Mid-cap, Small-cap stocks to shine amid improving market sentiment, says Geojit' Vinod Nair
The Indian stock market underwent a correction phase from 27th September 2024 to 7th April 2025—a span of 192 days, or roughly six and a half months. This consolidation was triggered as India's total market capitalisation (BSE) surged to ₹ 4.8 trillion in Sept 2024, pushing the estimated Market Capitalisation to GDP (Mcap/GDP) ratio to 145% based on FY24 nominal GDP, well above the ten-year average of ~90%.
This rally followed the euphoric third-term victory of the incumbent government in the June 2024 national elections. The political stability and anticipated continuation of reforms spurred heavy buying by domestic institutional investors (DIIs), retail investors, and foreign investors under the 'Buy India' strategy. However, the optimism was short-lived as corporate earnings for FY25 sharply declined. Nifty EPS growth was downgraded to just 5% YoY, a significant drop from the 15% forecasted at the fiscal year's start.
Several factors contributed to the earnings slowdown: Frequent Elections : Nine state elections and one national election in FY25 led to a significant reduction in both general and capital government spending.
: Nine state elections and one national election in FY25 led to a significant reduction in both general and capital government spending. Weak Demand : Rural and urban consumption was hit by an uneven monsoon, heatwaves, high food inflation, and sluggish wage growth.
: Rural and urban consumption was hit by an uneven monsoon, heatwaves, high food inflation, and sluggish wage growth. Global Headwinds: Elevated global inflation impacted corporate toplines and EBITDA margins, compressing profit margins.
As a result, the broader Indian market corrected by 20%, making mid- and small-cap stocks more attractive today due to both price and valuation corrections. The Nifty MidSmallcap 400 Index saw an intraday correction of 25% during this period.
The recent Q4 FY25 earnings season has brought encouraging signs. Companies in the Nifty 500 have reported 10.5% earnings growth much better than estimated and marginally better than large caps. This indicates a revival in mid- and small-cap earnings.
Last two quarters showcase those earnings cyclical growth is back. The Wholesale Price Index (WPI), which reflects corporate inflation, dropped to 0.85% in April from an average of 2.25% in Q1 2025. This decline is already translating into improved operational profits, aided by industry-wide repricing strategies and significant ease in inflation.
The momentum is expected to continue into Q1 FY26 (June quarter), supported by: Falling Inflation : Lower input costs are boosting margins.
: Lower input costs are boosting margins. Rising Disposable Incomes : Thanks to tax cuts announced in the 2025–26 Budget.
: Thanks to tax cuts announced in the 2025–26 Budget. Increased Government Spending : Post-election fiscal activity is picking up.
: Post-election fiscal activity is picking up. Declining Interest Rates: Lower borrowing costs are expected to spur consumption and investment.
These factors are likely to enhance revenue growth and profitability across sectors.
Market sentiment is also improving due to easing global and domestic risks. A pause in global trade tensions and reduced geopolitical risks in Central Asia, the Gulf, and the India-Pakistan region are lifting investor confidence. The likelihood of a U.S. recession in 2026 is also diminishing, further supporting global market stability.
This improving macro backdrop has sparked a preliminary rally in mid- and small-cap stocks, with renewed interest from both FIIs and retail investors.
Historically, Indian mid-caps have traded at a premium to large caps. In 2024, this premium peaked at 67%, compared to a five-year average of 33%. During the recent correction, the premium dropped significantly and now stands at 36%—a level that suggests strong long-term buying opportunities, especially if earnings continue to rebound in Q1 FY26.
