Most Nifty Midcap 100, Smallcap 100 companies record sluggish Q3 earnings

Operating profit margin growth for Midcap 100 was the slowest in three quarters at 20.76 percent and for Smallcap 100, the slowest in four quarters at 14.1%, respectively, for the December quarter.

The December quarter numbers for Nifty Midcap 100 and Nifty Smallcap 100 companies show a lack of sustained recovery in earnings growth. Operating profit growth slowed down in the last quarter because of sluggish sales and tepid demand. The Nifty Largecap 100 index, however, showed robust operating profit margin and net profit growth.

A Moneycontrol analysis of 65 companies in Nifty Midcap 100 showed that net sales for midcap stocks grew the slowest in 13 quarters, at 5.7 percent, compared to 7.8 percent in the previous quarter and 15.2 percent last year.

The on-year growth in net sales has been in single digits for the past four quarters and sequential growth too has been in single digits for seven consecutive quarters.

Operating profit margin growth for Midcap 100 was the slowest in three quarters at 20.76 percent and, for Smallcap 100, the slowest in four quarters at 14.1 percent for the December quarter.

Energy, banking and financial services companies were excluded from the study.

A study of 65 companies in NSE Smallcap 100 showed that net sales grew the slowest growth in 13 quarters at 3.03 percent, down from 6.4 percent last quarter and 20.3 percent a year ago. The on-year net sales growth remained in single digits for the past three quarters, and so was the sequential growth for nine quarters in a row. Midcap firms net profit growth in the December quarter stood at 93 percent on-year, it fell 23.1 percent sequentially. For smallcap companies, net profit growth was at 16.4 percent annually and it fell 9.5 percent over the last quarter.

Midcap and smallcap indices outperformed the Nifty significantly in the past year. Several analysts have cautioned against midcap and smallcap investments because of their elevated valuations and advised investors to stay away. Nifty Midcap and SmallCap 100 indices rose 14 percent and 19 percent. So far in 2024, they gained nearly 7 percent each, while in 2023, the indices surged around 47 percent and 56 percent, while the benchmark Nifty gained 20 percent in 2023 and only 1 percent so far this year.

Ambareesh Baliga, an independent market expert, said midcap and smallcap stocks are moving up without much improvement in fundamentals. “The market relies on momentum, rather than data. Liquidity follows momentum, contributing to inflated valuations,” he said.

“One of the reasons for the strong growth in largecap earnings is that in many sectors they have been gaining market share at the expense of smaller companies after Covid,” he said.

A Moneycontrol analysis of 75 companies in Nifty100 firms shows operating profit growth was at 21.75 percent, its fastest growth in eight quarters. Net profit growth scored 18.6 percent on-year and 22.4 percent on-quarter, while revenue growth stood at 8 percent and 2.5 percent.

Analysts said that as sales growth in largecap companies moderate, smaller companies stand to be hit, particularly those from the manufacturing sector. That’s because lower sales mean less consumption of raw materials which they source from mid and small cap companies. This hurts cash flows and increases operating costs, and results in loss of market share to any rival who is in a better position to withstand the shock.

Certain sectors exhibit seasonality, with variations in performance across quarters. For instance, the hotel sector does well in the December quarter but struggle in the September quarter. Year-on-year and sequential comparisons should consider the influence of Diwali, both this year and last year. Largecaps, representing less volatile industries, put up a smoother growth. However, they also face cyclicality, with strengths in areas like airline and two-wheeler stocks, while grappling with challenges in metal and FMCG sectors.

Chemical stocks, found across large, mid, and small caps, have faced challenges in the last few quarters. Midcaps, featuring cyclical stocks like metal, fertilizer, power, and chemicals, have struggled, but benefitted from hotels, cement, mining, and pharma. Small caps have shown success in EPS, aluminum, pharma, cement, and wind power, while electronic manufacturing, multiplex, and diagnostics have lagged.

"The performance of cyclical sectors significantly impacts midcap and smallcap sectors, causing them to underperform or outperform large caps based on cyclicality," said Deepak Jasani, head of retail research at HDFC Securities.

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