Mid, small-cap earnings show revenue strength but margin pressure in December quarter

Nifty Trading Plan for February 13

• Mid-caps saw strong revenue growth but slower profit expansion in Q3.
• Small-caps posted higher net profit growth despite moderating revenue gains.
• Margins dropped in both segments due to higher costs and limited pricing power.

Did our AI summary help?

Mid- and small-cap companies delivered mixed earnings trends in the December quarter, with mid-caps reporting strong revenue growth even as profit expansion slowed, while small-caps posted stronger bottom-line gains despite moderation in revenue growth.

For 99 companies in the BSE MidCap 150 Index, revenue grew 15.5 percent year-on-year, the strongest pace in four quarters. However, net profit growth slowed sharply to 8.5 percent, the weakest pace in seven quarters, as total cost climbed. Total expenditure rose 16.2 percent year-on-year, marking the fastest increase in 12 quarters.

In contrast, 189 companies in the BSE SmallCap 250 Index recorded net profit growth of 14.3 percent year-on-year, the strongest in three quarters, supported by interest cost relief. Revenue growth of 10.4 percent and expenditure growth of 9.5 percent year-on-year indicated moderation in overall business activity.

Gaurav Bhandari, Chief Executive Officer at Monarch Networth Capital, said improving mid-cap revenue growth signalled resilient demand conditions. He added that the sharper rise in expenditure reflected capacity additions, higher employee costs and investments ahead of growth rather than structural weakness, with margin softening occurring off a high base.

Aggregate operating profit margin for mid-caps fell to around 19.8 percent, a five-quarter low, while small-cap margin stood at 15.04 percent, an eight-quarter low.

Saurabh Jain, Head of Fundamental Research at SMC Global Securities, said operating margin compression across both segments stemmed from sustained commodity and input cost volatility, elevated wage inflation in labour-intensive businesses and limited pricing power in a maturing recovery phase. He said demand remained steady but not strong enough to fully offset cost increases, leading to moderation in operating leverage despite stable top-line growth.

Experts said sectorally, metals, oil and gas, and auto delivered relatively stronger operating performance, while IT, pharma, power, airlines and construction lagged. In small-caps, revenue moderation was visible in real estate and construction amid project delays and high interest rates. Certain pharma and healthcare companies faced pricing and regulatory pressures, chemicals were affected by input volatility and softer exports, metals and mining were impacted by commodity fluctuations, and parts of telecom and technology experienced order and capital expenditure delays.

Improvement was seen in select chemicals and industrials and capital goods on order execution and infrastructure demand, auto and ancillaries on volume rebound, and consumer and FMCG segments on steady demand, experts added.

Deepak Jasani, an independent research analyst, said mid-cap companies underperformed small-caps in Q3 due to a higher concentration of underperforming sectors. In mid-caps, interest costs increased sequentially due to commercialisation of capital expenditure and higher working capital requirements, resulting in lower other income sequentially.

In small-caps, interest costs declined year-on-year due to improved working capital management, though lower other income weighed on earnings. On a quarter-on-quarter basis, raw material costs rose as the benefit of lower input inflation faded, Jasani added.