Forget big disappointments, small-caps surprise investors with up to 25-fold rise in Q1 earnings

As the April-June quarter corporate earnings season nears an end, there is clear disappointment among investors with respect to the earnings of large firms, which continued to post dismal set of numbers, but several small-cap firms emerged as a positive surprises.

Many small cap firms proved to be exception backed by trimming losses and managing smart turn-around. The BSE Small-cap index was up nearly 5 percent in the April-August period as investors were enthused by cheaper valuations of these firms and earnings potential.

The small-cap index jumped nearly 21 percent year-to-date, outperforming the benchmark Sensex which gained 5.5 percent, indicating investors’ growing appetite in the small-cap story.

In the backdrop of weak earnings, patchy monsoon and other external factors, key equity benchmark indices stayed range-bound over the last five months. Between April and mid-August, India’s benchmark equity index, Sensex, dropped marginally by 0.3 percent, but Small-cap index maintained optimism gaining 4.7 percent during the period.

Robust earnings

The growing confidence of investors in the small-cap firms was justified by the robust earnings performance of several non-index firms in the first quarter ended June 30, 2015. A total of 235 firms out of the 500 small-cap companies reported profit growth on a year-on-year basis. Another 27 companies staged a smart turnaround by posting profit on-year, while 21 firms managed to sharply reduce their losses in the April-June quarter.

Of the 235, as many as 35 small-cap companies witnessed their net profit growing by up to 24 times during the quarter. These included firms from sectors ranging from software, petrochemicals and entertainment to construction, steel, pharmaceuticals and capital goods, among others.

Computer Education firm NIIT earned the top slot, with its net profit zooming 25 times in Apr-Jun 2015 quarter to Rs 15 crore compared with Rs 60 lakh in the year-ago period. The firm’s shares rose by 114 percent in five-months on the back of robust earnings growth and positive future outlook.

Similarly, hatchery firm Venky’s India reported a nine times net profit growth in the April-June quarter, while its stock gained 61 percent in the five-months period. Simarly, Supreme Petrochem’s bottomline rose by as much as seven times in the quarter. In the five-month period, the scrip jumped nearly 93 percent. Construction and realty firms too managed to post significant rise in their net earnings in the quarter, defying the lingering slowdown in the sector, resulting in sluggish sales and lack of pick up in infrastructure projects.

Construction firm Patel Engineering posted nearly seven times growth in Q1 net profit. Similarly, Gayatri Projects too reported 3.77 times growth in their net profit. Other firms, which reported sharp rise their April-June earnings include Brigade Enterprises, Hubtown Ltd and Indiabulls Real Estate.

Analysts bullish

Analysts attributed a steady improvement in sales in several non-metro cities and lower debt burden for the improved performance in select realty companies while infrastructure companies have also started witnessing a marked rise in order pick up, translating into higher growth. About 115 small-cap companies reported profit growth in the range of over 20-95 percent during the quarter. Companies such as Tamil Nadu Newsprint, Jain Irrigation, Strides Arcolab, MRF, Kalyani Steels, Chambal Fertilizers, Chennai Petro and Torrent Pharmaceuticals recorded profit growth of up to 75 percent.

Investors also lapped up shares of firms, which have returned in to black after a period of lousy performance. These firms include Welspun Corp, Dalmia Bharat, Ricoh India, Nahar Spinning, Dish TV, Astrazeneca Pharmaceuticals, JK Paper, SpiceJet and Future Retail.

For instance, Welspun Corp. saw its shares surging by 143 percent in last five months after the company reported profit of Rs 16.39 crore from a loss of Rs 97.48 crore a year ago. DIC India stock soared 111 percent after the company reported net profit of Rs 8.46 crore vis-a-vis Rs 10 crore loss a year ago.

Companies which managed to reduce their losses over the year-ago period were rewarded by investors. Shares of companies such as Sterlite Technologies, Bombay Burmah, ITI, Orient Paper, GTL Infra, BEML, Orchid Chemicals & Pharmaceuticals, Hotel Leela Ventures and Jindal Stainless witnessed appreciation of 17-63 percent.

According to analysts, small-cap firms have potential to reward investors in the coming quarters as well if economic recovery takes firm hold and market sentiments remain positive.

Data compilation by Kishor Kadam