How India Inc's balance sheets are improving, despite moderate revenue growth

First, the good news. In a heartening sign of resilience, India’s top companies posted robust growth in the past financial year after a two-year hiatus, benefiting from benevolent commodity cycles and cost management that helped them navigate otherwise tough market conditions at home and abroad.

Leavening that bit of cheer is a bit of bad news: uncertainty in West Asia despite the end of the US-Iran war. Even the status of Strait of Hormuz, the chokepoint for 60% of world oil trade, is unclear despite the truce.

Acknowledging the multiple clouds hanging over the economy, the Reserve Bank of India on June 5 cut its GDP growth forecast from 6.9% to 6.6% and raised its consumer price index (CPI)-based inflation forecast from 4.8% to 5.1%.

No wonder analysts are cautious. Shreyash Devalkar, Axis Mutual Fund’s Head of Equity, for instance, says future corporate performance will hinge on evolving macroeconomic conditions. “Since the war started, there are changes in macroeconomic parameters and input costs while none of these got reflected in the last results season,” Devalkar says.

The changes he is referring to are currency movements—the rupee has depreciated significantly against the dollar since the US and Israel declared war against Iran at the end of February; India’s rising current account deficit (CAD) and impact on interest rates. Raw material, fuel prices and even packaging costs have risen.

Profits PIP Revenue

To get back to the good news, in FY26, companies posted stronger profitability and improved balance sheets. Data from ACE Equity database shows that Nifty 500 companies posted a combined net profit of Rs 18.2 lakh crore in FY26, a 14% increase over Rs 15.9 lakh crore in FY25.

However, the pace of revenue growth was slow. The combined revenue of Nifty 500 companies increased close to 6% year-on-year (YoY) to Rs 168 lakh crore in FY26.

While top line expansion has slowed, several industries delivered strong profit growth through better cost management, improved commodity cycles and healthier balance sheets. In FY27, corporate earnings are expected to be muted “as higher commodity prices weigh on margins and the demand environment,” says Vikram Chhabra, senior economist at asset management firm 360 ONE Asset. He said one encouraging aspect of FY26 earnings were “green shoots in consumption, which had been lagging for the past few years.”

“Consumption showed durable signs of recovery, with autos, FMCG and several discretionary categories seeing demand pick up through the second half, aided meaningfully by GST (goods and services tax) rationalisation,” he added.

Aditya Khemani, Fund Manager at Invesco MF, says the corporate earnings pace had moderated after strong post-pandemic growth. “Over the last couple of years, corporate India’s earnings growth has slowed. However, within this, there is a noticeable divergence, with large companies experiencing slower earnings growth compared to small-and mid-cap companies. While corporate India remains on a strong footing with healthy balance sheets and robust cash flow profiles, an acceleration in earnings growth from current levels is necessary,” he says.

Transformation

Over the past decade, Indian companies have undergone a significant transformation in scale and profitability. An analysis of 451 companies from the Nifty 500 index that have reported financial data continually for the past 10 years shows their combined revenue increased from Rs 61.7 lakh crore in FY16 to an estimated Rs 164.2 lakh crore in FY26.

While the growth trajectory was disrupted by the pandemic, recovery was swift and broad-based. Revenue expanded sharply by 25% in FY22 and 21% in FY23 as economic activity normalised and demand recovered. Aggregate net profit of Nifty 500 companies rose more than fourfold in FY26 from Rs 4 lakh crore in FY16.

As businesses expanded, their total expenditure increased from Rs 52.8 lakh crore to Rs 136.5 lakh crore over the same period. Employee costs rose from Rs 6 lakh crore to Rs 16.5 lakh crore. The rise in these highlights the growing scale of operations, capacity expansion, workforce additions and higher investments in business growth. Despite these higher costs, companies were able to generate profits at a faster pace.

A key driver of this trend has been a sharp improvement in operating profitability, which jumped 256% between FY16 and FY26. This indicates that companies improved productivity, benefited from operating efficiencies and achieved better cost management as revenue expanded.

Another important factor has been the relatively slower growth in financing costs. While interest expenses increased 164% in the decade, their growth rate remained well below the rise in operating profit.

