India Inc Remains Cautious on Capex Despite 8-10% Revenue Growth in December Quarter

India Inc is expected to maintain a cautious approach towards investments, despite steady revenue growth in the December quarter, according to a domestic credit rating agency. Icra predicts an 8-10% revenue increase for Q3 FY26, aligning closely with the 9.2% year-on-year rise seen in the September quarter. However, this positive performance may not necessarily lead to a surge in private capital expenditure.

The operating profit margin (OPM) is anticipated to improve due to softening commodity prices and upbeat demand expectations compared to the previous year. Despite this, the uncertain global environment and tariff-related issues are likely to keep private capex restrained. Certain sectors like electronics, semiconductors, data centres, and niche automotive segments such as electric vehicles are expected to continue receiving investment.

Investment Trends and Economic Factors

Government capital expenditure is projected to bolster overall investment activity in the economy. However, the potential for investment growth might be lower in H2 FY26 following the upfronting observed in H1. The US tariffs have adversely affected the textile sector, with companies opting to absorb the impact rather than passing it on to customers, leading to reduced profitability.

Festive demand and GST rationalisation are likely drivers of healthy revenue growth in the December quarter. Domestic rural demand remains strong, supported by factors such as GST rate adjustments, income tax relief from the Union Budget 2025, and a 1% interest rate cut by the Reserve Bank of India between February and November 2025. These measures are expected to enhance urban consumption.

Challenges in Export-Oriented Sectors

Geopolitical tensions and high US tariffs continue to affect demand sentiments, particularly for export-oriented sectors like agro-chemicals, textiles, auto components, seafoods, cut and polished diamonds, and IT services. Kinjal Shah, co-group head for corporate ratings at Icra, highlighted these ongoing challenges impacting various industries.

In Q2 FY26, several sectors experienced a seasonal slowdown in demand. The oil and gas, airlines, and power sectors saw reduced activity. Additionally, consumer durables and FMCG sectors faced deferred purchases amid expectations of GST rate changes. This resulted in a sequential revenue growth of only 2.5%.

Sector-Specific Impacts

IT services companies encountered growth challenges in constant currency terms due to cautious spending by US clients amidst global uncertainties during the quarter. The prolonged monsoon this year also negatively affected year-on-year revenue growth across sectors like air conditioners, beer, and value-added dairy products.

The agency noted that while certain sectors will continue to attract investments, overall private capex is expected to remain measured due to global uncertainties and tariff-related ambiguities. Government spending will play a crucial role in sustaining investment activities within the economy.

With inputs from PTI