Sales growth in SME segment driven by capex, B2B companies: Jefferies

For these companies, the brokerage’s analysts see operating margins rise by over 100 bps YoY by FY25E

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26 Aug, 2025 12:21

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Small and mid-cap segment in Jefferies’ coverage saw healthy sales growth in the second quarter of this fiscal, thanks to sales growth in capex and business-to-business companies, according to the brokerage’s latest report.

This offset the weakness of sales in consumer-facing companies.

The analysts wrote that the small- and mid-cap companies under their coverage posted “healthy” sales growth of over 11 percent YoY increase in the September quarter, “as growth in capex/B2B plays… offset softer B2C offtake (Durables, Appliances)”. B2B stands for business to business and B2C for business to consumer.

The analysts added that electronics manufacturing services (EMS) stocks Amber Enterprises and Dixon Technologies posted good sales growth, driven by ramp-up in Production Linked Incentive Schemes (PLIs) and new customer and product adds. Meanwhile agrochemicals maker UPL Limited saw sharp sales 19 percent YoY decline dragged down by weak volumes and prices; and electrodes makers Graphite India and HEG Limited were impacted by weaker demand and average selling price.

In the same quarter, a “strong” profit-after-tax (PAT) growth—of over 44 percent YoY--was seen thanks to margin expansion among the small and mid-caps under their coverage, wrote the analysts.

They wrote that in the quarter, the companies posted “robust” PAT growth (+44%YoY), driven by “healthy” sales (+11%) and operating margin (OPM) rise of over 220bps YoY.

“Softening commodities, liquidation of higher-cost RM (raw material) inventory and firm pricing were key catalysts,” they added.

Seventy percent of the companies under their coverage posted YoY margin rise--the highest in building products; Finolex Industries followed by Supreme Industries, Astral Limited (stabilising PVC prices YoY), Pidilite Industries and Kajaria Ceramics (sharp YoY fall in vinyl acetate monomer and natural gas prices respectively). There was a year-on-year margin decline in select appliance stocks: 1) Crompton Greaves Consumer Electricals, Whirpool (softer demand); 2) Graphite Electrodes and HEG Limited (demand, pricing pressures), and 3) UPL: global channel destocking and elevated pricing pressure.

For these companies, the brokerage’s analysts see operating margins rise by over 100 bps YoY by FY25E, “aided by optimizing mix and premiumization”.

“We note that FY23 is a weak base for margins due to sharp rise in most input commodities (-170bps YoY). For revenue, post clocking +17% growth in FY23, we est FY24e sales growth at +9% (weaker B2C) and to recover to +14% in FY25e,” they added.