ICRA estimates that interest coverage ratios will decline to 4.8-5.0 times in Q1 FY27 from 5.8 times in the previous quarter

India Inc. is likely to face mounting earnings pressure in the first quarter of FY27 as geopolitical tensions in West Asia, elevated crude oil prices, rupee depreciation and the possibility of El Niño conditions weigh on both demand and profitability, according to rating agency ICRA.

The agency expects corporate revenue growth to moderate to the mid-to-high single digits in Q1 FY27, significantly lower than the 13.2 per cent year-on-year growth reported in the March quarter. Operating profit margins are projected to contract by 100-150 basis points as companies grapple with higher fuel, logistics, packaging and imported input costs.

Earnings Pressure

ICRA said companies are likely to find it difficult to fully pass on rising costs to consumers. While price increases remain an option, abrupt hikes could hurt demand and weaken competitive positioning, resulting in margin pressure across several sectors.

The pressure on earnings is expected to spill over into corporate credit metrics. ICRA estimates that interest coverage ratios will decline to 4.8-5.0 times in Q1 FY27 from 5.8 times in the previous quarter, despite stable leverage and funding costs, signalling a weaker profitability environment.

Demand Risks Grow

The rating agency identified the ongoing West Asia conflict and emerging El Niño conditions as the biggest near-term risks for corporate India. According to ICRA, the conflict could disrupt global trade flows, increase logistics costs and weaken demand in key export markets. The fallout may also extend to travel and tourism-linked sectors such as aviation and hotels, as well as LPG-dependent industries, including ceramic tiles and quick-service restaurants.

Meanwhile, expectations of a below-normal monsoon could hurt rural demand across sectors such as FMCG, two-wheelers, tractors and agrochemicals. These segments had posted healthy growth in the March quarter but now face downside risks.

“Domestic demand conditions have become more nuanced in Q1 2026-27, with below-normal monsoon expectations posing downside risks to demand across rural-linked segments such as FMCG, two-wheelers, tractors and agrochemicals,” said Kinjal Shah, Senior Vice President and Co-Group Head, Corporate Ratings, ICRA.

Inflationary Pressure Builds

ICRA warned that the combination of higher crude oil prices and rupee depreciation could fuel inflationary pressures and constrain consumption-led sectors.

The agency also noted that hardening bond yields and a potential increase in banks’ lending rates could raise borrowing costs even if the RBI keeps policy rates unchanged. Import-dependent industries are likely to face the sharpest impact from rising input costs.

Winners and Losers

The impact of the current environment is expected to vary sharply across sectors. Export-oriented industries such as IT services and specialty chemicals could benefit from translation gains arising from a weaker rupee despite facing soft underlying demand. The domestic paper industry may also gain as a weaker rupee reduces import competition.

Conversely, import-dependent sectors including aviation, FMCG and oil marketing companies are likely to face margin pressure from higher fuel and input costs with limited ability to pass on increases to consumers.

ICRA noted that aviation companies faced significant pressure in the March quarter because of elevated aviation turbine fuel prices and softer demand conditions. Oil refining and marketing companies, however, benefitted from strong refining spreads and inventory gains.

Despite the challenging backdrop, ICRA said private investment activity remains healthy in select sectors. Manufacturing segments such as defence, electronics manufacturing, electric mobility and other production-linked incentive-supported industries continue to attract investments alongside power equipment, real estate and data centres. These sectors could provide support to industrial activity even as consumption slows.

Supply Chains Stable

The agency also pointed to signs of resilience in corporate balance sheets and supply chains. Inventory days for a sample of more than 2,000 manufacturing companies stood at 57 days as of March 31, 2026, compared with 56 days a year earlier, indicating that geopolitical disruptions have not yet materially affected working capital cycles across the broader corporate sector.

Looking ahead, ICRA said the sustainability of India Inc.’s credit profile will depend on how effectively companies and policymakers navigate geopolitical uncertainty, commodity price volatility and evolving global trade dynamic.

Published on June 18, 2026