Why Earnings Quality, Not Forecasts, Will Drive the Next Leg of India’s Bull Market

India’s next bull-market leg will be driven by earnings quality—not lofty forecasts. As hype fades, investors are rewarding sustainable profits, transparent disclosures, and strong cash flows over short-term beats and one-offs. Read our story to understand how quality will define the future [EasyDNNnews:PaidContentStart]

The Market’s Next Test: From Hype to Hygiene 

India’s bull market has entered a peculiar phase: expectations remain lofty, but the proof now lies in delivery, not declarations. Since the September 2024 quarter, corporate results have repeatedly underwhelmed, and even through the September 2025 quarter—when many hoped for an upside surprise—earnings struggled to clear the bar. Q2FY26 extended that pattern: 

broadly mixed, pockets of strength offset by disappointments. In this environment, the next leg of the market will not be driven by rosy projections or one-off revaluations; it will be powered by earnings quality—the sustainability of profits, the true source of those profits, and the integrity with which they convert into operating cash flows that ultimately compound shareholder wealth. 

This shift is subtle but decisive. In a liquidity-soaked world, guidance sounds good; in a credibility-driven market, guidance must be earned. Investors who once celebrated every forecast upgrade now flip straight to the cash-flow statement and the notes to accounts, asking: What, exactly, powered this profit? Will it repeat? And how much cash did it throw off? The bull market’s next leg will not be carried by rhetoric—it will be carried by repeatability. 

The Forecast Fallacy: When Guidance Becomes a Mirage
Forecasts are the comfort food of markets—easily digestible, emotionally satisfying, and often misleading. Analysts upgrade projections after every good quarter, only to revise them down when global headwinds appear. Yet markets no longer react to these pendulum swings as they once did. The current cycle is rewarding resilience, not rhetoric. 

Investors have grown wary of managements that issue aggressive guidance or lean on ‘other income’ to pad the bottom line. Instead, they are dissecting whether earnings are core-operating or coSMEtic—whether the numbers reflect business execution or balance-sheet manoeuvring. As Financial Shenanigans author Howard Schilit warned, the danger lies in ‘recording revenue too soon’ or inflating income with nonrecurring items. Companies that treat forecasts as marketing collateral rather than fiduciary responsibility risk losing market trust faster than they gained it. 

Q2FY26: The Mid-Cap Surprise and What Lies Beneath
India’s September-quarter scorecard surprised on the upside. Across brokerage tallies and media roundups, Q2FY26 results exceeded expectations—with mid-caps leading outperformance and Large-Caps showing steady resilience. But beneath the headlines lies important nuance. Aggregate PAT growth around 15–16 per cent looks impressive, but the composition tells the real story. 

▪️Metals, OMCs, and BFSI drove much of the incremental profits.
▪️Several mid-caps reported strong revenue but volatile margins.
▪️Tech and pharma stabilised but were far from spectacular. 

The pattern signals a decisive market preference: from top-line exuberance to bottom-line discipline. The market is now distinguishing between companies expanding through operational excellence and those enjoying temporary tailwinds—commodity spreads, forex gains, or accounting adjustments. 

The Problem with ‘Other Income’
‘Other income’ has quietly become the elephant in India Inc.’s boardrooms. For years, investors waved it through as treasury yield or mutual-fund dividends. Today, it is the most scrutinised line in an earnings call. Rising rates boosted returns on cash piles; asset sales and fair-value adjustments added glitz; subsidies and grants did their bit. All legitimate under accounting rules—but not the bedrock of compounding. 

The analytical remedy is simple—segregate operating from investing activities. Do not conflate one-time treasury profits with core performance. In a market that routinely trades above 20× forward earnings, even a small distortion in earnings quality can produce big valuation errors and mispriced capital allocation. If the ‘E’ is not high-quality, the ‘P/E’ is a house of cards. 

Operating Cash Flow: The Litmus Test of Quality
If one number separates profits from performance, it is cash flow from operations (CFO). High-quality earnings translate into robust cash flows. When profit growth is not mirrored by cash-flow growth, something is amiss—aggressive revenue recognition, stretched receivables, or capitalised expenses. 

Smart investors now track cash-flow conversion: the percentage of net profit realised as operating cash. Companies that consistently convert less than 70 per cent of profits to cash are often funding their EPS via accounting, not customers. In forensic terms, watch for cash-flow shenanigans—shifting financing inflows into the operating section to make results appear stronger. In a tightening-liquidity world with rising working-capital friction, such tactics are not just cosmetic; they are unsustainable. 

