logo
Red flag! Small-cap stocks rally adds  ₹9 lakh crore in 2 months despite earnings miss. Time to turn cautious?

Red flag! Small-cap stocks rally adds ₹9 lakh crore in 2 months despite earnings miss. Time to turn cautious?

Mint2 days ago

Small-cap stocks: There's a popular adage in the stock market —Prices are a slave to earnings. But this doesn't seem to hold true in the case of the small-cap stocks that have been in an upward trend for four straight months despite a sharp miss in the March quarter earnings.
The overall PAT for the small-cap stocks was down 16% year-on-year, significantly worse than the already muted expectations. Despite that, in the financial year 2025-26 alone (FY26), the BSE Smallcap index has gained nearly 15%, adding over ₹ 9 lakh crore to investor wealth, according to Bloomberg data, raising concerns that the current bullish trend is likely built on shaky ground. Potential for high returns in a short period has powered the small-cap rally.
However, this has deprived investors of valuation comfort, with the one-year forward P/E for BSE Smallcap trading at 33x, which is well above its long-term average of 19-20x.
The small-cap segment also remains a popular category among mutual fund investors, garnering the second-highest net inflow of ₹ 17,535 crore up to April, as per data from Morningstar. This sustained investor interest underscores the strong appeal of the segment, likely driven by the robust returns small-cap funds have delivered over the past few years, Himanshu Srivastava, Associate Director – Manager Research at Morningstar India, said.
The earnings miss was notable, especially amid positive surprises across large and mid-cap names. Domestic brokerage Motilal Oswal Financial Services (MOSL) said that not only was the segment a laggard, but it also recorded a notable PAT decline, influenced materially by weakness in the financials sector, underlining the challenges for smaller BFSI players during the quarter.
According to Prashanth Tapse, Senior Vice President of Research at Mehta Equities, small-cap companies have historically exhibited greater earnings volatility, making them more vulnerable to macroeconomic shifts. As a result, even flat or slightly weak earnings can lead to disproportionate price corrections, amplifying volatility, he cautioned.
However, he expects a rebound in corporate profitability among fundamentally strong small-cap businesses, driven by a favorable macroeconomic environment like declining interest rates (following RBI rate cut), which are expected to reduce borrowing costs, benefiting small-cap firms with higher sensitivity to credit conditions, and cooling inflation that is likely to ease raw material and operational costs, supporting margin expansion in upcoming quarters.
Since the small-caps remain a barbell segment, capable of both strong rebounds and deep corrections, analysts believe stock selection is critical.
"From a valuation standpoint, any correction in small-cap stocks would make price reasonable, improving the risk-reward profile for long-term investors. While a cautious and informed approach, emphasising on quality and diversification, can help navigate the complexities of this segment," Tapsee added. He advised investors not to just focus on short-term earnings, but try and spot businesses with low debt, consistent cash flows, and sectoral tailwinds, while avoiding companies where promoters have high pledging history, rising debt levels, or working capital issues, with concerns on corporate governance.
Vaqarjaved Khan, Sr. Fundamental Analyst, Angel One, also said that one must not completely exit small-caps as a strategy but should remain selective going forward. Earnings miss by a big margin, such as 10-25%, coupled with highly stretched valuations, make picking small-cap stocks relatively tricky, according to Khan. Against this backdrop, he advised staying away from cyclical sectors such as textiles, paper and overleveraged small NBFCs trading at premium valuations. He further added that it's better to stay away from frothy names and churn positions from small-caps to mid and large-caps.
While small-cap stocks, by nature, are more volatile and sensitive to economic cycles, they can see sharper earnings downgrades during uncertain phases. However, this same segment has historically shown the ability to deliver outsized returns over long investment horizons, especially as some of these companies evolve into future market leaders.
"Despite the volatility, small-caps continue to be seen as high-risk, high-reward engines of long-term growth; they demand patience, discipline, and a strong stomach for risk. From a portfolio construction standpoint, small-caps can act as a return kicker, enhancing long-term portfolio growth when included in moderation. That said, the allocation to small-cap funds should be calibrated based on an investor's risk appetite, time horizon, and overall financial goals," said Srivastava of Morningstar.
Disclaimer: This story is for educational purposes only. 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 any investment decisions.

Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

Plan to sell IPL 2025 champions RCB only..., Kohli's team reveal truth to BSE, they said...
Plan to sell IPL 2025 champions RCB only..., Kohli's team reveal truth to BSE, they said...

India.com

time2 hours ago

  • India.com

Plan to sell IPL 2025 champions RCB only..., Kohli's team reveal truth to BSE, they said...

RCB won the IPL 2025 title after wait of 18 years. They beat PBKS by six runs in IPL 2025 final last week. Media reports stated that RCB owners Diageo India are planning to sell a stake in the team after their IPL 2025 win. RCB could become 2nd IPL team after Gujarat Titans to sell a stake, according to a report in Bloomberg. RCB owners Diageo India are looking at valuation of $2 billion, according to the report in Bloomberg. RCB owners Diageo have confirmed their stand in statement to the Bombay Stock Exchange. "The company would like to clarify that the aforesaid media reports are speculative in nature and it is not pursuing any such discussion," Mital Sanghvi, the company secretary, informed the regulating body of the Indian Stock Market. "This is for your information and records." Diageo-owned United Spirits stock prices increased after new of RCB stake sale. Diageo India had to respond to a mail from BSE. Former IPL chairman Lalit Modi is not surprised at RCB valuation of $2 billion, according to report in Cricbuzz website. "I will not be surprised if it is sold for a higher price," Lalit Modi said. RCB official have no been available since deadly Bengaluru stampede last week which led to death of 11 people amid Virat Kohli's team felicitation.

