Q2 earnings could remain subdued despite GST rate cut buzz; here's why

As Indian markets are navigating through volatility led by tariffs and GST rate cut buzz, investors and analysts are sounding cautious about Q2FY26 earnings. The Q1FY26 earnings season posted muted earnings with single-digit top-line growth across the board from NIFTY50 to NIFTY smallcap 100 companies. Investors, analysts and management remained positive about recovery in Q2FY26 earnings. However, the GST rate rationalisation news has led to a new worry for companies, with the possibility of another quarter.

Here’s why

Automobile industry prepares for dull festive season

The Q2 and Q3 are usually the best quarters for the automotive industry, as festive demand aids strong sales for all types of vehicles. The announcement of the GST rate cut or rationalisation is welcome; however, a delay in the implementation of the new policy rates could impact the festive season this year. FADA, the industry body of automobile dealers in India, said, they are observing the trend of postponement in purchases due to the policy shift. Buyers are enquiring about the new rates post the rate cut, and postponing the purchases. According to SIAM, the July passenger vehicle sales declined 2.5% YOY to 3.4 lakh units. Analysts suggest, the delay in purchases could impact the earnings of automobile companies adversely.

The consumer electronics sector witnesses a similar trend

Apart from the automobile industry, consumer durable goods like white goods and electronic equipment manufacturers are also witnessing a similar trend. Consumer electronics items are expected to see big benefits from the rate revision, which is prompting buyers to delay their purchases. Analysts expect distributors to brace for the first impact of the delay in purchases as they hold high inventory ahead of the festive season. Management executives at White goods manufacturers like AC, refrigerator manufacturers, suggest weak offtake in a generally good festive season.

Operating margin impact due to inventory losses

Apart from the delay in purchase, retailers and distributors are likely to face inventory losses as they face challenges in clearing the existing inventory. The challenge in clearing the inventory post the rate rationalisation could face margin contraction due to its higher cost of acquisition. Although there is no clarity on how the government is planning to compensate for the inventory losses.

Tariff impact

The US president announced an additional 25% tariff on India, effective from Aug 27 on Monday. Tariffs are now officially effective, and Industry leaders now wait for the Government of India’s response to navigate through the challenges. The textile sector is expected to be the major adversary in the tariff event. Market analysts estimate earnings could see a $1.5 billion impact in revenue from exports, from the total $10.5 billion textile exports. In addition, pharmaceutical companies also witness earnings pressure due to tariffs. The Q2FY26 earnings may not show the entire picture of the tariff impact on earnings. However, subsequent quarters may see increased impact.

In summary, the Q1FY26 earnings season highlighted the slowdown in the economy, with an expectation of recovery in Q2. However, with a temporary blip due to the postponement of purchases, amid GST could lead to another weak quarter. However, the subsequent quarters may see a sharp recovery depending on the magnitude of the GST reforms.