Citi Research: Mid-Cap Firms To Outperform Larger Peers After Two Quarters in Q2
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Citi Research: Mid-Cap Firms To Outperform Larger Peers After Two Quarters in Q2

Watch | What Citi Expects This Earnings Season

Mid-cap companies, aided by a lower base, are expected to post better earnings than large-cap peers after two quarters, according to Citi Research.

The sustained outperformance, however, will depend on supporting macro-environment factors that result in earnings recovery, Surendra Goyal, managing director and India research head at the company, said during a conversation with BloombergQuint. “There is still some bit of risk aversion which will not allow that (investors choosing mid caps over small caps) to happen over the next six to 12 months.”

Yet, overall earnings growth of India Inc. in the three months ended September is expected “not to be different” from the previous quarter, Citi Research said in a report. Companies are slated to post “flattish” second-quarter earnings year-on-year owing to weak volumes in the automobile sector and sluggish pricing trends among the metal companies, it said.

The research firm expects the pre-tax earnings of the S&P BSE Sensex and NSE Nifty 50 Index constituents to fall 3 percent and 4 percent, respectively.

Citi Research: Mid-Cap Firms To Outperform Larger Peers After Two Quarters in Q2

For financials, the benefit of lower provisioning expenses for state-owned banks may be offset by weaker net interest income growth, the report said. The loss of exclusivity and semi-exclusivity on some drugs in the U.S. for a few Indian drugmakers may weigh on the performance of pharma sector, it said.

Overall, weak macro factors may continue to exert “downgrade pressure” on earnings for financial years 2019-21 despite the boost from corporate tax cuts, it said.

Earnings boost for the current year from the tax rate cuts will likely be lower than the 8-9 percent we initially expected due to additional government clarifications such as MAT credit availability and revaluation of deferred tax assets.
Citi Research report
Citi Research: Mid-Cap Firms To Outperform Larger Peers After Two Quarters in Q2

Citi’s Sectoral Outlook


  • Weak volumes are expected to impact margins negatively due to operating deleverage.
  • Demand outlook for rest of the year as we approach the BS-VI emission norms change.

Capital Goods

  • Overall, we expect inflows for capital goods companies to be government ordering-driven, with private ordering continuing to remain subdued.
  • Among consumer electricals or appliances, any commentary on festive season sales would be key to watch.


  • Citi expects operating per tonne contraction across majors on weaker realisations, partly offset by lower petcoke prices. However, seasonal volume weakness should impact fixed costs.
  • Second-quarter pricing has been the most resilient in north and the least in east.


  • Loan growth to be slightly slower to stable due to broader macro slowdown, especially due to lower demand from the corporate segment.
  • Growth likely to remain subdued for vehicle finance and real estate segments.
  • Most companies may opt to take impact of change in tax rate on deferred tax assets upfront in this quarter. Lower tax rate will benefit ongoing earnings, Citi said in the research note.

Information Technology

  • Citi forecasts the overall second-quarter revenue growth for large Indian IT firms to be in the range of 1.4-6.7 percent quarter-on-quarter (in constant-currency terms).
  • Margins are expected to improve sequentially for most firms given the absence of visa cost, lower impact of wage hikes and rupee. However, it is expected to decline year-on-year.
  • Cross-currency headwinds are likely to impact dollar revenue growth by around 70-120 basis points sequentially for large Indian IT firms, the report said.


  • Citi expects healthcare services providers to perform better than drugmakers in the second quarter.
  • Service providers picks: Apollo Hospitals followed by Dr. Lal PathLabs due to factors such as strong earnings and low capex phase. That’s expected to improve the operating leverage and margin.
  • Pharma picks: Biocon as it expects the company’s biosimilars division to be strong in the second half of the current year. And Aurobindo Pharma as diversification will help the firm grow despite regulatory concerns.
Domestically focused companies will probably see a decent quarter. Otherwise we don’t see any major pick-up in growth. The drop in revenues for Sun Pharma, Cipla and Lupin will pull the aggregate revenue down.
Prashant Nair, Director, Deputy Head of India Research, Citi India

Click here, here, here and here for Citi Research disclosures.

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