Q3 earnings: Profit growth holds, but cracks are showing

Year-on-year revenue growth sharply decelerated to 4.4% in Q3, down from 7.3% and 9.1% in the previous two quarters. In contrast, net profits for the sample surged 12.4%, outpacing the 8.7% growth seen in the preceding quarter, widening the disconnect between topline and bottomline performance.

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This growing gap between sluggish revenue and rising profitability raises concerns about whether the current profit momentum is sustainable.

Despite subdued revenue growth, companies improved profitability through favourable input costs and disciplined cost management. Raw material expenses as a share of revenue dropped to 37%—the lowest in six quarters—down from 38.2% in the previous quarter. While this provided some relief, employee costs remained steady.

A breakdown of expenses shows that raw material costs remained benign in Q3, rising just 1% year-on-year, compared to an 8% and 6% increase in Q1 and Q2, respectively.

However, for profit growth to be sustainable, companies will need to strengthen their topline.

“Such favourable input cost dynamics cannot last indefinitely," warned Feroze Azeez, deputy chief executive officer, Anand Rathi Wealth. “At some point, global commodity prices will turn, or wage pressures will rise, putting renewed pressure on corporate margins."

Divergent trend

While large and mid-sized companies experienced subdued revenue growth but strong profit gains, small- and micro-sized firms saw the opposite—their revenue inched up, but profits shrank significantly.

Mid-sized companies ( ₹1,000-10,000 crore revenue) posted a robust 26% year-on-year profit growth, while large firms (revenue above ₹10,000 crore) saw an 11% increase. In contrast, small companies (revenue below ₹1,000 crore) faced steep profit declines.

However, rising US protectionism introduces fresh uncertainties, particularly for large firms, that could reshape this growth trajectory in the coming quarters.

“We think that large-caps are more vulnerable to tariff-related disruptions, while mid-caps could see a cost advantage—a divergence that could shape market dynamics in the coming quarters," Azeez said. 

Going forward, the mid-sized companies, which carried the torch in Q3, may continue to be on a strong footing, while large companies are expected to come under pressure.

Sectoral show

A sector-wise analysis revealed stark differences in profit performance. Of the 19 broad sectors analysed by Mint, 10 reported strong profit growth of over 10%, while four saw sharp declines.

Agriculture and allied industries led the pack with nearly 76% profit growth, signalling a revival in rural economic activity and demand. Infrastructure and engineering followed, posting over 50% growth.

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On the other hand, textiles suffered the steepest decline, with profits plunging nearly 79%, while oil and gas (down 11.8%), auto and ancillaries (down 11.3%), and metals and mining (down 2.7%) also faced pressure.

The sectoral divide also underscored a widening gap in topline growth between manufacturing and services.

Madan Sabnavis, chief economist at Bank of Baroda, noted that the services sector—excluding banking, financial services, and insurance—outperformed manufacturing.

Margins mirage

Margin pressures eased further in Q3, with both net profit and operating profit increasing as a share of revenue. Operating profit margins rose to 30.6%, up from 28.7% a year ago, while net profit margins improved 75 basis points to 10.6%.

However, this growth remains on shaky ground, as profit expansion continues to outpace subdued revenue growth.

“Companies can only squeeze efficiencies so much before they hit diminishing returns," said Azeez. “Unless demand recovers meaningfully, corporates will eventually face a ceiling on profit expansion."

Despite a challenging backdrop, revenue-profit dynamics could improve as consumption demand gains traction in the coming quarters, boosted by significant tax cuts announced in the Union Budget.

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Sabnavis expects the revenue-profit gap to narrow as turnover picks up but foresees a K-shaped recovery, with improvements varying sharply across sectors.