As a result, the gap between operating earnings and interest obligations widened, strengthening interest coverage ratios and reducing financial stress across corporate balance sheets.

The improvement in profitability is also evident in the sharp rise in taxes paid. Tax expenditure increased from Rs 1.5 lakh crore in FY16 to Rs 5.2 lakh crore in FY26, an increase of 243%. Higher tax payments reflected stronger earnings generation and demonstrated that profit growth had been broad-based and sustainable.

Growing Resilience

Taken together, the data suggests that corporate India’s net profit growth has been driven by a combination of factors: sustained revenue expansion, improved operating margins, better cost management, stronger balance sheets and reduced financing costs relative to earnings.

In FY25, one of the biggest changes in India Inc was a revival in capital expenditure. Whether that has continued can be confirmed only when data for FY26 is available. According to industry data, aggregate capex of Nifty 500 companies increased from Rs 3.91 lakh crore in FY16 to Rs 9.98 lakh crore in FY25. The increase indicates that companies are moving beyond balance sheet repair and focusing on expansion.

Capex growth slowed during FY20 and FY21, partly because of economic uncertainty caused by the pandemic, but investment recovered strongly from FY22 onwards.

Capex increased 17% in FY22, followed by 25% growth in FY23 and nearly 20% in FY24. By FY25, spending reached Rs 9.98 lakh crore, growing 12.4%. Increase in capital spending has been accompanied by higher borrowings. That has come alongside stronger profitability and investment, suggesting firms are using leverage to fund expansion rather than merely support operations.

Market Performance

In FY26, profits of large-cap stocks jumped 12% YoY, while stocks of companies on the Nifty small cap 250 index posted a negligible 2% rise. Nifty midcap 150 stocks delivered robust 42% profit growth in the last financial year.

After the recovery from the pandemic, since FY22, Nifty large-cap 100 stocks have posted a 67% profit surge and Nifty small-caps gained 72%. With a 165% profit gain in the past four years, Nifty mid-cap stocks emerged as outperformers.

The sector-wise distribution of profits of Nifty 500 companies in FY26 shows that among the major sectors, banking had the highest contribution at 23%, making it the dominant individual sector.

The oil and gas sector accounted for 13% of total profits, followed by finance at 11% and IT at 8%. The automotive and power sectors each contributed 5%, representing the smallest shares in the distribution.

Sector-wise, the earnings recovery was uneven. Financials and commodity-linked industries emerged as the biggest contributors. Oil and gas recorded one of the strongest performances, with profit rising 50%. The improvement was supported by better profitability among oil companies.

The strongest growth was posted by iron and steel companies, which saw a 188% surge in PAT. Power companies also reported healthy growth, with profits increasing 18%.

According to a report by Motilal Oswal Financial Services Ltd (MOFSL), the aggregate earnings of companies in the MOFSL Universe, covering 359 businesses across large-cap, mid-cap and small-cap segments, grew 16% year-on-year in the quarter, significantly ahead of the estimated 8% increase.

Recovery, But With Risks

Invesco’s Khemani says an improvement in profits became visible around the December quarter. “In fact, several high-frequency indicators, such as credit growth, suggest that economic activity strengthened in the March quarter,” he says. “It is also important to note that commodity prices spiked during March due to the ongoing West Asia crisis. As a result, a clear theme in the March quarter was that commodity producers outperformed commodity consumers.”

The broader picture suggests Indian firms have entered a stronger but more selective growth phase, dependent more on sector-specific drivers. Financials, metals, power, manufacturing and some others remain key earnings drivers while consumer and technology firms face a challenging environment.

The rising capex cycle indicates confidence among companies, but geopolitical uncertainties, commodity prices, and global demand remain important factors.

Any resolution of the conflict in West Asia could lead to a sharp decline in commodity prices, especially crude oil, with a positive impact on the economy, Khemani says.

He has a word of caution for investors: “It is important to remember that the global environment is far more volatile than in the past. Therefore, investors should maintain a minimum investment horizon of four to five years when participating in equity markets.”

@PrinceInMedia