Smallcap investors just got some bad news from Q1 earnings. Time to tweak your portfolio?

Economic Times

a day ago

Smallcap investors face headwinds as Q1 earnings reveal an 11% YoY dip, with nearly half of companies missing estimates. Midcaps, however, shine with a robust 24% growth. Experts suggest a portfolio shift towards large-caps and mid-caps, anticipating a stronger second half driven by GST reforms and improved consumption.
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What should investors do?
If share prices are slaves to earnings, then the just-concluded Q1 earnings season has just spoiled the outlook for investors in the smallcap basket. According to an analysis by Motilal Oswal, smallcap earnings dipped 11% year-on-year (YoY) with almost half of the stocks under its coverage missing estimates. Smallcaps (132 companies) continued to experience weakness and a broad-based miss, with private banks, NBFCs (lending and non-lending), Insurance, Oil & Gas, and Automobiles posting a YoY earnings decline. The smallcap earnings dipped 11% YoY (our estimate of flat growth), with 46% of the coverage universe missing our estimates,' domestic brokerage Motilal Oswal said.While smallcaps crumbled, midcaps emerged as the undisputed winners. "Midcaps (92 companies) have extended their streak of the past two quarters and yet again delivered a strong earnings growth of 24% YoY (vs. our est. of 20%)," Motilal Oswal said, adding that 17 of 22 sectors under coverage delivered a double-digit PAT growth.Oil & gas, PSU banks, NBFCs, metals, and IT were the major growth drivers, which contributed 89% of the incremental YoY accretion to earnings, it said.Nifty, on the other hand, reported a single-digit earnings growth for the fifth consecutive quarter but the analysis revealed troubling concentration dynamics. "Five Nifty companies – Bharti Airtel, Reliance Industries, SBI, HDFC Bank, and ICICI Bank – contributed 77% of the incremental YoY accretion in earnings," Motilal said, highlighting how narrow the growth story has become.Meanwhile, several blue-chip names dragged performance: "Coal India, Tata Motors, IndusInd Bank, ONGC, HCL Technologies, Kotak Mahindra Bank, Axis Bank, Eternal, HUL, and Nestle contributed adversely to the earnings."The earnings disappointment has triggered fresh estimate cuts. Vinay Paharia, CIO, PGIM India Mutual Fund, noted: "The FY2026E/27E earnings per share (EPS) of Nifty-50 Index has seen further cuts over the past one month, reflecting the weakening growth outlook, with FY2026E Nifty-50 EPS cut by 2% in the past one month."The downgrade cycle reflects broader concerns: "1QFY26 earnings season shows weakness in consumption, muted IT services demand and subdued loan growth for lenders."Despite the gloom, analysts see light at the tunnel's end. Hiren Ved from Alchemy Capital offered a nuanced outlook: "The big hope is that in second half on back of good monsoon, better liquidity, lower rates, we start to see better numbers coming out in the second half and as the base of earnings in the second half is also lower."He said the earnings story in the first half of FY26 is likely to be neutralish but the second half should be very strong, especially the third quarter for consumption.Prime Minister Narendra Modi's announcement on GST reforms has made brokerages more bullish than before on all things consumption - autos, cement, consumer durables, FMCG and even financials as a proxy play.Sumit Bhatnagar, Fund Manager at LIC MF, sees the worst behind us: "The key takeaway for us is that the earning downgrade cycle or the pace of earnings downgrade is getting slower and probably we are in a bottom quarter or maybe the Q2 can be the bottom quarter for earning downgrade per se and from here on we expect the earnings to pick up gradually."On valuations, Bhatnagar struck an optimistic note: "Our markets are still fairly valued whether it is your headline indices or if you compare it on a yield gap basis or if you compare the premium that we have enjoyed vis-à-vis other emerging markets which are broadly in line with the long-term averages."Amid an earnings divergence, Motilal said its portfolio bias remains towards large-caps with 70% weight. 'We have turned more constructive towards mid-caps (with 22% weight vs. 16% earlier) owing to better earnings delivery and improving prospects. We are overweight on BFSI, consumer discretionary, industrials, healthcare & telecom, while we are underweight on oil & gas, cement, real estate, and metals."Global brokerage firm Jefferies sees potential upside catalysts ahead: "We anticipate a strong rebound in the Sep'25 qtr, owing to low base of activity due to elections in last year, which led to weak govt spending. Also, this year, Diwali is earlier as compared to the previous year by 12 days. This implies that Sep'25 qtr will likely capture a share of Diwali demand." Emkay Global positioned the GST reforms as the key catalyst: "The GST rationalization offsets near-term worries on weak growth and tepid earnings. The six-week downtrend should now reverse, as i) the outlook for earnings improves considerably, and ii) valuations will factor in the broader positives of this big-ticket reform measure."Emkay is overweight on consumer discretionary, and prefers small and midcaps in staples and cement within materials.As smallcap investors grapple with the harsh Q1 reality, the message from brokerages is clear: the growth premium has shifted decisively toward midcaps, while the GST reform tailwinds promise to reshape consumption patterns in the second half.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)