Hype is for real: Mid-cap firms earnings show sharp recovery

Written by fe Bureau | Mumbai | Updated: Aug 21 2014, 10:05am hrs
Mid-cap firmsFor the 12 months to June 2014, while the operating income of the mid-cap pack grew at a marginal 8% y-o-y compared to 16% a year back. (Reuters)
An improving earnings profile of top-performing mid-cap companies seems to justify the heightened investor interest.

The trailing 12-month aggregate net margin of top-30 mid-cap performers has reported a sharper recovery in the last two quarters compared to their bluechip counterparts.

For the years ended June 2014 and March 2014, the net profit margin of the set grew at 94 bps each, due to moderating growth in raw-material cost and interest expenses. On the other hand, for a set of leading large caps, the average expansion in net margin stood at 81 bps during the same time period.

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For the 12 months to June 2014, while the operating income of the mid-cap pack grew at a marginal 8% y-o-y compared to 16% a year back, a corresponding decline in the growth of total expenses as well as higher other income growth supported the operating performance. This resulted in an average sequential addition of 86 bps in the operating margin of the pack in each of the last two quarters.

A substantial rise in other income of companies such as Ashok Leyland, Suzlon Energy, Voltas, Birla Corp and Strides Acrolab supported the total income of the sample.

Meanwhile, the y-o-y growth in interest cost has toned down since the March quarter, which led to an expansion in the net margin. For the year, it grew at a moderate 1.3% y-o-y compared to a sturdy 29% last year. For trailing 12 months ended September, June and March 2013, the mid-cap sample was collectively reporting net loss.

Amid a tempering interest burden, the interest coverage ratio of the sample, which generally indicates a company's ability to meet interest outgo

on its outstanding debt, for

the year jumped by 95 bps to

two times.

For the compilation, we collated the 30-best performing stocks from the BSE mid-cap and BSE 100 universes, excluding banks, financial institutions and oil marketing companies. We ensured that no common stock was considered in both samples. While all of the 60 stocks from both the universes have outdone the year-to-date gains made by the 30-share Sensex (24%), two-third of mid-cap stocks have more than doubled this calendar year.

Although mid-cap stocks tend to rally sharply when hopes of a bottoming economic growth compounds, the latest rally was also supported by the election-led euphoria and anticipation that a strong Central government may be able to push effective economic policies.

The enthusiasm towards mid caps in 2014 is a complete reversal of the sentiment in 2013 when the BSE Mid-cap lost 5.7% of its value while the Sensex rallied 26%. In the last two years, a combination of a difficult operating environment and high interest rates impacted the financials of mid-cap companies more severely than larger companies.