Midcap cos lose more than large peers in ?11

In the current year, share prices of midcap companies have corrected more than that of largecaps. While Nifty was down 12.2% in 2011, BSE midcap index was down even more at 14.2%.

Many midcap companies have witnessed margin pressures for the quarter ending December 2010 on the back of rising interest and material cost. Operating margin of BSE-500 companies for the December 2010 quarter declined by 360 bps than it were a year ago.

Bloomberg data shows that the net earnings of midcap companies for Q3 went up by 17.5% compared to last year and collectively managed to beat the consensus estimated earnings by 2%.

While it is a better performance than that of the September 10 quarter (when its earnings failed to meet estimates by 8%), on an average 49% of midcap companies (or 62 out of 126 companies) have failed to meet analysts estimates.

In contrast, the earnings quality was better for largecap companies ? while on an average Nifty Q3 earnings reported so far were 2.5% above market estimates, only 20% of companies reported earnings that were below estimates.

According to market participants, the results so far do reflect margin pressure specially in the mid-cap space, where interest cost as a percentage of total sales constitute a significant component.

According to Piyush Garg, CIO at ICICI Securities, says, ?Midcap companies from the capital intensive sectors are likely to feel a greater effect of higher interest cost also as that of cost of funding the working capital?.

The sectoral distribution of the earnings analysis substantiates this view with sectors like consumer goods, utilities and basic materials comprising of automobile ancillaries and power & infrastructure oriented companies, posting a negative surprise of 18%, 9% and 6%, respectively.

The margin pressure is likely to extend in the coming six months given the current situation of high inflation and interest rate.

This is likely to affect the net earnings of mid-cap companies, especially for which working capital form a larger part of their raw material requirements.

On the whole, almost two third of the companies from the sample set of 126 midcap companies showed a positive or a negative deviation in earnings in the range of 0-20% while about 16 companies beat the market expectations by 20-50%.