Midcap Earnings Strengthens In March Quarter While Smallcaps Face Margin Pressure

Midcap companies outperformed smaller peers in the March quarter as stronger operating leverage and broad-based demand recovery lifted profitability across sectors such as metals, pharmaceuticals, power and capital goods.

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According to earnings data from 92 companies in the BSE MidCap 150 Index that have announced March quarter results so far, aggregate net profit rose 30% year-on-year. The growth marked the sharpest increase in five quarters. The analysis excludes banking, financial services, insurance, oil and gas companies and Vodafone Idea.

Revenue for these midcap firms climbed 19% year-on-year, the fastest pace recorded in 15 quarters, while operating profit increased 26%, the highest rise in seven quarters.

The improvement in earnings was supported by strong performance across sectors including metals, power, real estate, renewables, jewellery, auto ancillaries and capital goods. Profit growth remained particularly strong in metals, pharmaceuticals and power companies.

Capital goods companies profited from good order flows because of capital expenditure within government and corporate sectors, while pharmaceutical companies profited because of domestic formulations and export sales.

Auto ancillary companies also reported stronger sales on the back of improved original equipment manufacturer volumes and exports.

Smallcaps See Profit Decline

In contrast, earnings performance among smallcap companies remained under pressure despite higher sales growth.

Among 160 companies from the BSE SmallCap 250 Index that have declared quarterly results so far, aggregate net profit declined 12% year-on-year. It marked the first drop in smallcap earnings in 11 quarters.

Revenue for these companies rose 12%, the strongest increase in seven quarters. Total spending, however, rose 11.8%, the biggest increase in 12 quarters, damaging operating margins and overall profitability.

Interest costs also moved higher by 5% during the quarter after remaining negative for three consecutive quarters. Smaller companies, which generally depend more on borrowings, were impacted by higher financing costs.

Real estate, defence and infrastructure companies contributed to revenue growth, while profit pressure was visible in sectors such as consumer durables, infrastructure, power and trading businesses. Shipping, telecom infrastructure and metals offered some support to overall earnings.

Market Volatility Weighed On Sentiment

Indian equity markets witnessed sharp volatility during the March quarter amid geopolitical tensions in West Asia, elevated crude oil prices, foreign institutional investor outflows and weakness in the rupee.

During the period, the Sensex and Nifty declined nearly 15% each. The BSE MidCap 150 Index fell 13%, while the BSE SmallCap 250 Index dropped 15.3%.

Market participants are also monitoring the impact of the Reserve Bank of India’s rate cycle on borrowing costs for smaller companies. Transmission of lower lending rates to smaller borrowers is expected to take several months, which may delay any immediate relief on margins and financing expenses.