Jefferies goes big on midcaps, smallcaps as companies post 44% profit surge

Global brokerage firm Jefferies is upbeat on midcap and smallcap space after companies under its coverage reported robust earnings for the September quarter, riding on reduced commodity prices, sell-off in higher-cost raw material inventory, and stable pricing.

A Jefferies report on small and midcap companies, excluding UPL, showed strong profit growth of 44 percent over last year, driven by an 11 percent rise in sales and a 220-basis-point widening in operating profit margin over the last year.

The brokerage said 70 percent of the companies it covers showed a year-on-year increase in profit margins, with the building products sector having the highest rise. Finolex Industries had the most significant increase, followed by Supreme Industries, Astral Ltd (thanks to stable PVC prices year-on-year), Pidilite Industries, and Kajaria Ceramics (due to a sharp decrease in VAM and natural gas prices, respectively).

However, it observed a year-on-year decrease in profit margins in select appliance stocks. This affected Crompton Greaves, Whirlpool India (due to reduced demand), Graphite Electrodes companies like Graphite India, HEG (facing demand and pricing pressures), and UPL (experiencing global channel destocking and increased pricing pressure). The brokerage house has cut the earnings per share for these firms for FY24 and retained the FY25 EPS for some firms.

The sales growth was driven by capex and B2B companies like Polycab, Supreme, and V-Guard, compensating for weaker consumer (B2C) demand in durables and appliances. EMS companies such as Amber Enterprises and Dixon Tech experienced good sales growth due to increased production linked incentives (PLIs) and new customers and products. However, UPL faced a significant sales decline of 19 percent on-year due to lower volumes and prices. Electrode companies like Graphite India and HEG were affected by reduced demand and average selling prices (ASPs), Jefferies said.

Jefferies predicts an average operating profit margin (OPM) increase of 100 basis points year-on-year by FY25. This rise will be supported by optimising product mix and premiumisation. They highlight that FY23 had lower margins due to a significant increase in input commodity prices (-170bps YoY). Regarding revenue, after achieving 17 percent growth in FY23, Jefferies estimates sales growth to be 9 percent in FY24 (impacted by weaker consumer demand) and then recover to 14 percent in FY25.

It foresees capex and housing plays to continue to deliver healthy volume growth. Its top picks are Polycab, Supreme Industries, Amber Enterprises, Kajaria Cement,  meanwhile it stays cautious on Havells India , Whirlpool India, and high PE stocks Pidilite Industries and Astral Ltd.

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