Rupee advanced as US-China trade tensions ease; opens higher at 85.53/$
Rupee advanced as US-China trade tensions ease; opens higher at 85.53/$

Business Standard

time2 hours ago

  • Business Standard

Rupee advanced as US-China trade tensions ease; opens higher at 85.53/$

The Indian Rupee advanced after two days of muted trade on Wednesday, after the US and China decided to defuse trade tensions following two days of talks. The domestic currency appreciated 9 paise to open at 85.53 against the greenback, after closing at 85.62 on Tuesday, according to Bloomberg. The currency has traded nearly flat so far this year, while it has risen by 0.09 per cent so far this month. The US and China agreed to a plan to ease trade tensions, with both sides agreeing to implement the consensus the two sides reached in the prior round of talks in Geneva. Meanwhile, a US federal appeals court has allowed Trump's most sweeping tariffs to stay in place, while it reviews a lower court decision to block them. The Indian Rupee traded in a narrow range on Tuesday, amid a lacklustre session as markets awaited developments on a potential deal between China and the US, noted Anil Kumar Bhansali, head of treasury and executive director of Finrex Treasury Advisors LLP. A broad framework has now been agreed upon, based on talks in Geneva, and the rupee is expected to open slightly stronger at 85.58, Bhansali said. "It may trade within a range of 85.40 to 85.90 during the day, with mid-month demand emerging from oil, defence, and government payments." There are no significant inflows or outflows expected in the near term, and the currency continues to hold within a broad range of 85.00–86.00 and a narrower band of 85.25–85.75, Bhansali said. The rupee's intraday range over the last two sessions has been limited to just about 20 paisa, underscoring how volatility has subsided, according to a Reuters report. The 10-day daily realised volatility has fallen to its lowest level in more than two months. The Reserve Bank of India (RBI) made a larger-than-expected 50-basis-point interest rate cut on Friday. The central bank also slashed the cash reserve ratio (CRR) by 100 basis points to 3 per cent. In commodities, crude oil prices fell in early trade on Wednesday as markets were still assessing the outcome of US-China trade talks. Brent crude price was down 0.25 per cent to $66.70 per barrel, while WTI crude prices were lower by 0.25 per cent at 64.82, as of 9:05 AM IST.

Auto Parts Supplier Marelli Files for Chapter 11 Bankruptcy
Auto Parts Supplier Marelli Files for Chapter 11 Bankruptcy

Mint

time3 hours ago

  • Mint

Auto Parts Supplier Marelli Files for Chapter 11 Bankruptcy

(Bloomberg) -- Marelli Holdings Co., the struggling auto parts supplier for Nissan Motor Co., Stellantis NV and other carmakers, has filed for Chapter 11 bankruptcy protection in the US as it seeks to slash its debt burden and restructure under new ownership. About '80% of the company's lenders have signed an agreement to support the restructuring, which will deleverage Marelli's balance sheet and strengthen its liquidity position,' Marelli said in a statement. It added it does not expect the process to have any operational impact on its business. Marelli has received a commitment for $1.1 billion in debtor-in-possession financing from its lenders. Upon Court approval, this amount, coupled with cash generated from the company's ongoing operations, is 'expected to provide sufficient liquidity to support the company through the Chapter 11 process,' Marelli said. The auto parts supplier has been caught up in industry upheaval as electrification and automation force global carmakers to shift their strategy to cope with declining sales in key markets. One person familiar with the matter said earlier this week that global investment firm Strategic Value Partners LLC, led by Victor Khosla, will effectively become the new owner of Marelli. KKR & Co., the US-based private equity group that created Marelli in 2019 by merging its Calsonic Kansei and Magneti Marelli units, will transfer its shares to the consortium of lenders as part of the proposed deal, the person said. Representatives for KKR declined to comment. Strategic Value Partners didn't respond to an email seeking comment. Marelli, which employs more than 50,000 people, had sought unsuccessfully to restructure over the past few years as orders from customers fell. The manufacturer based in Saitama, Japan, operates around 170 facilities globally that supply lighting systems, air conditioning, electric motors, suspensions and other components to carmakers. Apart from SVP, Marelli's creditors include Deutsche Bank AG, Mizuho Financial Group Inc. and other lenders. The consortium also includes Seoul-based MBK Partners Ltd. and New York's Fortress Investment Group LLC, the person said. Marelli filed for court-led rehabilitation in 2022 and at that time, its total debt was around ¥1.1 trillion ($7.6 billion), the most ever for a Japanese manufacturer. That was since reduced to around ¥650 billion. 'After careful review of the company's strategic alternatives, we have determined that entering the Chapter 11 process is the best path to strengthen Marelli's balance sheet by converting debt to equity,' Marelli CEO David Slump said in the statement. 'Taking this action now provides access to new liquidity to fund our long-term growth and innovation pipeline.' (Updates with detail from official statement.) More stories like this are available on

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into the world of global news and events? Download our app today from your preferred app store and start exploring.
app-storeplay-store