New Delhi

Domestic small- and mid-cap companies are expected to outperform large-cap firms in earnings growth during the September quarter, supported by capital expenditure, modern manufacturing and artificial intelligence-led data centre investments, according to a research report by J.P. Morgan.

The brokerage expects earnings of Nifty 50 companies to grow 17 per cent year-on-year in the second quarter of the current financial year, while companies covered by the brokerage are projected to record 16 per cent growth in net profit.

The brokerage expects revenue growth across its covered companies to accelerate to 20 per cent in the September quarter from 19 per cent in the preceding quarter. However, rising raw material, fuel, freight and packaging costs are likely to weigh on profitability.

J.P. Morgan expects earnings growth to be led by materials and logistics, particularly metals, hospitals, retail and consumer discretionary businesses, industrials and financials.

The report said resilient domestic demand, early festive-season inventory building and favourable pricing in select commodity-linked sectors are expected to support double-digit growth despite cost pressures.

However, earnings performance is likely to remain uneven across sectors. Electronics manufacturing services, pharmaceuticals and consumer staples could see strong revenue growth fail to translate into comparable profit growth, while information technology services and cement are expected to remain weak.

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, reflecting elevated input costs.

In contrast, large private banks could see further earnings upgrades following the Reserve Bank of India's rate hike and its shift towards a calibrated tightening stance, the report said.

J.P. Morgan also highlighted risks to the outlook, including rising food inflation, below-normal rainfall, geopolitical uncertainties and continued pressure on IT services from artificial intelligence-led deflation.

The brokerage said the shift in festive-season timing could make year-on-year comparisons less straightforward for jewellery, fashion and beauty products, while higher commodity costs could constrain margins across consumer-facing businesses.

In its sector allocation, J.P. Morgan maintained an overweight stance on financials, consumer discretionary, industrials, healthcare and materials, while remaining underweight on information technology.

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The brokerage said small- and mid-cap companies remain better positioned to benefit from some of the strongest growth themes, including capital expenditure and AI-led infrastructure investment, supporting its preference for these segments over large-cap stocks.