Though second quarter earnings have largely come in below estimates, mid caps...
Though second quarter earnings have largely come in below estimates, mid caps seem to have fared better than their large-cap counterparts.
Just like blue chips, mid caps, too, have reported a slowdown in y-o-y topline and bottomline growth, but their profit margins appear more comfortable than large caps, shows an FE compilation of the September quarter numbers.
An aggregation of Q2 results of 61 large-cap and 83 mid-cap companies — excluding those from the financial and banking domain and oil marketers — shows that while large caps reported a 20-bps expansion in the net profit margin to 10.5% from the last year, mid caps saw a y-o-y increase of 36 bps.
Mid caps also seem to have weathered the higher interest costs better, given that a 14% y-o-y increase that weakened the pack’s interest coverage ratio by 47 bps points to 2.22% could not impact the net profit margin (4.81%).
Interest coverage is a gauge of a company’s ability to cater to its outstanding debt.
At the operating level, both samples reported a similar increase of about 80-90 bps despite mid caps reporting a modest increase in total raw-material costs (1.9% y-o-y).
Large caps, on the other hand, reported a y-o-y drop of 1.1% in total raw-material expenses, including stock adjustments and finished goods purchases. Operating margins for the samples stood at 14.5% and 20.8%, respectively.
For the analysis, we bifurcated the set of companies as per their market cap; companies with m-cap of more than R25,000 crore were considered large caps and those between R8,000 crore and R25,000 crore were grouped as mid caps.
In the large-cap universe, one in every three companies reported a decline in net profit compared to the same quarter last year, while for mid caps, the number stood at 10% of the sample.
This should explain why at least three brokerage houses — Edelweiss Securities, Motilal Oswal Securities and Kotak Institutional Equities — cut their FY15 earning projections for the Sensex in the last one week. KIE has, in fact, cut its FY15 Sensex EPS growth estimate to 10.7% from 13.8%.
Overall, Q2 numbers have been disappointing across sectors — banks struggling with asset quality issues; consumer goods hit by a slowdown in volume growth; and IT companies reporting lower-than-expected revenue growth.
In the mid-cap space, seven companies reported net losses; While Adani Power and Indian Hotels saw their quarterly losses reduce, JP Associates, Tata Power and MRPL turned loss-making.
The slowdown in the economy was well reflected in a similar quantum (13-14% of the universe) of companies from both packs reporting declines in y-o-y topline growth.
Companies like Bharat Forge, Thermax, Whirlpool, Britannia Industries, Tata Chemicals, JSW Energy, Bharat Electricals and Alstom T&D were the key good performers among mid caps.