Moneycontrol Pro Panorama | Two hits and one miss for investors

A sizeable reduction in profit margins in Q1 and cut in profitability guidance came as a negative surprise for investors.

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Investors have been presented with both good and bad news today. On the positive side, retail inflation declined to its lowest level in more than six years in June, reflecting deceleration in food and wholesale prices.

The cooling of prices provides ample room for the Reserve Bank of India to lower its policy rate, says Suvodeep Rakshit, chief economist at Kotak Institutional Equities. Still, it may not be easy for the central bank to decide on cutting interest rates. Dinesh Unnikrishnan explains here why the Reserve Bank of India’s Monetary Policy Committee faces a policy dilemma.

The second set of positive news comes from Rallis India, a seller of seeds and crop protection in India and abroad. The early onset of the monsoon rains helped the company report good growth. Volumes grew at a healthy pace and the company is also seeing signs of recovery in export demand.

The company's results and management commentary indicate a good beginning to the kharif crop season for agriculture inputs providers. Readers may recall that the industry growth in the last two fiscal years is constrained by weak export demand and headwinds in the domestic market.

Rallis is up 4 percent in Tuesday's afternoon trade. Shares of other crop protection product makers UPL, PI Industries, Dhanuka Agritech and Bayer Cropscience are also trading with gains.

“We remain cautiously optimistic for the quarter ahead,” Gyanendra Shukla, managing director and chief executive officer of Rallis, said in a statement. The key now is the sales of products placed by the company with dealers and retailers in the market.

On the other hand, the negative set of news stems from the results of HCL Technologies. The stock dropped after the company cut its profitability outlook for FY26. Compared to Tata Consultancy Services (TCS), which alluded to demand contraction in Q1 FY26, HCL increased the lower end of its revenue growth guidance for FY26.

However, a sizeable reduction in profit margins in Q1 and cut in profitability guidance came as a negative surprise for investors. Excess capacity, lower employee utilisation, slow ramp-up of a large deal, client bankruptcy, higher expenses and new investments adversely impacted HCL’s margins. Read our Research Team’s analysis of HCL results here.

In a healthy demand environment, companies generally overcome these kinds of business headwinds. However, in a soft demand environment like the current one, companies find it difficult to insulate their profit margins from cost pressures. HCL expects some of the profitability headwinds to persist in Q2 and lowered its profitability guidance for FY26.

Pertinently, HCL’s results underline the IT services industry’s challenges on the cost and profitability front. Note that TCS’s profit margins declined on a year-on-year basis despite a delay in wage hikes and improvement in revenue mix.

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