By Swapnil KarkareIndia’s small caps are once again in the news – this time, not for higher volatility or FII sell-offs. Analysts and investors alike are increasingly upbeat about this space.
“We believe that over the long term, in a growth economy like India, small-cap stocks will outperform large caps,” Venugopal Manghat of HSBC Mutual Fund says. His optimism stems from a combo of tailwinds: low inflation, falling interest rates, rising liquidity, and strong support in manufacturing, infrastructure, and financial growth.
Market experts like Shankar Sharma of GQuant Investech call India 'a fundamentally small-cap market', while Gautam Shah, Founder, Goldilocks Research, takes a bolder stance. He suggests ignoring the Sensex and Nifty and focusing on the broader market that includes smallcaps.
Smallcap stocks have seen a remarkable expansion in market value, jumping from Rs. 17 lakh crore in 2017 to Rs. 92 lakh crore by the end of 2024, according to Bajaj Finserv AMC. That’s a nearly 5x jump.
In fact, what qualifies as “small” has also changed dramatically. Back in 2019, the large-cap threshold was Rs. 26,000 crore. Today, it’s Rs. 1 lakh crore. Small-caps jumped from just Rs. 2,000 crore to Rs. 11,000 crore (the BSE smallcap index has an even higher threshold, with the largest stock, Hitachi Energy, at Rs. 80,000+ crore).
So, while the whole market cap ladder has moved up, smallcaps have climbed the fastest.
In this week's Analyticks,
A smallcap boom: Small, rising players are back in the news
Screener: Favourite smallcap stocks among analysts, where consensus is 'Strong Buy'
The smallcap space is riding on high enthusiasm
Varun Goel of Mirae Asset Investment Managers believes that small caps are now one of the best long-term bets. These companies are set to benefit from the revival in private capex, cleaner balance sheets, and a steady pickup in consumption as incomes rise.
Analysts seem to support this view. Among the top 250 small-cap stocks, 117 have strong analyst coverage (five or more forecasts) in Trendlyne’s Forecaster tool. Most of these companies are expected to deliver double-digit growth in both revenue and earnings over the next year.
On the revenue side, Utilities, Metals & Mining, Consumer Durables and NBFCs lead the pack. For earnings, the highest forecasted growth is seen in Consumer Discretionary, Transport & Logistics, Metals & Mining, Chemicals, and Auto. These sectors are closely tied to India’s infrastructure and consumption cycles.
Optimism is backed by results
A growing economy, along with the recent market correction and lower risk premiums, have encouraged investors to favour smaller, domestically-focused companies that are likely to benefit more from India’s consumption and capex revival. But the story does not stop here.
For the second consecutive month, small-caps are beating their largecap peers in earnings growth. In May, earnings per share for the Nifty Small Cap 250 Index rose by 2.3% MoM against a flat line for the Nifty 50 Index. And smallcaps rose 9.6%, higher than the Nifty 50’s 1.7% — a sign that investor confidence is returning.
Mutual fund investors are favouring smallcaps
Sometimes the best way to gauge market sentiment is to follow where institutional money is flowing. The mutual fund data reveals a pattern that's been building steadily over the past year - investors have steadily increased their allocation to smallcap funds.
From June 2024 to May 2025, small-cap schemes saw Rs. 43,954 crore in net inflows, followed closely by midcap at Rs. 43,133 crore and much higher than largecaps at Rs. 26,389 crore. This does not include multicap or flexicap schemes. Starting this year, inflows in smallcap schemes have beaten midcaps by 15% and large caps by 78% on average.
“The sharp decline in largecaps points to a shift among investors toward higher-growth, though riskier, segments like mid and small caps. It also reflects some degree of profit booking, as large-cap indices had already seen a considerable run-up in the months prior”, explains Himanshu Srivastava of Morningstar Investment Research India.
It can get nail-biting: uncertainty and smallcaps go together
It's important to highlight that smallcaps are often the first to react when sentiment turns sour — and not in a good way. Downgrades and drawdowns are more common here due to their thinner margins, lower liquidity, and greater earnings volatility.
What complicates matters more is that many small-caps don’t enjoy the luxury of close institutional tracking. Even a minor change in outlook or performance can lead to sudden re-ratings, both upward and downward.
In the recent earnings season, 31% of small-cap companies missed earnings expectations compared to 17% of large-cap companies, according to JM Financial. Thus, we need to be cautious while selecting smallcaps to invest in.
Smallcaps defy the stereotype: most are healthy
But despite widespread concerns about quality and valuations in the smallcap space, a deeper analysis reveals that this is a surprisingly healthy group.
Out of 250 companies, 150 have a ‘Good’ durability score (above 55). That’s 60% of the smallcap index. It shows that a majority of small-cap companies have solid and consistent fundamentals. This finding aligns perfectly with Bajaj AMC's research, which found that 74% of the top 250 small-cap companies reported double-digit return on capital employed (ROCE).
