Indian companies face downgrade risks as commodity prices stay high, GST boost fades: HSBC

Indian companies face the risk of earnings downgrades in the coming quarters as commodity prices remain elevated, while the boost from GST cuts and inventory gains fades, HSBC Global Investment Research said in a report on Monday.

“Looking ahead, there’s a risk of downgrades in coming quarters as commodity prices stay elevated, while the lift from GST cuts and inventory gains fade. The impact of further price hikes on demand is another risk,” HSBC said.

The caution comes despite a better-than-expected financial performance in June quarter, with around 70% of Indian companies reporting results either ahead of or in line with expectations. “Despite an oil shock, earnings growth kept up well. In the latest reporting season, 70% of Indian firms’ results were ahead of or in line with expectations,” the brokerage said.

Sales, excluding energy and materials, grew 12% year-on-year (YoY), while earnings rose 16% in Q1 FY27. Mid- and small-cap companies stood out, with earnings growing 30% and 35%, respectively, compared with 15% for large caps, the report noted.

“Consumption stayed resilient after the GST cuts and RBI easing last year. Firms also rolled out calibrated price increases and, along with inventory gains, these partially offset higher raw material costs,” HSBC said.

“Overall, the results were better than expected, with the growth recovery holding up well,” it added.

FY27 earnings growth seen at 14.3%

Strong results have also led to upward revisions in earnings estimates. FY27 estimates have been upgraded for nearly half of the companies in the FTSE India index since the end of June.

“Strong results pushed FY27 earnings upgrades up by 50bps to 14.3%, led by financials (PSUs and NBFCs),” HSBC said.

However, the brokerage noted that consensus downgrades were already visible in some sectors. “There were consensus downgrades in autos (higher commodity prices) and hospitals (lower margins in new units),” it said.

Mid- and small-caps lead earnings growth

The brokerage said the strongest earnings growth came from mid- and small-cap companies. “Most growth excitement” was in mid- and small-caps, where earnings grew 30-35%, versus 15% for large caps.

“Materials, industrials and financials drove overall growth; energy and tech were the key laggards,” HSBC said.

The brokerage also flagged margin compression across several sectors. “Margin compression in industrials, autos, durables and hospitals; jewellery, paints, ferrous metals and cables & wires held up better,” it said.

On banks and lenders, HSBC said: “Strong growth, driven by NBFCs. Performance mixed for large private and PSU banks; bigger banks faced margin pressure.”

In the consumer segment, “Jewellery and autos showed strong revenue growth, but auto margins contracted. Staples continued to benefit from GST cuts,” it said.

Industrials reported solid growth, with “electrical equipment benefitting from ongoing investment in power transmission, renewables, and data centres”.

Metals also delivered strong earnings, supported by high global prices, while software services remained a drag despite foreign-exchange support. “Tier-2 players continued to outperform larger peers,” HSBC said.

In real estate, “conflict-related disruptions led to slower residential launches, while strong consumer spending continued to support mall operators”.

HSBC said FY27 earnings estimates stand at 14.3%, led by financials, particularly PSUs and NBFCs. “We remain neutral on India from a regional perspective,” it said.