It is that time of the year in India when sunny, blue skies give way to dark, rain-bearing clouds. And while this nimbus formation is good for the country, where agriculture and rural consumption are heavily dependent on a good monsoon, it also makes for gloomy weather.

The financial performance of India Inc. in the quarter ended March 31, 2018 makes for a similar picture. With the after-effects of demonetization receding and demand picking up, the sales figures reported by several companies, especially those that are consumption-led, have seen healthy growth. But each sector has its own tale to tell when it comes to challenges to profitability.

While stressed assets continued to affect profitability in the banking sector, rising inputs costs on account of soaring prices of crude oil and other commodities ate into the bottomline of several manufacturing enterprises. Brent crude prices rose to a three-and-a-half-year high of around $80 per barrel in May. However, ahead of an impending OPEC meeting, which is expected to decide on increasing crude oil supply, prices have corrected and stood at around $74 on Monday.

A research report dated June 8 by analysts Dhirendra Tiwari and Dippojal Saha of Antique Stock Broking says that the aggregate net profit of the companies in its coverage universe, in the last quarter of fiscal 2018, was down 20% year-on-year, “largely driven by PSU (public sector) banks” even as the combined sales of these companies rose 15.6% in the same period.

Excluding public sector banks, however, bottomline growth was 7.5%, which the Antique report calls “decent, if not spectacular”. Truth be told, a 7.5% profitability growth is disappointing as it comes on a low base, on account of the effects of demonetisation in the comparable quarter last fiscal. But at least earnings have grown, optimists would say.

For the Nifty companies (50 of them), sales grew by 13.6% year-on-year, while profit after tax declined 7.5%. The main sectoral drivers of profitability among the Nifty companies were building materials, private banks and consumer goods; while companies in sectors such as healthcare, public sector banks and telecom were laggards.

The silver lining for those watching the Indian economy is that there has been a demand-led uptick in topline for several companies, which will be an encouraging trend if it sustains. “Overall demand commentary was positive with consumer companies indicating a demand pick-up especially in rural India. In fact, rural demand, as per a few managements, has slightly outpaced urban growth,” the Antique report says. “Auto demand also remained buoyant while cement companies reported a 15% year-on-year jump in volumes with industry participants indicating a sustained pickup in demand growth driven by affordable and rural housing segments.”

Majority of India Inc.’s profitability challenge appears to be on account of public sector banks. While private sector banks that have a larger focus on retail lending continued to do well in the January-March 2018 quarter, those that have a greater exposure to corporate lending were impacted. While loan and earnings growth for retail-focused banks increased 20% year-on-year in the March 2018 quarter, the slippage ratio on account of corporate loans increased to 11% from 3% in the October-December 2017 quarter.

The telecom sector, which has listed firms such as Bharti Airtel, Idea Cellular and Reliance Communications, continued to remain challenged due to the tariff war continuing in the industry, primarily led by latest entrant Reliance Jio Infocomm, which has shaken up the market with cheap voice and data services, forcing incumbents to respond in kind.

How the future earnings of Indian companies shape up in the current financial year 2018-19 will depend on a number of factors. “Demand sustenance (once the base effect tailwind fades), rising input prices, higher interest rates and slippages/recovery trends in corporate banks will define FY19 earnings trajectory in our view,” say analysts Prateek Parekh, Aditya Narain and Akshay Gattani of Edelweiss Securities in a research note dated June 6.

Most importantly, 2018-19 is the last financial year before the country sees its next general elections, with the current Narendra Modi-led government completing its tenure by May 2019. While this may mean that the government would continue spending on social welfare schemes, putting more money in the hands of those at the bottom of the pyramid, and thereby spur demand, it could also translate into a populist stance of easing the pace of policy reforms.

For now, the dark clouds are welcome as, first and foremost, India hopes for a good monsoon, which never fails to lift economic sentiments.

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