Small, Mid-Caps to Outpace Large Caps in Q2FY27 Earnings
J.P. Morgan report predicts small and mid-cap firms will lead earnings growth in Q2FY27, driven by AI, manufacturing, and capex.
Domestic small- and mid-cap companies are poised to lead the charge in earnings growth during the September quarter, outperforming their large-cap counterparts. According to a recent research report by J.P. Morgan, this surge is being fueled by robust capital expenditure, modern manufacturing advancements, and significant investments in artificial intelligence-led data centres.
Growth Projections for the September Quarter
The brokerage has provided a detailed outlook for the second quarter of the current financial year. Key projections include:
- Nifty 50 Earnings: Expected to grow by 17 per cent year-on-year.
- Net Profit: Companies covered by the brokerage are projected to record a 16 per cent growth in net profit.
- Revenue Acceleration: Revenue growth across covered companies is expected to climb to 20 per cent, up from 19 per cent in the previous quarter.
Despite these optimistic figures, the report warns that rising costs for raw materials, fuel, freight, and packaging are likely to create significant pressure on overall profitability.
Sectoral Winners and Losers
The earnings landscape for the upcoming quarter is expected to be uneven, with specific sectors set to shine while others struggle.
Leading Sectors
Growth is expected to be spearheaded by the materials and logistics sectors. Specifically, the brokerage identified the following as key drivers:
- Metals
- Hospitals
- Retail and consumer discretionary businesses
- Industrials and financials
Resilient domestic demand, early inventory building ahead of the festive season, and favorable pricing in certain commodity-linked sectors are expected to sustain double-digit growth, even amidst rising costs.
Lagging Sectors
Not all industries are expected to thrive. The report suggests that Information Technology (IT) services and cement are likely to remain weak. Additionally, while electronics manufacturing services, pharmaceuticals, and consumer staples might see strong revenue growth, this may not necessarily translate into comparable profit growth due to margin pressures.
Banking and Margin Pressures
In a positive note for the banking sector, J.P. Morgan anticipates that large private banks could see further earnings upgrades. This optimism follows the Reserve Bank of India's rate hike and its shift toward a more calibrated tightening stance.
However, the broader corporate sector faces a squeeze on margins. The brokerage expects earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins for its covered companies to contract by 121 basis points year-on-year, a direct reflection of elevated input costs.
Risks and Market Outlook
While the outlook for small and mid-caps remains strong due to themes like AI-led infrastructure and capex, several risks loom on the horizon. J.P. Morgan highlighted the following concerns:
- Rising food inflation
- Below-normal rainfall patterns
- Geopolitical uncertainties
- Continued deflationary pressure on IT services caused by Artificial Intelligence
- Shifting festive-season timings, which may complicate year-on-year comparisons for jewellery, fashion, and beauty brands
In terms of sector allocation, J.P. Morgan maintains an overweight stance on financials, consumer discretionary, industrials, healthcare, and materials, while remaining underweight on information technology.