Indian companies have collectively shown an improvement in their quarterly numbers for the three months to September, raising hopes that downward revisions of forward earnings may be coming to an end. However, at the same time, the September quarter report card shows that mid caps have outshone large caps for the third consecutive quarter so far.

Both at the operating and net profit levels, mid-cap companies fared better than large caps despite higher interest costs.

An analysis of 101 large caps and 85 mid caps, excluding those from the financial and oil & gas domains, that have announced their September quarter results on or before Wednesday, shows that while large caps demonstrated a rebound in the operating and net margins compared to the last year, mid caps witnessed an almost 200 bps y-o-y gains in these margins.

Generally, the operating performance of large caps, which have sizable production capacities, tends to get affected by higher raw material costs. On the other hand, mid-and-small-size companies that have to raise capital at a higher interest rate, see a decline in their net profits in a high interest rate environment. The increase in working capital requirement further jacks up their interest cost compared to large caps.

For the September quarter, even as interest costs of mid caps grew 15%, they managed to post a net margin gain of 270 basis points.

Further, the interest coverage ratio ? a gauge of a company’s ability to meet interest costs of its outstanding debt ? of the mid caps improved by 55 bps, in line with the progress shown in the large cap universe.

For the analysis, we bifurcated the set of companies according to their market cap; companies with a market cap of more than Rs 5,000 crore were deemed as large caps and those with a market cap between of R2000 crore and R5,000 crore were grouped as mid caps.

In the September quarter, large caps demonstrated a 17% y-o-y growth in the top line and mid caps showed a revenue growth of about 10% during the period. Interestingly, the BSE mid-cap index has outperformed all its large-cap rivals since the start of the year.

Against a 31% year-to-date return given by the index, the Sensex, and the BSE-100 yielded 22% and 25%, respectively.