Largecaps lag mid and smallcaps as rising input costs squeeze margins

ET Intelligence Group: While India Inc’s aggregate operating margin has been under pressure over the past few quarters amid higher input costs, large-cap companies have taken a bigger hit compared with their mid- and small-cap counterparts. A higher operating leverage and India-centric focus have helped mid- and small-cap companies.

According to an ETIG analysis of 3,340 companies excluding banks and finance companies, the operating margin of the large cap sample for the June quarter contracted by 280 basis points year-on-year to hit a 13-quarter low of 14.3%. In comparison, though mid- and small-caps operate at a lower profitability, their margins showed lesser contraction. For small-caps, it fell by 100 basis points to 7.7% whereas mid-cap margin remained flat year-on-year at 12.8%.

Each of the three samples showed a higher proportion of raw material costs relative to sales, which affected margins. For large-caps, the ratio increased by 530 basis points year-on-year to 36%. The mid- and small-caps had a greater proportion of input costs in revenue compared with the large-caps. For mid-caps, the ratio went up by 300 basis points to 45.8% while it rose by 550 basis points to 57.5%.

For the total sample, operating margin fell by 230 basis points year-on-year to 13.5%. It skidded below 14% for the first time in at least 13 quarters.

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Additionally, mid- and small-caps fared better than large-caps in terms of revenue and net profit growth. Revenue grew at a nine-quarter high of 23.7% and 30.2% for mid- and small-caps respectively. Net profit also grew in double digits – 21.2% for mid-caps and 26.7% for small-caps. While large-caps posted strong revenue growth of 22%, net profit growth was modest at 1.6%, the slowest in seven quarters.