When Loss-Making Giants Redefine Earnings Potential
Digital leaders like Zomato, Swiggy, and Policybazaar have forced a rethink of how investors assess the new economy. While these companies may still report accounting losses in certain periods, improving operating leverage, disciplined unit economics, and steadily narrowing cash burns are reshaping market perception. Zomato’s Blinkit, for instance, has turned EBITDA positive, while its core food-delivery business has maintained margins despite intensifying competition— signalling sustainable operational strength. Swiggy, post its successful IPO in late 2024, has continued to tighten its unit economics with sequential margin improvements and narrowing losses across both food delivery and quickcommerce segments. 

Lesson: In today’s market, earnings potential—the ability to convert gross merchandise value (GMV) into future profits— often matters more than short-term accounting profitability. Yet even in the new economy, the market’s mood has matured. It no longer rewards growth at any cost but values companies that can scale without perpetual dilution, demonstrating clear pathways from engagement to monetisation and, ultimately, to positive cash flow. 

From EPS Growth to Earnings Hygiene
“Earnings hygiene” captures how clean the numbers are—free of gimmicks, extraordinary items, and manipulative adjustments. Martin Fridson reminded us that two companies with identical EPS can have vastly different investment merit depending on what underlies those earnings. 

Consider two mid-cap manufacturers reporting 25 per cent YoY EPS growth:
▪️Company A: Profit driven by core operations, 20 per cent revenue growth, stable working capital.
▪️Company B: Profit juiced by selling a subsidiary, a deferred-Tax gain, and capitalised marketing costs.
Same EPS, different destiny. The market is finally paying a quality premium for Company A. 

The Anatomy of Earnings Quality: Four Pillars
▪️Sustainability - Profits must stem from recurring operations backed by structural demand. Beware of short-term margin spikes due to input-cost drops, policy windfalls, or opportunistic pricing that can reverse quickly.

▪️Transparency - Trustworthy reporting means clear segmental disclosure, consistent accounting across consolidated/standalone, and candour on related-party transactions. ‘Compliance’ can still diverge from economic reality; investors need clarity, not cleverness.

▪️Cash Conversion - Earnings must become cash, not receivables. Track Days Sales Outstanding (DSO), inventory turns, and working-capital intensity. Persistent receivable build-ups amid reported growth often presage future disappointments.

▪️Capital Discipline - High-quality earnings are amplified by high-quality allocation. Reinvesting at strong incremental ROCE compounds value; diworsification destroys it. Every rupee retained should be a rupee that earns above the hurdle. 

When ‘Beating Estimates’ Loses Meaning
In recent quarters, more than 60 per cent of Nifty-500 constituents ‘beat’ consensus. But what, exactly, are they beating? Sandbagging—publishing conservative forecasts to engineer positive surprises—has diluted the informational value of ‘beats’. 

Investors should refocus on the quality of the surprise:
▪️Are margin gains repeatable or cyclical?
▪️Is volume growth sell-through or channel stuffing?
▪️Are costs under control without starving future growth (R&D, distribution, digital)? 

The key is not who beats—it is who compounds. 

Sectoral Shifts: Where Quality Is Emerging 

▪️Financials - Banks and NBFCs remain the market’s backbone, but the conversation has shifted from sheer loan growth to asset quality, provisioning discipline, and net interest margin (NIM) sustainability. For banks, the focus is on maintaining healthy CASA ratios, prudent credit underwriting, and balanced loan-book diversification. For NBFCs, investors now prioritise liability management, cost of funds, and asset-liability matching over rapid balance-sheet expansion. In both cases, risk-adjusted returns and credit discipline matter far more than headline loan growth. 

▪️Manufacturing & Capital Goods - ‘Make in India’ has lifted Order Books. Winners will convert orders into cash, not receivables. Execution efficiency and after-sales monetisation (services/AMC) are the differentiators. 

▪️Consumption & FMCG - Raw-material relief has helped margins; the best players are reinvesting the gain into distribution, rural reach, and brand building— preferring durable moats over short-term optical profits. 

▪️New-Age Tech - With Zomato, Nykaa, Paytm and others turning the corner, investors are moving from top-line glamour to unit-economics Discounted Cashflows (DCFs)—a quieter, more disciplined approach to valuing growth. 

Detecting Red Flags in a Bull Market
Bull markets breed complacency; complacency breeds manipulation. The common traps echo the classics from Financial Shenanigans: 

▪️Recognising revenue too soon (front-loaded contracts, channel stuffing).
▪️Recording bogus revenue (related-party orchestration, barter).
▪️Boosting income via one-offs (asset sales, revaluations, subsidies, tax reversals).
▪️Capitalising routine expenses (marketing, maintenance) to flatter EPS. 

Indian markets have matured, but these still lurk—especially in fast-rising mid-caps. The antidote: compare across quarters, normalise for one-offs, and triangulate P&L with cash flows and working capital. 

