Strong rebounds during bouts of rising markets notwithstanding, the mid-cap pack is likely to lag its large-cap counterpart in terms of valuations it commands, given the decayed fundamentals of most companies in the universe.
According to a latest compilation , a third of the BSE mid-cap companies, which announced their December quarter numbers so far (109), have reported a drop in their y-o-y profit growth. On the other hand, of the 28 Nifty constituents for which the quarterly numbers are out, a fifth reported a similar decline.
It is not surprising then that the BSE mid-cap index is trading below its long-term relative valuation to that of the Sensex. In terms of price to Ebitda, the index is trading at about 10% discount to the average relative valuation (0.69). Although the Q3 numbers have worked as a trigger for many stocks, they reinforce the tough economic scenario that have a higher bearing on mid-cap companies. Even as they trade at lower valuations, the mid caps require a set-up of strong economic growth trajectory and increased business confidence, which may materialise after the general elections, said Piyush Garg, CIO, ICICI Securities.
Of 33 mid-cap companies reporting a fall in net earnings, as many as 10 belong to the banking and financial space, including eight public sector banks that saw their net profits decline by anywhere between 20% and 92%. Higher provisioning, bad loans and a slowing loan growth impacted the financial performance of Bank of Maharashtra, Vijaya Bank, State Bank of Tranvancore and IDBI Bank, which saw their y-o-y earnings drop by 92%, 91%, 83% and 75%, respectively.
Infra and construction players like Jaypee Infratech, IRB Infra, Oberoi Realty and Indiabull Real Estate reported a decrease in quarterly profits compared to last year. Companies like JP Power Ventures, Dish TV, Alstom India, Torrent Power and Tata Chemicals either continued to make losses or turned loss-making.
The slowdown in economic activity was also reflected in mid-cap numbers, with as many as 20 companies, including, Ahsok Leyland, TTK Prestige, UPL and Engineers India, witnessing a drop in their quarterly revenues.
An elevated interest rate scenario seemed to be making matters worse for some companies that saw a drop in their interest coverage ratio a gauge of a companys ability to cater to its outstanding debt. Interest cost for Phoenix Mills, PVR, Torrent Power, JSW Energy, Petronet LNG and IRB Infra grew sharply affecting the interest cover (Ebit/interest cost) of these companies compared to last year.