A third of cos in BSE mid-cap index report drop in y-o-y profitability

Written by Devangi Gandhi | Mumbai | Updated: Feb 6 2014, 18:32pm hrs
Besides the general volatility in equity markets, which tends to weigh on mid caps more, the latest quarterly results indicate that it may take long for investor interest to decisively come back towards the pack.

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.