Only 10 companies scored ‘Bad’ on durability (less than 35), which is a relatively small number. One-fourth have a valuation score of less than 30, while almost 60% are fairly priced.
Momentum is even more skewed. 188 companies (two-thirds) fall in the ‘Mid’ category, suggesting neutral or unremarkable price action. Only 19 are in the Good momentum category, while 43 are in Bad, reflecting recent volatility and cooling off after earlier rallies.
Who are the standouts in this space?
As always in small-cap investing, selectivity matters more than broad-based exposure. We analysed small-cap companies based on Trendlyne’s Durability and Momentum scores that are seen positively by market analysts.
Companies with a good durability (55+) and momentum (60+) scores and a high operating margin (15% and above) included: MCX, Narayana Hrudayalaya, KFIN Technologies, Karur Vysya Bank, Deepak Fertilisers, and Intellect Design Arena. These stocks are not exceptionally overvalued.
MCX
New products like electricity derivatives, rising retail interest in options, and volatility in key commodities are driving MCX’s stock prices. Anshul Jain, Head of Research at Lakshmishree Investments, sees growth potential in the stock, though at a more measured pace than before.
Narayana Hrudayalaya
Despite recent rallies, the healthcare major remains attractively valued compared to peers. Its PE Ratio stands at 51x/43x on TTM/Forward basis vs. its peers: Max Healthcare (108x/62x), Apollo Hospitals (70x/53x), Fortis (74x/56x) and KIMS (65x/56x).
KFIN Technologies
Strong revenue growth, expanding EBITDA margins, and accelerated momentum in the company’s international operations has turned Jefferies bullish on this stock. The brokerage justifies its premium valuation based on consistent execution, expanding addressable market, and a high-margin, tech-driven business model. Its ROCE and ROE have consistently remained above 20% for the last four years.
Karur Vysya Bank
Emkay is optimisticabout the bank’s future performance, backed by strong RoA, asset quality, capital/provision buffers, and stable management. It boasts one of the lowest NPAs among small & mid-sized private banks, with NNPA at just 0.2%. It also has one of the lowest borrowing costs among its peers at 5.8%.
Deepak Fertilisers
Deepak's Q4FY25 net profit rose 23% on strong crop nutrition products demand. Unlike agrochemical firms facing demand volatility in both domestic and export markets, fertilisers are showing resilience in domestic demand. The management is doubling down on its speciality product portfolio and capacity expansion, while an above-normal monsoon is expected to improve its market share.
Intellect Design Arena
Intellect Design management projects 15% revenue growth in FY26, driven by its new AI platform and banking solutions. The Chairman has set an ambitious target of Rs. 5,000 crore in AI revenues over five years, from the current total revenue of just over Rs. 2,500 crore in FY25. Of course, ambitions are so far, just ambitions. But it's worth keeping an eye out.
Screener: Smallcap Favourites: Smallcap stocks with rising momentum, where Forecaster consensus is 'Strong Buy'
Birla Corp, JB Chemicals have Strong Buy consensus from Forecaster
Wars and tariffs have made high volatility the defining trend of 2025, and smallcap stocks have borne the brunt. The BSE Smallcap index fell 3.3% over the past six months. In this environment, there are outperformers and laggards, so we look at smallcap stocks with positive analyst consensus. This screener shows stocks from the Smallcap index with rising Trendlyne momentum scores, where Forecaster consensus recommendation is 'Strong Buy'.
The screener consists of stocks from the pharmaceuticals, agrochemicals, iron & steel products, capital markets, and cement & cement products industries. Major stocks in the screener are DCB Bank, Birla Corp, JB Chemicals & Pharmaceuticals, Dhanuka Agritech, Balrampur Chini Mills, Nuvama Wealth Management, RR Kabel, and VRL Logistics.
Birla Corp has a Forecaster consensus of ‘Strong Buy’ with its Trendlyne momentum score growing to 57.1 over the past month. Analysts at Motilal Oswal are confident on this cement & cement products company on the back of strong growth in its Mukutban plant, an increase in realisation, and capacity expansion set to be commissioned in FY28-29. However, analysts expect a near-term volume moderation due to capacity constraints and peak capacity utilisation.
JB Chemicals & Pharmaceuticals also features in the screener with a ‘Strong Buy’ consensus from Forecaster. This pharmaceuticals company’s Trendlyne momentum score increased to 53.2 over the past month. Analysts at Prabhudas Lilladher expect its growth to continue, led by the geographical expansion of legacy brands, improvement in the medical representative (MR) segment productivity, scale-up in acquired brands, new launches, and scaling up of contract manufacturing business.
You can find some popular screeners here.
