More companies slipped into losses in the March quarter (Q4FY26) despite a broader recovery in revenues, as rising input costs hit smaller firms with limited pricing power and weaker balance sheets. Analysts warn the deterioration could intensify in the coming quarters as rising crude oil prices begin to fully impact India Inc’s bottom lines.
A Mint analysis of 1,572 companies’ standalone earnings revealed India Inc’s raw material cost rose 12% year-on-year in Q4, marking the sharpest increase in at least three years. Sequentially, it rose 10%, though the immediate impact was largely limited to logistics and packaging, as most companies continued to benefit from lower-cost inventories built before the crude oil spike in March.
Pricing pressure
As a result, 136 companies slipped into losses in Q4 from being profitable in Q3. In comparison, only 83 companies reported negative earnings turnarounds between Q3 and Q2, the analysis showed.
The deterioration was also concentrated among smaller firms. Nearly 90% of companies reporting negative turnarounds had revenues below ₹500 crore, with three out of five of them being operationally loss-making, indicating that the losses stemmed from weakening fundamentals.
“The companies slipping into losses were disproportionately smaller, operationally leveraged businesses where neither demand recovery nor cost containment was sufficient to offset the twin pressure (of rising input costs and stalling margins),” Kush Gupta, director at SKG Investment & Advisory, a PMS firm.
This suggests that while demand conditions stabilized in Q4, rising input costs eroded profitability underneath, particularly for smaller players. Gupta argues that while larger companies retained some pricing flexibility, smaller firms lacked the ability to pass on higher costs to protect margins.
In fact, nearly 63% of medium- and large-sized companies that experienced a profit reversal in Q4 were affected by exceptional one-off charges rather than by weakening operating performance, the analysis showed.
Nonetheless, nearly 20% of the sample companies reported losses in Q4, up from an average of 18% over the preceding three quarters. With margin pressures only beginning to emerge, experts believe losses could rise further in the coming quarters.
Gupta further noted that Q4 effectively captured past inventory prices while future purchase orders are being written at significantly higher crude-linked costs. “The full mark-to-market impact begins arriving in Q1FY27,” he said.
Underestimated risks
Analysts said the margin squeeze is likely to be most visible among consumer companies, commodity manufacturers, micro, small and medium (MSME) linked industrials, and lower-tier lenders, as they struggle to pass on rising costs.
In fact, the negative turnarounds in Q4 were concentrated among smaller financial services firms, followed by textiles, pharmaceuticals and traditional capital goods companies.
SKG Investment’s Gupta noted that small-cap fast-moving consumer goods (FMCG) companies are also vulnerable because they face simultaneous pressure from rural demand uncertainty and crude-linked packaging inflation, while lacking the balance-sheet strength of larger peers.
Industrials and capital goods companies, too, face rising execution risks as skilled labour shortages rise, working capital cycles tighten, and receivable delays increase amid tighter liquidity conditions, Rishabh Nahar, partner and fund manager of Qode Advisor, a PMS firm, said. “The order book narrative is real, and I do not dismiss it. But execution risk is systematically underweighted,” he added.
He further warned that the broader market may still be underestimating the fragility underneath the earnings recovery.
“The Street is building FY27 expectations on a return to FY24-style margins that were aided by falling commodity prices and post-pandemic operating leverage,” Nahar said. “If input costs remain elevated and pricing power weakens, earnings growth could become far narrower and more concentrated than consensus currently expects.”
That could leave India Inc facing a more difficult phase in FY27, as rising costs and slowing demand squeeze profitability simultaneously, particularly outside the large-cap universe.