Smallcap mania is back. But do Q4 earnings really justify the multibagger hype?
A blistering rally in smallcap stocks is reigniting investor dreams of overnight riches but the numbers are telling a far more complicated story. With the BSE Smallcap Index up nearly 10% in one month, retail participation is surging, echoing the speculative fervor of the last bull market that climaxed in September 2024. And the excitement isn't just index-level: in the last one month, a staggering 69 smallcap stocks have delivered over 30% returns. Among the biggest gainers, Suven Life Sciences surged 83%, while GRSE, Timex, IFCI, Nelcast, and HLE Glascoat all rallied at least 50%.
ADVERTISEMENT But while prices soar, fundamentals remain shaky and earnings aren't keeping pace with the hype.
'Indian smallcaps and midcaps seem to have outperformed largecaps in Q4 FY25, but the numbers tell a different story,' said Akshay Badjate, Fund Manager at Merisis PMS. 'Our analysis of the top 750 listed companies shows smallcaps lagging in profit growth, with a median PBT growth of just 4% compared to 11% for the top 250 largecaps. Many smallcaps even posted flat or negative growth, undermining the narrative of a broad-based rally.'
Despite the tepid performance on the bottom line, investor appetite has remained insatiable. The Nifty Smallcap 250 has rallied 9% in the last two months, triple the 3% rise seen in the Nifty 50. Badjate attributes this surge to 'liquidity, retail enthusiasm, and domestic growth optimism,' but warns that the disconnect between price and performance may not be sustainable.'Our view at Merisis Advisors is cautious,' he said. 'While select smallcaps with strong fundamentals remain appealing, the segment risks a correction if earnings don't align with valuations. We're trimming smallcap exposure and leaning into largecaps and large midcaps, where we see better operational momentum and value.'
Also read | Rs 7 lakh crore boom in just 10 days! Is the smallcap stocks party getting out of hand?
ADVERTISEMENT Q4 did deliver a few bright spots for the broader market. 'The Nifty Midcap 150 reported 15% YoY profit growth and the Smallcap 250 delivered 12%. Margin performance was largely stable in midcaps, though smallcaps saw some pressure,' said Krishna Appala, Fund Manager at Capitalmind PMS.But Appala also flagged that the earnings catch-up story has its limits. 'Valuations remain stretched — midcaps trade at 34x and smallcaps at 32x trailing earnings, well above the 22x seen in largecaps. The divergence between earnings and valuations in the broader market calls for greater selectivity.'
ADVERTISEMENT He further added that while largecaps may appear sluggish, they now offer a better risk-reward profile. 'Despite the sharp upmove recently, largecaps currently offer a better balance of earnings visibility and valuation comfort on a forward-looking basis. The environment today rewards fundamentals and discipline over broad-based exposure — especially when mid and smallcap multiples leave little room for error.'Still, not all fund managers are ready to write off smallcaps just yet. Vaibhav Chugh, Director and Head of Sales at Whiteoak Capital AMC, sees rich opportunity in the chaos — provided investors pick wisely.
ADVERTISEMENT 'Yes, the result season started slow but as it progressed, midcaps and smallcaps have surprised on growth trajectory as well as upgrades to downgrades statistics,' Chugh said. 'We continue to be overweight small caps. We find relatively high alpha opportunities due to the heterogeneity of business models, sectors and sub-sectors in the smallcap space — which is the ideal setup for bottom-up stock pickers.'
With nearly 70 smallcap names delivering eye-popping returns in a matter of weeks, the lure of the next multibagger is proving hard to resist. But experts caution that investors need to tread carefully — the fundamentals are not as broad-based as the rally suggests, and elevated valuations leave little room for disappointment. The smallcap story is far from over, but chasing momentum without earnings to back it could lead to painful lessons.
Also read | Sensex soars 10,000 points from April lows. But India Inc's Q4 numbers expose cracks in market rally
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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