Small and Mid-Cap Stocks Surge Amid Strong Earnings Growth

Small and Mid-Cap Stocks Surge Amid Strong Earnings Growth

Small and Mid-Cap Stocks Surge Amid Strong Earnings Growth

The S&P BSE Midcap and S&P BSE Smallcap indices have witnessed a substantial rally, rising 38.8% and 47.5% respectively, during the fiscal year 2024. This surge is primarily supported by the robust earnings growth reported by companies in these segments.

Margin Expansion Driving Earnings

A key factor behind this growth has been the margin expansion seen in small and mid-cap stocks. The decline in commodity prices has notably benefited these stocks, leading to notable improvements in their profit margins. According to Jefferies India Pvt Limited, excluding UPL Ltd, the companies in their coverage universe saw an operating margin expansion of over 220 basis points year-on-year, contributing to a 44% YoY profit growth.

Key Catalysts for Growth

The softening of commodity prices, along with the liquidation of higher-cost raw material inventory and stable pricing, have been instrumental in this growth. About 70% of the companies under Jefferies’ coverage reported a year-on-year margin increase, as per their Q2 Review report.

Sector-Specific Gains

• Pipe Manufacturers: Companies like Finolex Industries Ltd and Supreme Industries Ltd witnessed the highest margin rise year-on-year, buoyed by stabilizing PVC prices.
• Chemical and Ceramics Industries: Firms like Pidilite Industries and Kajaria Ceramics benefited from softer VAM prices and lower year-on-year gas prices.
• Capex and B2B Sectors: Companies such as Polycab India Ltd, Supreme Industries Ltd, and V-Guard Industries reported healthy sales growth, offsetting weaker B2C offtake in consumer durables and appliances.
• Electronics Manufacturing Services: Amber Enterprises and Dixon showed good sales growth, driven by PLI scheme benefits and new customer and product additions.

Earnings Upgrades and Top Picks

Post Q2, notable earnings upgrades were seen in Polycab and Supreme Industries, while key downgrades were observed in UPL Ltd, Whirlpool of India Ltd, and others. Jefferies predicts continued healthy volume growth in capex and housing plays. Their top picks include Polycab India Ltd, Supreme Industries, Amber Enterprise, and Kajaria Ceramics, each with distinct strengths and market positions.