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ARTHA

Outlook: Rising Uncertainty A key risk has emerged from the escalation of the West

Ahead Asia conflict towards the end of Q4FY26. Its impact
extends beyond supply-side disruptions through higher
energy and input costs to include demand-side pressures
Resilient demand, improving revenue momentum, and
stable margins in Q3FY26 enabled Indian corporates to in export-linked sectors and significant logistics
enter the final quarter of FY 2025-26 from a position of challenges due to the rerouting of key shipping channels.
relative strength. However, this resilience is now coming This has led to elevated freight costs, longer transit times,
under increasing pressure from both the external and increased uncertainty in supply chains. As a result,
environment and evolving domestic cost dynamics. cost pressures are becoming more broad-based,
particularly for energy-intensive and globally integrated
Early trends in Q4FY26 suggest that demand conditions sectors.
have largely remained stable but are becoming
increasingly uneven across sectors. While domestic In this context, it remains uncertain whether the buffers
demand, particularly in consumption- and services-led built up in Q3FY26 will be sufficient to absorb these
segments, has remained steady, export-oriented sectors pressures. With global uncertainties and domestic cost
show signs of moderation. Overall earnings growth dynamics moving in tandem, the sustainability of margins
appears to be softening relative to Q3FY26, with greater and overall corporate performance will depend on firms’
divergence in sectoral performance reflecting differing ability to navigate these uneven demand conditions
exposure to global demand, cost pressures, and supply alongside evolving cost pressures and supply chain
chain conditions. disruptions in an increasingly uncertain environment.

Key Risks

The West Asia conflict, which escalated in the last month of Q4, is the most immediate downside risk. India
sources petrochemicals, polymers, limestone, and industrial inputs heavily from the region. Disruptions are
transmitted into cost pressures for many sectors including Glass, Ceramics and Continuous-Process Industries,
Energy, Oil and Gas, Chemicals, Petrochemicals & Plastics, Agrochemicals, Pharmaceuticals, Steel, Other
Metals & Foundaries and Capital Goods and Engineering. These sectors face sharp cost headwinds from West
Asia supply disruption with rising global oil prices further adding to input cost pressures. Margin pressure is
expected in the coming quarters if the conflict continues. Export-oriented sectors face elevated freight costs
and longer transit times as shipping routes are rerouted. Other risks include:

Export sector stress (tariffs Wage cost AI adoption in IT
and logistics disruptions) acceleration services

Textiles, gems & Manufacturing wage growth at AI-led transformation
jewellery and other 10.2% remains elevated. If is gradually reshaping
export-oriented sectors revenue momentum moderates demand for traditional
face higher freight costs, in the coming quarters, rising IT services. While
longer transit times, and labour costs could compress growth remains stable
tariff uncertainty in key margins. Labour code in Q3FY26, the
markets, weighing on implementation (currently medium-term
export competitiveness. reflected in extraordinary trajectory is uncertain.
expenses) may continue to exert
pressure in the near term.

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