India Inc is set to sustain healthy year-on-year (Y-o-Y) revenue growth of 8–10 per cent in Q3 FY2026 (vis-à-vis 9.2 per cent Y-o-Y in Q2 FY2026), led by firm rural demand and expectations of a revival in urban demand, rating agency ICRA said on Tuesday.

Coupled with the softening input costs like crude oil and coal, the rating agency projects an improvement in the operating profit margin (OPM) by 50–100 bps on a Y-o-Y basis.

What factors are expected to support consumption and margins?

  Kinjal Shah, senior vice president and co-group head, corporate ratings, ICRA, said, “Domestic rural demand remains resilient and tailwinds like GST rate rationalisation, income tax relief announced during the Union Budget 2025, 100 bps interest rate cut by the Reserve Bank of India between February 2025 and November 2025 (leading to lower borrowing costs) and easing food inflation are expected to boost urban consumption.”

That said, the ongoing geopolitical tensions and steep US tariffs continue to impact demand sentiments, especially for export-oriented sectors such as agrochemicals, textiles, auto and auto components, seafoods, cut and polished diamonds and IT services.

How did India Inc. perform in Q2 FY2026? 

ICRA’s assessment of 2,966 listed companies (excluding financial sector entities) for Q2 FY2026 showed 9.2 per cent Y-o-Y revenue growth, driven by strong demand in consumption-oriented sectors such as retail, hotels and automobiles, as well as infrastructure-linked sectors including capital goods and cement. However, a seasonal slowdown in the oil and gas, airlines and power sectors, along with deferred purchases in consumer durables and FMCG amid GST rate rationalisation expectations, resulted in a sequential revenue growth of just 2.5 per cent.

Growth challenges persisted for IT services companies in constant currency terms due to cautious spending by US clients amid global uncertainty. An unusually prolonged monsoon further moderated Q2 FY2026 revenue growth across several sectors. Demand for air conditioners, beer and value-added dairy products weakened as a shorter summer affected consumption. Agrochemical companies faced reduced offtake due to fewer spraying opportunities, and even hospitals in some regions reported cancellations of planned surgeries, highlighting the widespread disruptions caused by extended rains.

How have US tariffs affected key export sectors?

  On the export front, US tariffs significantly influenced performance. Auto component exporters witnessed a decline in volume offtake from US auto OEMs during Q2 FY2026, as tariffs constrained production and sales in the American market — although Indian exporters largely avoided tariff-driven pricing pressure. In contrast, textile exporters — including home textiles and apparel — absorbed part of the tariff impact to protect market share, resulting in margin compression.

Urban demand has remained subdued over the past 18–20 months; however, a shift in product mix and signs of premiumisation across categories have supported headline revenue growth despite soft volume trends. Organised players in hospitality, healthcare and gold jewellery retail continue to expand their footprint through acquisitions and commercial arrangements, further aiding revenue momentum.

What do the Q2 FY2026 margin trends indicate?

  Corporate India reported a 140 bps Y-o-Y rise in OPM to 16.1 per cent in Q2 FY2026. Margin expansion in telecom, cement and oil and gas was supported by stronger demand and improved realisations. This was partially offset by margin pressures in fertilisers, construction and retail segments due to weaker realisations and elevated input costs. Sequentially, OPM remained largely flat, largely due to lower profitability in sectors such as retail, hotels, metals and mining, cement and airlines — a trend driven primarily by seasonal factors.

ICRA noted that the interest coverage ratio — adjusted for sectors with relatively low debt (IT, FMCG and pharma) — improved to 5.0 times in Q2 FY2026, compared with 4.1 times in Q2 FY2025. Growth in operating profits outpaced the rise in interest expenses linked to higher working capital and capital expenditure needs.

What is ICRA’s outlook on investment and capex cycles? 

Looking ahead, ICRA expects the private capex cycle to remain measured due to global uncertainty and tariff-related concerns. However, sectors such as electronics, semiconductors, data centres and select automotive segments, including electric vehicles, are likely to continue scaling up investments. Government capital expenditure is also expected to support overall investment activity, though the growth potential may moderate in H2 FY2026 following significant front-loading in H1 FY2026.