Casework: Headline vs. Core in Q2FY26
Several corporates reported headline profits that were flattered by one-offs or exceptional gains. Distinguishing core operational performance from temporary boosts is crucial. 

What to infer: normalised profitability and CFO/EBITDA alignment matter more than celebratory PAT prints. 

Two Deep Dives: ACC and Suzlon
The quarter also offered two instructive case studies—ACC and Suzlon—both with strong operational momentum, both with non-operating tailwinds inflating the headline PAT. 

ACC Q2FY26: Operational Strength with a Tax Tailwind
▪️Total income up 29 per cent YoY, record volumes, premium mix gains.
▪️EBITDA up 94 per cent YoY; margin expanded to 14.3 per cent.
▪️PAT up 460 per cent YoY, aided by ₹671 crore income-tax provision reversal (one-off).
▪️Ex-tax benefit, the story remains solid—but less spectacular than the PAT headline suggests. 

Suzlon Q2FY26: Best in Decades, But Context Matters
▪️Revenue up 85 per cent YoY, record turbine deliveries.
▪️EBITDA up 145 per cent, margin 18.6 per cent (vs. 14.1 per cent YoY).
▪️Net profit up 538 per cent to `1,279 crore, the highest in ~30 years—boosted by ₹718 crore deferred tax asset recognition.
▪️Core momentum is strong (order book ~6.2 GW, net cash), but the tax recognition magnifies PAT. Sustainability of elevated margins, especially in OMS, remains a watchpoint. 

Where Margins Are Expanding and Where They Are Squeezed
The ‘quality lens’ is especially helpful when you look at operating profit margins—are they expanding for reasons that will last, or for reasons that will fade? We will use the final column—Operating Profit Margin YoY Change—as the ‘quality pulse’ for the quarter. 

Reading the tables: Margin expansion led by names like Airtel and UltraTech looks healthier because it is backed by scale and/or mix improvements. Contraction in aviation and selective commodities/pharma underscores why investors must disaggregate cyclical price-led gains from genuine operating leverage and productivity. 

When Accounting Meets Analytics
Earnings quality is not just accounting; it is analytical mindset. Blend quantitative checks with qualitative judgement: business model durability, management incentives, and industry structure. A company showing margin expansion and PAT growth without cash-flow progress often signals early revenue recognition or capitalised costs. Conversely, temporary earnings dips with strong cash generation may signal prudent provisioning—a green flag for quality. 

A practical checklist for your research desk: n CFO/PAT > 90 per cent over multi-quarter averages = robust conversion.
▪️Receivables/Revenue trending down alongside growth = clean sell-through.
▪️Segment disclosures that reconcile with consolidated totals = transparency.
▪️One-off tracker: Maintain a table of non-recurring items (tax reversals, impairments, asset sales); normalise quarterly PAT and re-rate the trajectory.
▪️Capital allocation diary: Track deployment (organic capex vs. M&A), post-facto ROCE, and the cadence of buybacks/dividends. 

The Role of Capital Markets in Rewarding Integrity
Markets have a long memory. Over time, companies with transparent accounting, conservative guidance, and disciplined allocation command valuation premiums—sometimes quietly, always persistently. Think of the past decade’s compounding champions: they were not the loudest; they were the most predictable. 

Conversely, businesses that leaned on creative accounting or perpetual revaluation—especially across certain real-estate cycles or Small-Cap sprints—eventually faced derating when numbers stopped adding up. In the long run, earnings quality is destiny. 

India’s Bull Market 2.0: Driven by Trust, Not Tickers The first leg of the post-pandemic rally was liquidity-driven— low rates, global risk-on, retail exuberance. The next leg will be trust-driven: 

▪️Trust in numbers: cash-aligned profits, conservative revenue recognition.
▪️Trust in disclosures: granular segments, clear reconciliations, forthright Q&A.
▪️Trust in management integrity: sober guidance, measured promises, consistent delivery. 

The rise of domestic institutions—MFs, pensions, insurers— adds durable scrutiny. These allocators prize consistency, not theatrics. As India’s equity culture deepens, valuations will hinge less on hype and more on hygiene. 

Conclusion

Forecasts can excite, but only quality sustains. India stands on the cusp of a multi-year expansion powered by demographics, digitisation, capex revival, and deleveraged balance sheets. But the next leg of the bull market will be shaped not by how loudly companies talk about growth, but by how cleanly they report it. In the coming quarters, research must evolve from numbercrunching to forensic storytelling—connecting the accounting to the economics, the cash to the claims. Or in Fridson & Alvarez’s words: It is not enough to know what the numbers say; one must also know what they are hiding. 

For investors, the lesson is timeless: in the long run, markets revert to the mean, and the mean is earnings quality. 

“The inescapable fact is that the value of an asset, whatever its character, cannot over the long term grow faster than its earnings do.” -Warren Buffett

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