Surface Strength, Hidden Strain: Nifty 500’s Q2 profit boom masks fragile underpinnings

State-run oil marketing companies (OMCs) emerged as the biggest contributors in Q2FY26, with Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd, and Indian Oil Corporation together adding Rs15,700 crore to the profit pool — accounting for a quarter of the Rs61,000 crore rise. When Reliance Industries and Oil and Natural Gas Corporation are factored in, the oil and gas segment’s contribution jumps to over 60 percent.

A large part of this performance was due to a low base effect. For instance, Indian Oil Corporation saw a 99 percent earnings collapse in Q2FY25, significantly inflating the YoY comparisons.

The BFSI segment was the next major contributor, accounting for nearly 22 percent of overall profits but showed mixed growth. Public-sector banks outperformed expectations, even as private-sector lenders and NBFCs showed moderation. Over the quarter, housing finance, auto finance, and gold lending firms posted strong numbers, largely driven by robust demand and rising prices.

Moreover, one-off gains masked underlying weakness: Ambuja Cement’s profit was boosted by a tax provision reversal of Rs1,697 crore, while Bharti Airtel’s results were flattered by Rs7,500 crore in foreign exchange gains. Tata Steel also benefitted from cyclical upswing in earnings.

“The majority of the YoY earnings growth was contributed by sectors like OMCs, NBFCs, Telecom, Cement, Auto (ex Tata Motors),” said Sunny Agrawal of SBI Capital Markets. “On the other hand, heavyweight sectors like IT, and Consumer Staples saw muted contribution.”

Cement and Autos: Bright Spots in a Dimming Landscape

Apart from oil and financials, cement companies contributed around 7 percent to profit growth (YoY growth of 20 per cent in sales and 91 percent in net profit), despite challenges from monsoons. Demand held firm especially in the northern, central, and eastern regions, supported by infrastructure spending and stable pricing.

The auto sector contributed roughly 4.5 percent to total profits, supported by export demand, the festive season, and gains from premium launches and electric vehicle adoption. Still, outside of these bright spots, much of the market showed sluggish performance.

Beneath the Headlines: Fragility Surfaces

The broader picture for the Nifty 500 showed profit growth of Rs4.16 lakh crore (up 19 percent YoY), revenue growth of 8 percent, and operating profit growth of 14.11 percent.

Yet independent market expert Ajay Bagga said these numbers obscure more than they reveal: “Excluding oil marketing companies and a few large lenders, profit growth is far more uneven than the headline 19 percent suggests," Bagga observed. “Several domestic cyclicals are losing steam, and export-linked sectors remain weak. Ex-OMCs, earnings growth drops sharply, reflecting margin normalisation and slower volume growth.”

Consumption, in particular, took a hit during the period between the August 15 GST reform announcement and its rollout on September 22 — leading consumers to postpone purchases. “This stalling impacted staples, durables, and auto numbers for the quarter,” Bagga added.

Moneycontrol analysis showed that excluding the oil and BFSI sectors, the remaining 405 companies posted a 17 percent profit growth — the fastest in two quarters — and revenue growth of 11 percent, the strongest in ten quarters. These numbers do not exclude exceptional items. Experts, however said, even this group’s performance highlights selective strength, not broad-based stability.

Growth Momentum Weakens Across Key Sectors

According to Sahil Kapoor of DSP Mutual Fund, the broader market — excluding commodities — is expanding at roughly 10 percent, with trailing P/E multiples near 25x. “Sales growth is in mid-single digits and below nominal GDP, with margins already near record highs. A return to 20 percent profit growth will require stronger revenue momentum,” Kapoor said, noting that IT, pharmaceuticals, and export-linked segments are yet to show consistent high growth.

Sector-specific commentary suggests that industrials, real estate, power, and electrical manufacturing sectors (EMS) are also cooling. IT, FMCG, chemicals, and textiles are weighed down by fragile global demand and pricing pressures.
“Industrials and engineering remain positive but are clearly past peak momentum. Real estate and power stay resilient, but growth has plateaued,” noted an analyst familiar with these markets. “EMS and auto ancillaries show early signs of demand fatigue, while FMCG faces urban sluggishness as margin tailwinds fade.”

Outlook: Uneasy Road Ahead

Experts are cautious about the sustainability of growth across sectors. Bagga was blunt: “A broad-based double-digit recovery still looks a couple of quarters away. FMCG could stabilise first as urban demand gradually improves; IT needs a clearer pickup in US and Europe tech budgets, while exports depend on a stronger global economic cycle.”

With earnings concentrated among a handful of sectors and margin expansion at risk of tapering off, markets may soon shift focus from headline earnings to the breadth and quality of profits — a shift that could have significant implications for valuations in the coming months.