The author, Vinod Nair is Head of Research at Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
India Gazette
an hour ago
- India Gazette
QuBeats wins Defence Ministry's iDEX ADITI 2.0 grant of Rs 25 crore to build Quantum Navigation Systems for Indian Navy
New Delhi [India], June 7 (ANI): Indian quantum deeptech startup QuBeats has won the prestigious ADITI 2.0 Defence Challenge to develop an indigenous Quantum Positioning System (QPS) for the Indian Navy. The award, which comes with a grant of Rs 25 crore (USD 3 million), will enable QuBeats to build next-generation high-precision quantum sensors that promise accurate navigation in GPS-denied or spoofed environments - a critical capability for modern military operations. QuBeats said in a release that it is disrupting conventional paradigms with its innovative quantum magnetometer technology in an era heavily dependent on satellite-based navigation like GPS. 'These high-precision sensors detect the Earth's unique magnetic anomaly signatures, enabling navigation that is entirely independent of GPS systems--reliable by day or night, in any condition. This groundbreaking capability offers transformative benefits across both military and civilian domains, addressing a potential market of USD 10 billion. The startup is currently raising a seed round to accelerate its product research roadmap,' the release said. 'As one of the few quantum sensing companies of its kind in India, QuBeats is redefining the country's strategic technological edge,' it said. The release said the company has been founded by a stellar team of physicists, engineers, and defence technologists and is building a suite of quantum products that include Quantum Magnetometers, Quantum Gyroscopes, Miniature Atomic Clocks, Rydberg Radars, and highly sensitive target detection sensors for critical and strategic use cases. 'Winning the ADITI 2.0 Challenge is not just a validation of our unique technology approach, but a clarion call to India's quantum aspirations. QuBeats is here to build the future--and build it from India,' said the founders in a joint statement. The release said QuBeats is uniquely positioned with a first-mover advantage in India in an age where navigation sovereignty and sensor dominance define military superiority,. With foundational IP in quantum sensing, a strong R&D pipeline, and a global outlook, QuBeats aims to productize quantum sensing solutions for defence, aerospace, energy, and critical infrastructure. The founding team includes Mallikarjun Karra - a PhD candidate at Max Planck Society, Madhu Talluri -postdoc from Lawrence Berkeley Lab, Shouvik Mukherjee - a finishing postdoc at Joint Quantum Institute at Univ of Maryland, US and Rajat Sethi - a graduate of MIT, Harvard and IIT Kharagpur. The release said China and the United States are investing billions in quantum navigation and sensing. China's PLA has integrated quantum magnetometers for stealth submarine detection, while the US is advancing chip-scale quantum clocks and gravity sensors for battlefield resilience. It said QuBeats provides India a vital response to these developments. 'By creating indigenous, battle-ready, and globally competitive quantum systems, QuBeats is India's answer to strategic parity in quantum warfare,' the release said. QuBeats said it proud to lead India's charge 'with vision, innovation, and the indomitable spirit of first principles' as quantum becomes the new high ground in defence and aerospace. (ANI)
India Gazette
an hour ago
- India Gazette
"Pak Generals want conflict, terrorists are their tools": Ravi Shankar Prasad in Berlin
Berlin [Germany], June 7 (ANI): BJP MP and leader of the all-party delegation Ravi Shankar Prasad on Saturday sharply criticised Pakistan's military establishment, asserting that its Generals orchestrate conflicts to remain relevant, using terrorists as tools to destabilise India. During a community event with the Indian diaspora in Berlin, Prasad highlighted India's remarkable progress in IT, space, and digital transformation under Prime Minister Narendra Modi's leadership, contrasting it with Pakistan's repeated failures in wars while referring to the repeated incidents of Pakistan-sponsored terrorism and the military's dominant role in the country's politics. 'India and Pakistan were born the same day. Where are we in India, and where are they (Pakistan)? India has become a major global IT power in the world. India has become an emerging space power in the world. The startup movements here are now globally recognised. India has also become the second biggest mobile phone manufacturer in the world. We have brought digital transformation with equity and justice,' Prasad said. 