10 midcaps & smallcaps seeing margin expansion for 4 quarters now: Worth a look?

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10 midcaps & smallcaps seeing margin expansion for 4 quarters now: Worth a look?


NEW DELHI: At least 10 smallcap and midcap companies have seen expansion in profit margins for four straight quarters now. For some of them, the margin expansion came despite a rise in raw material cost. The managements of these companies are sounding confident of sustaining the trend.

MindTree said its PAT margin improved to 16.13 per cent in December quarter from 13.17 per cent in September quarter, 11.15 per cent in June quarter and 10.05 per cent in March quarter. Over the last four quarters, PAT margin for this IT firm has risen 610 basis points over December 2020’s 10.02 per cent.

Analysts said IT company’s margins are industry-leading in the midcap space, led by revenue growth, all-time high utilisation and sustained high offshoring. The company management is confident of sustaining Ebitda margins at nearly 20 per cent. Prabhudas Lilladher is expecting the company to clock Ebitda margins of 19.6 per cent in FY22 and 19.5 in FY23.

From losses and single digit margins to 19.41 per cent PAT margin in December quarter, Intellect Design Arena has staged a strong rebound in terms of margin profile in last one year. Anand Rathi said the company was seeing accelerating revenue growth and margin expansion. The company management has guided for double- digit revenue growth in FY22 and 30 per cent growth in EPS. The brokerage recently hiked its price target for the stock to Rs 550 from Rs 330 earlier, valuing it at 22 times FY23 adjusted EPS. The stock traded at Rs 444 apiece on Friday.

Balaji Amines saw its PAT margin rise 1,100 basis points in four quarters to 20.12 per cent in the December quarter. “Gross margin during the quarter expanded to 48 per cent (up 50 bps sequentially), supported by a Rs 8 per kg increase in realisation, which offset the negative impact of Rs 3 a kg increase in raw material cost. We expect gross margin to remain strong in the coming quarters, as is contribution from the specialty chemicals segment,” said ICICIdirect. This brokerage has a price target of Rs 1,680. The stock traded at Rs 1,630 on Friday.

Mastek’s margin expanded 517 points in four quarters to 15.87 per cent in the latest one. Analysts said the company’s margin profile has witnessed a complete reset in the past few quarters, led by integration of the higher-margin Evosys business and margin expansion in the core business.

“An increase in offshoring, lower sub-contracts and operating leverage resulted in EBIT margin expansion of ~800bps in 9MFY21. Uncertainty over the hiring of the new CEO remains the biggest overhang. Clarity will emerge in the next 1-2 quarters,” said HDFC Institutional Research. The stock traded at Rs 1,184 on Friday.

Mangalam Cement saw 698 basis points YoY jump in PAT margin at 11 per cent for December quarter. Phillip Capital said it was after 11 years that Mangalam Cement has crossed the Rs 1,000 mark on Ebitda per tonne. “Mangalam Cement is among the cheapest stocks available in the sector,” the brokerage said last week, as it suggested a price target for Rs 360 for the stock. It traded at Rs 275 on Friday.

Godawari Power & Ispat, Kesoram Industries, Shakti Pumps, Mangalam Organics and Reliance Communications are some of the other companies seeing similar or stronger margin improvements.

“When sales are negative, sustained margins are a miracle,” Nilesh Shah of Kotak AMC told ETNOW in a recent interview. “When sales become positive, those margins can expand further. The pressure of rising raw material and commodity prices will have to be negated through cost improvement, through sales growth and by passing some portion to consumers. We are interested in those companies which are able to have these three characteristics and, hence, their margins can expand despite raw material price increase,” he said.





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