India Inc’s price dilemma

By K Ravichandran

For India Inc, the challenge in FY27 may not simply be higher input costs, but how much of those costs can be passed on without weakening demand. Companies are entering a period in which price increases can protect margins and revenues but also put pressure on volumes. The result could be a widening divergence between headline revenue growth and the underlying quality of corporate earnings.

The Q1 results offered a glimpse of this. India Inc’s revenues grew by 21.3% year-on-year (y-o-y), supported by commodity- and bullion-price-led value inflation and volume growth in select sectors. However, operating profit margins contracted by 171 basis points (bps). Excluding oil and gas, aggregate operating margins were more resilient, improving marginally to 18.1% from 17.9% a year earlier.

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Revenue growth is expected to remain healthy at around 13-15% in Q2 FY27, although moderating from the unusually strong performance in Q1. Cost inflation-led growth is likely to sustain, but volumetric consumption growth could moderate as companies raise prices to offset higher raw material, energy, labour, and freight costs.

Operating profit margins could contract by 100-150 bps y-o-y in Q2 FY27, as elevated input costs continue to weigh on profitability. While external uncertainties persist, attention has increasingly shifted to emerging domestic risks. El Niño has added a fresh layer of uncertainty to India’s macroeconomic outlook, mainly through its implications for the southwest monsoon. A subpar monsoon could disrupt rural demand, impacting FMCG companies’ revenues, and its impact could extend beyond the farm sector. Deficient rainfall can push up food inflation even as it compresses rural incomes, both of which directly influence consumption demand. Other sectors with significant rural exposure, including tractors, two-wheelers, and fertilisers, may face volume pressures. Weaker farm cash flows could also result in subdued credit demand and increased stress in agricultural and microfinance portfolios.

This makes the ability of companies to pass on higher costs increasingly important. Pricing actions can provide some protection to margins, but the benefits may come with a lag. For consumption-oriented sectors, an abrupt increase in prices could hit demand and competitive positioning. Cost optimisation, productivity improvements, and operating efficiencies could consequently become as important as pricing power in determining profitability.

Oil refining companies are likely to continue facing pressure from under-recoveries on petroleum products and thinner marketing margins. Aviation, automobiles, FMCG, cement, and other energy-intensive sectors are also exposed to higher crude oil and derivative prices, palm oil, coal, and other inputs, as well as the consequent rise in freight and packaging costs.

For some sectors, however, the ability to raise prices could provide a partial cushion. FMCG companies, for instance, are seeing healthy volume growth, supported by improving domestic consumption, but higher logistics and packaging costs, along with more expensive imported inputs like palm oil, are expected to weigh on margins. Price revisions could partly offset this pressure, although companies may have to stagger such increases to avoid affecting demand and competitive positioning.

The automobile sector presents a similar balancing act. Demand has benefitted from GST reforms and new model launches, but the high base, a potentially weak monsoon, and higher fuel prices could moderate growth. A sustained rise in petrol and diesel prices could weigh heavily on price-sensitive two-wheeler and entry-level passenger-vehicle segments, while higher logistics costs could put pressure on OEMs and auto-component margins.

Some sectors are better positioned to withstand the margin pressure. Metals and mining firms are supported by favourable commodity realisations, while upstream oil producers benefit from higher crude prices. Telecom operators and select utilities are also relatively better placed, supported by operating leverage or cost-pass-through mechanisms. Export-oriented sectors like textiles and auto components could benefit from better realisations arising from rupee depreciation, although their performance will remain contingent on global demand. Some export-oriented firms are likely to see a one-time earnings support in Q2 FY27 from refunds of US tariffs paid earlier.

While domestic consumption-oriented sectors like automobiles, retail, consumer durables, and hospitality are expected to remain better placed, persistent weakness in global demand and the transformation of the technology sector could weigh on export-oriented businesses.

Domestic demand itself can’t be taken for granted. Retail inflation is also expected to edge higher over the next few quarters, potentially constraining discretionary spending, making it harder for firms to rely entirely on price increases to protect margins. Over the past few years, corporate balance sheets have been deleveraged, providing a cushion against cyclical fluctuations in demand. The financial sector’s strength, with comfortable asset quality and capitalisation levels, should also provide the capacity to absorb stress while supporting credit growth.