Midcaps, Smallcaps Gear Up for Strong Q3 Earnings

Midcap companies are expected to see a year-on-year Profit after tax growth of 16% for the December quarter, while Smallcap companies will see a considerably higher growth rate of 30%, according to estimates from Elara Capital. 

The reason for this is that real estate, industrials, cement, energy, auto and Midcap IT all show improved performance. The growth in Smallcaps is due to the low base as well as the cement sector  moving to a profit position, with real estate and utilities witnessing good growth.

The outlook for this sector indicates that there will be continued recovery in earnings across the broader markets.

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Sector Winners and Laggards

The strongest sectors identified in Midcap growth are real estate 291%, industrials 57%, cement 44%, energy 39%, auto 35%, and Midcap IT, 30%. Building materials have been witnessing a 17% decline in profits, and banks & metals are seeing a 9% and 4% contraction as well.

With respect to Smallcap transports, IT services & banks have projected flat and/or negative profit growth on a year-on-year basis. While other Midcap IT services, industrials, real estate, energy & health care all continue to see increasing momentum.

Earnings Trends and Base Effects

In the past few quarters, mid-cap firms have been demonstrating faster growth than large-cap firms, and this trend will likely continue. Small-cap firms are benefiting from low base effects rather than uniformly strong performance across the board, but consensus estimates are reflecting a strong recovery trend for the December quarter based on broad-based improvement.

The Nifty is currently trading at 20 times next year's projected earnings, compared to an average of 19 times for the past ten years. On the other hand, the BSE Midcap and Smallcap indices are both trading at a premium to their long-term averages of 23.9 and 19.62, respectively, at 25 and 21.7 times, respectively.