Global brokerage firm Jefferies recently reported a significant upswing in the performance of midcap and smallcap companies, indicating promising prospects for these segments. The positive trend can be largely attributed to various factors such as reduced commodity prices, sell-offs in higher-cost raw material inventory, and stable pricing.
Jefferies’ analysis of small and midcap companies, excluding UPL, revealed an impressive profit growth of 44 percent compared to the previous year. This surge in profitability was driven by an 11 percent increase in sales and a 220-basis-point expansion in operating profit margin.
Remarkably, 70 percent of the companies under Jefferies’ coverage showcased an increase in profit margins on a year-on-year basis. Among the sectors, building products experienced the most significant rise, with notable increases observed in Finolex Industries, Supreme Industries, Astral Ltd, Pidilite Industries, and Kajaria Ceramics.
While most companies demonstrated improved profit margins, select appliance stocks experienced a year-on-year decrease. This decline impacted firms like Crompton Greaves, Whirlpool India, Graphite India, HEG, and UPL. Consequently, Jefferies has revised its earnings per share forecast for these companies for FY24, while maintaining the FY25 EPS for others.
The sales growth in the midcap and smallcap space can be attributed to capex and business-to-business (B2B) ventures such as Polycab, Supreme Industries, and V-Guard, which compensated for weaker consumer (B2C) demand in durables and appliances. Additionally, electronic manufacturing services (EMS) companies like Amber Enterprises and Dixon Tech experienced robust sales growth due to increased production linked incentives (PLIs) and the acquisition of new customers and products. However, UPL faced a significant sales decline of 19 percent due to lower volumes and prices.
Looking ahead, Jefferies forecasts an average operating profit margin increase of 100 basis points year-on-year by FY25. This growth will be supported by an optimized product mix and premiumization strategies. After achieving a 17 percent growth in FY23, sales growth is expected to slow down to 9 percent in FY24 due to weaker consumer demand, followed by a projected recovery to 14 percent in FY25.
In conclusion, the midcap and smallcap sectors are showing strong growth potential driven by favorable market conditions, reduced commodity prices, and strategic business decisions. Jefferies recommends considering investment in companies such as Polycab, Supreme Industries, Amber Enterprises, and Kajaria Ceramics, while exercising caution towards stocks like Havells India, Whirlpool India, Pidilite Industries, and Astral Ltd.
1. What are midcap and smallcap companies?
Midcap companies refer to businesses that have a medium-sized market capitalization, typically falling between large-cap and small-cap companies. Smallcap companies have a smaller market capitalization compared to midcap and large-cap companies.
2. What factors contributed to the growth of midcap and smallcap stocks?
The growth of midcap and smallcap stocks can be attributed to reduced commodity prices, sell-offs in higher-cost raw material inventory, and stable pricing. Additionally, capex and B2B companies, as well as EMS companies, played a significant role in driving sales growth.
3. Which sectors showed the most significant rise in profit margins?
According to Jefferies’ analysis, the building products sector witnessed the highest rise in profit margins, with notable increases seen in companies such as Finolex Industries, Supreme Industries, Astral Ltd, Pidilite Industries, and Kajaria Ceramics.