'What Pakistan is doing is creating terror machines. How to create world-class terrorists under their (military) Generals. They attacked us four times and lost every time. We never attacked; they were the ones who always started the war. It is because they are under the control of Generals and not political leaders. Generals want conflict to keep themselves relevant, and terrorists are the instruments through which they execute. Wherever there is a terrorist, either he is a Pakistani or trained in Pakistan,' he added. He emphasised India's economic achievements, including a 51 per cent share of global digital payments and its status as the second-largest mobile manufacturer, attributing this to PM Modi's 2014 vision of 'IT+IT=IT' (Information Technology + India's Talent = India Tomorrow). 'Prime Minister Narendra Modi used to say in 2014 that if he became the PM, he would make an India where IT+IT=IT, which means Information Technology + India's Talent = India Tomorrow. Digital payment in India is at 51 per cent of the world,' the BJP MP stated. Prasad also spoke about the April 22 Pahalgam terror attack and India's decisive response through Operation Sindoor on May 7, noting that Operation Sindoor remains paused but ready to resume based on Pakistan's actions. 'Pahalgam attack happened on April 22. We attacked on May 7 and hit the terrorist camps. If Pakistan has to talk, it must directly speak to us. Our message was stern and straight: If you stop, we stop. If you fire, we will give a stronger reply. Operation Sindoor is on pause, subject to the good behaviour of Pakistan. It has not ended,' he stated. The delegation, led by Ravi Shankar Prasad, includes BJP MPs Daggubati Purandeswari and Samik Bhattacharya, Congress MP Amar Singh and Gulam Ali Khatana, Shiv Sena (UBT) MP Priyanka Chaturvedi, AIADMK MP M Thambidurai, former Union Minister MJ Akbar and former diplomat Pankaj Saran. The delegation arrived in Germany after concluding their visit to Belgium to convey India's resolute and united stand against terrorism. (ANI)
Economic Times
an hour ago
- Economic Times
China says willing to improve communication with countries on rare earth controls
TIL Creatives China says willing to improve communication with countries on rare earth controls China's commerce ministry said on Saturday that it has approved a certain number of compliant rare earth export applications and will continue to refine its examination and approval process. The ministry also expressed willingness to enhance communication with other countries over export controls, according to a statement on its website, Reuters reported. The announcement comes at a time when Indian automakers are facing worsening shortages of rare earth magnets, critical components for electric vehicles (EVs) and other high-tech industries. According to Bloomberg, Beijing has turned down at least two recent applications for India-bound shipments of rare earth magnets, raising fears of an imminent disruption in Indian automobile production. Industry and government officials told Bloomberg that while shipments to the German and U.S. units of a global firm were cleared, the same request to its Indian arm was rejected. Since April 4—when China began enforcing tighter curbs on exports of seven rare earth elements—supplies to Indian auto parts manufacturers have been stuck at Chinese new controls require importers to certify that the magnets will not be used for defense purposes or re-exported to the U.S. The new end-user certification process can take at least 45 days and is now facing a global per the Bloomberg report, at least 30 Indian applications endorsed by the Indian government are still awaiting Chinese approval, while over 10 applications from other countries have reportedly been cleared. According to a May 28 presentation by the Society of Indian Automobile Manufacturers (SIAM), no Indian applications have received final approval from China's commerce ministry despite many having secured embassy endorsements. 'Even if one magnetised part is missing, the vehicle cannot be built,' SIAM warned in the presentation, adding that some Indian firms may consider shifting operations to China if the supply crunch continues. The squeeze has heightened concern among Indian automakers. 'The rare earth situation is a very difficult one,' Bajaj Auto's Executive Director Rakesh Sharma told analysts. 'Supplies and stocks are getting depleted as we speak, and if there's no relief in shipments, production will be seriously impaired in July.'To address the growing crisis, a delegation of Indian businesses is planning to visit Chinese counterparts this month with help from the Indian Embassy in Beijing. The embassy has reached out to China's commerce ministry, seeking expedited clearance of pending applications.A meeting was recently held at the Indian Prime Minister's Office to discuss options for resolving the impasse. Indian officials have advised manufacturers to explore alternative supply chains and consider local refining capacities—though such solutions are long-term in the Indian government is also encouraging firms to explore ferrite magnets or magnet-free designs, though these come with compromises in cost and performance. As a result, some companies are considering stop-gap measures such as importing motors or shifting production to fossil-fuel-powered vehicles. With inputs from agencies
