The June quarter report card of India Inc shows that mid-cap companies have fared better than their large-cap counterparts, both at the operating and net profit levels. This, despite the higher interest costs. Also, other income for this set of companies showed a stronger growth, while raw material cost grew at a lower pace.
The jump in the operating margin was bolstered by a more than 35% increase in the other income of the mid caps, while that of the large caps grew 19%. As such, a comparatively slower growth in the raw material cost further cushioned operating performance of the mid caps. At 11%, the y-o-y growth in raw material cost, inclusive of the effect of stock adjustments and finished good purchases, was almost half of the 21% increase for the large caps.
Generally, the operating performance of large caps, which have sizable production capacities, tend to get affected by higher raw material costs. On the other hand, mid- and small-size companies, which generally 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.
However, for the June quarter, even as interest costs of mid caps grew 55%, they managed to overcome it to post a net margin gain of 194 bps. Further, the interest coverage ratio ? a gauge of a company’s ability to cater to the interest costs of its outstanding debt ? of the mid caps also declined by a smaller extent of 25 bps against about 170 bps for the large caps.
For the analysis, we bifurcated the set of companies according to their market cap; companies with a market cap of more than R5,000 crore were deemed as large caps and those with a market cap between R2,000 crore and R5,000 crore were grouped as mid caps.
During the quarter, the large caps demonstrated a 19% y-o-y growth in the topline and mid caps demonstrated a revenue growth of 14% during the period. Interestingly, the BSE mid-cap index has outperformed all of its large-cap counterparts since the start of the year. Against a 19.7% year-to-date return of the index, the Sensex and BSE-100 have yielded 14.7% and 16.8%, respectively.
