Mid-cap firms report highest net profit growth in 4 quarters

Lower commodity prices, higher other income help

Lower commodity prices, higher other income and improvement in operational performance helped companies in the NSE Midcap 100 improve profitability and post healthy bottom line growth. The aggregate net profit of 77 companies (excluding banks, and financial and oil marketing companies) from the NSE Midcap 100 index reported an average 13.7 per cent year-on-year (y-o-y) jump in the July-September quarter (Q2). The net profit growth was the highest since the September 2014 quarter, when the reported net profit of these firms increased 19 per cent over the September 2013 quarter.

The adjusted net profit, excluding one-time gain/loss, of these companies grew 5.5 per cent in Q2. While exceptional items have contributed significantly to the net profit growth of mid-cap companies, the adjusted net profit growth is still the highest in the past four quarters.

Net sales of the sample companies declined 1.2 per cent y-o-y, but other income increased 14 per cent y-o-y. Earnings before interest, taxes, depreciation and amortisation margin expanded nearly 200 basis points to 24.7 per cent from 22.8 per cent, aided by other income.

"We expect earnings to grow at seven-eight per cent for FY16 against market expectations of 12 per cent. FY17 is likely to be much better," said P V K Mohan, head (equities) at Principal PNB Asset Management Company.

The healthy earnings growth recorded by the midcap companies led to the index outperforming the market. Since July, the NSE Midcap index has fallen only one per cent compared with the 7.2 per cent fall in the Nifty 50 index.

Mid-cap automobiles, pharmaceuticals and power generation sectors saw their net profit double over the previous year's quarter. Steel, mining and telecom sectors, on the other hand, reported weak numbers.

Of these 77 mid-cap companies, Ashok Leyland, Wockhardt, Alembic Pharmaceuticals and Torrent Pharmaceuticals saw their net profit double over the September 2014 quarter.

Steel Authority of India (SAIL), JSW Steel, Gujarat Pipavav Port, NMDC, Emami, Jubilant FoodWorks disappointed the Street by reporting a decline in profit.

Ashok Leyland posted a 137 per cent jump in net profit at Rs 287 crore driven by strong medium & heavy commercial vehicle sales during Q2, while the benefits of cost control and operating leverage helped achieve operating performance improvement.

Britannia Industries reported a 42 per cent growth in adjusted net profit at Rs 219 crore, led by healthy double-digit volume growth, coupled with an improved product mix. Its net sales increased 12 per cent over the previous corresponding quarter.

SAIL reported its biggest quarterly loss of Rs 1,056 crore, mainly due to lower sales realisations, which dropped 24 per cent in the second quarter of FY16, over the same quarter last year. The company had net profit of Rs 649 crore in the year-ago quarter. Income from other sources helped Biocon, DLF, Gujarat Pipavav, Tata Communications, Bata India, NCC and Just Dial report net profit for the quarter.

"Expect pick-up in sales and margins in the second half for the capital goods sector, driven by increased government spending and the resultant pick-up in the pace of projects execution. However, a slower-than-expected pick-up in the pace of execution poses downside risk. Cement, capital goods, health care, auto, financials, consumer to lead FY15-17 net profit growth," Motilal Oswal Securities said.