Defensive Sectors To Drive India Inc Earnings Rebound In Q2
India’s corporate earnings are expected to rise in the September quarter of FY26, with defensive sectors such as oil and gas, telecom, cement, healthcare and capital goods leading growth, even as private banks and financials drag performance, Motilal Oswal Financial Services (MOFSL) said in its India Strategy report for 2QFY26.The brokerage forecasts aggregate profit after tax (PAT) for the MOFSL universe to grow 9 per cent year-on-year, while Nifty-50 earnings are expected to rise 6 per cent. Excluding financials, PAT growth is expected to accelerate to 16 per cent for the MOFSL universe and 10 per cent for Nifty.
Earnings growth in the quarter will be anchored by oil and gas (up 25 per cent), NBFC lending (up 21 per cent), telecom (profit loss), metals (up 10 per cent), technology (up 6 per cent), cement (up 62 per cent), capital goods (up 14 per cent), and healthcare (up 10 per cent). These eight sectors are expected to contribute 95 per cent of the incremental year-on-year earnings growth for the quarter.
Conversely, both private and public sector banks are likely to post a 7 per cent earnings decline, marking the second straight quarter of weak performance from private lenders since the pandemic. This will weigh on overall financial sector profits, which are expected to dip 1 per cent year-on-year despite robust NBFC performance.
Who Will Lead The Change?
“O&G is likely to lead the charge; excluding financials, profits are anticipated to grow 16 per cent YoY and 10 per cent YoY for the MOFSL Universe and Nifty, respectively,” the brokerage said. Oil marketing companies are expected to deliver their second consecutive quarter of growth after five straight quarters of decline. Their earnings are forecast to rise 25 per cent year-on-year, providing a major cushion to overall corporate profitability.
Telecom operators are also expected to swing to profits of Rs 23 billion in 2QFY26, compared with a Rs 15 billion loss a year earlier. The improvement is attributed largely to sustained margin expansion at Bharti Airtel. The cement sector is projected to deliver a 62 per cent surge in earnings, rebounding from a weak base of a 48 per cent decline in 2QFY25. This will mark the second straight quarter of positive growth after four quarters of steep earnings contraction.
Healthcare companies are set to post 10 per cent earnings growth, the slowest in eight quarters, after six straight quarters of 15 per cent-plus expansion. Meanwhile, capital goods firms are expected to record healthy 14 per cent earnings growth, supported by continued strength in infrastructure and manufacturing activity in select pockets.
The report estimates PAT growth of 7 per cent for large-caps, 23 per cent for mid-caps and 14 per cent for small-caps. Mid-cap companies are expected to post 6 per cent sales growth and 13 per cent EBITDA growth, outpacing larger peers.
Sales and EBITDA for the MOFSL universe are likely to rise 6 per cent and 8 per cent year-on-year, respectively. Excluding commodities, EBITDA is projected to grow 5 per cent for the MOFSL universe and 6 per cent for Nifty.
Financials are set to retain over one-third of total corporate profits, but their share has been steadily slipping from a peak of 40 per cent in September 2024. Oil and gas’ profit contribution is expected to rise sequentially to its highest in six quarters.
“Defensives are poised to aid earnings growth in 2QFY26, led by oil and gas, healthcare and telecom, while financials will weigh on the aggregate,” MOFSL said.
Earnings Downgrades And India
The brokerage noted that BFSI’s profit contribution has declined to around 37 per cent, while defensives have gained share. This reflects both the cyclical slowdown in bank earnings and the resilience of sectors less exposed to geopolitical and tariff headwinds.
Earnings downgrades have moderated, with Nifty EPS estimates cut by just 1.1 per cent for FY26 and 1.7 per cent for FY27. MOFSL now expects Nifty EPS to grow 8 per cent in FY26 and 16 per cent in FY27 to Rs 1,096 and Rs 1,274, respectively. The brokerage expects the earnings cycle to bottom out in 2QFY26, with quarterly PAT growth accelerating to 12 per cent in both 3Q and 4QFY26. Annual PAT growth is forecast at 11 per cent for FY26 and 14 per cent for FY27.
Valuations remain reasonable, with Nifty trading at 20.6 times 12-month forward earnings, in line with long-period averages. MOFSL expects improving earnings growth and a domestic policy push — including GST2.0 reforms and monetary easing — to support valuations.
The earnings recovery is unfolding against a supportive macroeconomic backdrop. The Reserve Bank of India has cut the repo rate by 100 basis points to 5.5 per cent and lowered the CRR by 150 basis points, aided by benign inflation of 2.1 per cent. Liquidity has moved from deficit to surplus, improving credit flow.
Meanwhile, the government has pushed through GST2.0 reforms and is preparing further factor market, judicial and ease-of-doing-business reforms to boost long-term growth potential.
Despite external headwinds, including punitive US tariffs, a kinetic war and foreign portfolio outflows of USD 9 billion between July and September 2025, domestic institutional inflows have remained strong, helping markets stay resilient.
Indian equities have underperformed global peers over the past year, with Nifty-50 down 6 per cent from its September 2024 highs in USD terms, compared with double-digit gains in South Korea, Brazil and Germany. However, MOFSL believes the stage is set for a mean reversion, driven by improving earnings, policy momentum and a likely rotation of foreign capital back into India.
“Given India’s sharp underperformance, combined with the tailwinds of improving earnings and a policy overdrive, we expect a rotation of FII capital back into India,” the report said.
MOFSL’s model portfolio is tilted towards domestic cyclicals and defensives, with overweight positions in autos, industrials, healthcare and consumer discretionary, and underweight positions in oil and gas, cement and metals.
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