Q4 Scorecard: Mid-Caps Flex Muscle, Large-Caps Lose the Lead

Even as the valuation debate split investors into choosing between large-caps and midcaps, Q4 earnings have declared mid-caps as the winner, albeit in another race. The mid-cap universe emerged as the frontrunner in the March quarter earnings season, delivering 19% on year profit growth, beating the 10% increase clocked in by large-caps by a wide margin. However, the story doesn’t end there, midcaps not just delivered stronger aggregate profit growth, but midcap sectors also notched superior growth when compared to their large-cap peers.

While investors continue to debate valuations and weigh up the merits of large-caps versus midcaps, the March quarter results have given their verdict, and midcaps have clearly stolen the show. Posting a robust 19% year-on-year growth in profits, midcaps comfortably outpaced large-caps, which managed a more modest 10% rise.

But it’s not just the headline numbers doing the talking. A closer look reveals that midcaps, across the board, outperformed their large-cap counterparts, not just in aggregate earnings, but in sector-specific growth as well. “The quality of results was notable, with widespread distribution of strong growth across several mid-cap sectors, in several cases better than the large-cap counterparts,” Gautam Duggad, Head of Research - Institutional Equities, Motilal Oswal Financial Services said.

Data from Motilal Oswal Financial Services underscores the growing divergence between mid- and large-cap performances. Mid-cap metals surged 84% year-on-year, contributing nearly 37% of the incremental profits in the mid-cap universe, eclipsing the 33% rise seen in their large-cap counterparts.

Other strong performers included capital goods (+30%), consumer durables (+72%), and NBFCs, both lending (+23%) and non-lending (+36%), all outpacing large-cap peers. Even mid-cap tech, despite its relatively muted 12% growth, held its edge over large-caps, reinforcing MOFSL’s view that mid-cap IT is structurally positioned to outperform its heavyweight rivals over time.

“While overall earnings have been ahead of estimates, a welcome departure from the past 3 quarters’ outcome of broad earnings misses, the mid-cap segment has been an unexpected standout surprise. This underlines its critical role in throwing up growth leaders for future, thus broadening the market’s investable set of companies,” Duggad said.

Moving on to valuations, while prices for mid-caps on an aggregate basis do appear more expensive than large-caps, the reality beneath might be trickier. Several market experts have argued that several pockets within the mid-cap space might offer relatively comfortable valuations.

Pankaj Tibrewal, CIO of Ikigai Asset Managers, highlighted this in his recent newsletter. He pointed out that around 52% of the Nifty 50’s total profit pool comes from just three sectors—oil & gas, banks, and PSUs. However, these sectors account for only 39% of the index’s total market capitalisation, as they typically trade at lower PE multiples.

In simpler terms, the heavy profit generators within the Nifty 50 represent a smaller share of its market cap, while sectors with higher valuations occupy a disproportionately larger share. As a result, the Nifty 50 currently trades at around 26x 1-year forward PE, compared to the Nifty Midcap 150’s 23x, largely because low-PE sectors have less weight in the latter.

In other words, Tibrewal stated that large caps aren’t quite as cheap as they seem. The broader valuation comfort comes largely from a few sectors, not the index at large.