductions in indirect taxes, are fading, while “El Niño [will] hurt farm output and thus rural consumption,” Nuvama says.

Why it matters: Sovereign capital, asset managers, and family offices across the UAE and Saudi Arabia have increased their exposure to India, expecting sustained high-growth earnings, but Nuvama argues that the 19% bottom-line growth forecasts remain disconnected from underlying fundamentals. “A competitive INR and some spillovers of global AI capex boom are some of the offsets. However, it is insufficient to accelerate earnings,” Nuvama notes, leaving the current estimates vulnerable to further downgrades.

What’s next: The sectors currently operating at cyclical low margins could see a recovery once the impact of the oil shock mellows and margins begin to revert toward historical averages.