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

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Mint
an hour ago
- Mint
NZ's Willis Criticizes RBNZ Handling of Orr Resignation
(Bloomberg) -- New Zealand Finance Minister Nicola Willis has criticized the Reserve Bank for its handling of former Governor Adrian Orr's resignation, saying it should have been more transparent about his reason for quitting. 'It's my expectation that all government agencies comply with their statutory obligations and wherever possible are open and transparent with New Zealanders,' Willis told reporters on Thursday. 'Of course they need to balance that against their legal obligations when it comes to employment discussions and agreements, but on this one I think they could have pulled their socks up.' Orr resigned abruptly on March 5 without giving a reason, and RBNZ Board Chair Neil Quigley would only say that it was a personal decision. But documents released yesterday under the Official Information Act reveal that Orr quit because the board was willing to agree to considerably less money in a new five-year funding agreement with the government than he thought was necessary. Willis said she had spoken to Quigley 'and expressed my view that they did not manage that Official Information Act request well and that I expect them to do better.' Quigley acknowledged 'they could have, and should have, done better,' she said. The RBNZ acknowledges it was late in producing a response to some of the OIA requests it received, Quigley said in a statement following Willis's remarks. 'I regret that this delay occurred,' he said. 'The circumstances and the volume of information associated with the OIAs were complex, and we needed to be sure that our consideration of relevant information was comprehensive. As well as our obligations under the Official Information Act, we needed to take into careful consideration the former governor's exit agreement and privacy law.' Quigley said the exit agreement and the ongoing work on the funding agreement had meant he was limited in what he could say about the resignation on March 5. That included the need to explain to staff any potential implications of a lower level of funding on staffing levels, he said. 'We are taking into account the feedback that we have received on our management of these OIA requests and looking carefully at how we can improve our response times in the future,' he said. (Updates with RBNZ chair's comments in fifth paragraph) More stories like this are available on


Time of India
an hour ago
- Time of India
‘I need exposure to India' mood revs up block trades, IPO plans
India's stock market is experiencing a resurgence, with share sales reaching $6.4 billion in May, the highest since December 2024, fueled by substantial block trades. A recent interest rate cut by the central bank has further boosted investor confidence. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads The South Asian nation saw $6.4 billion raised through share sales in May, the highest monthly total since December 2024, according to data compiled by Bloomberg. Block trades worth $5 billion were the biggest contributors, marking the busiest month for such deals since March last year. The momentum has carried into June, with at least 10 blocks raising $1.2 billion in the first week stocks are now positioned for more gains after the central bank on Friday delivered a bigger-than-expected interest rate cut and injected further liquidity into the banking system. This has supported a rally that's already underway, with the benchmark NSE Nifty 50 Index rebounding from its April lows, which were triggered by concerns over US President Donald Trump's broad tariffs.'Right now, investors are saying, 'I need exposure to India — and I need it fast,'' said Sunil Khaitan, a managing director leading financing in India at Goldman Sachs Group Inc. 'Block trades remain the quickest and most efficient way to get that exposure.'The recent torrent of deals stands in contrast to the lull earlier in 2025, when local deals cooled off after a record-breaking year. India even ceded its position to Hong Kong as the world's second-largest market for share sales in the first three months of the year, weighed down by an unexpected slowdown in economic growth and cautious corporate earnings of the largest recent block trades include British American Tobacco Plc's $1.5 billion sale of tobacco manufacturer ITC Ltd.'s shares, Singapore Telecommunications Ltd.'s $1.5 billion selldown of wireless carrier Bharti Airtel Ltd.'s stock and billionaire Rakesh Gangwal's $1.4 billion disposal of shares in IndiGo's parent company. Private equity firm Carlyle Group and South Korean automaker Hyundai Motor Co. were also among those paring their India flurry of activity with blocks appears to be spilling over to IPOs. HDB Financial Services Ltd. recently secured a nod from the securities regulator for a first-time sale that could raise $1.5 billion. Prudential Plc's Indian asset management venture is also nearing a filing for a listing expected to fetch as much as $1.2 billion, according to people familiar with the corporate earnings and decent economic growth provide a robust backdrop for deals, which could include billion-dollar IPOs later this year, said Samarth Jagnani, Morgan Stanley's head of global capital markets for India and Southeast Asia.'The second half will be better,' he the recovery, Indian deals remain well below last year's $66 billion record. Total share sales — including IPOs, placements and blocks — have raised $15.5 billion so far this year, 29% lower from the year-ago period, according to Bloomberg-compiled IPOs are also moving ahead with tamer valuations: Solar-pump maker Oswal Pumps Ltd. this week said its IPO was looking to raise 13.9 billion rupees ($162 million), lower than what it targeted last year.


Mint
an hour ago
- Mint
New World Bondholders Want More Disclosure on Financing Plans
(Bloomberg) -- New World Development Co. bondholders are growing frustrated with the level of financial disclosure by the cash-strapped developer as it prioritizes communication with banks during critical loan talks. The distressed Hong Kong builder has less than three weeks to complete an HK$87.5 billion ($11.2 billion) loan refinancing deal before a covenant waiver expires at the end of the month. Debt advisers, meanwhile, have said that they think a liability management exercise on the bonds would be the only way for New World to preserve equity value, and are urging noteholders to band together to resist any such move. As this plays out, an information gap is creating transparency concerns for bondholders, hungry for any scraps of intelligence to make trading decisions. A number of them, who asked not to be identified, said they haven't been able to get answers from New World in recent months on what steps it is planning to ease a liquidity crunch made worse by a market selloff. On the other hand, some banks got to see a cash flow projection in April with details about the company's planned debt payments over the next three years, according to other people familiar with the matter. While such moves can irk bondholders, it isn't uncommon for distressed firms to prioritize communication with bank lenders. Banks often have better access to company financials through loan covenants or lending relationships, while unsecured bondholders typically rely on public filings or voluntary disclosures. New World bondholders have another pressing concern: Over the past three months, the company's perpetual bonds have lost an average of more than 40% of their value, according to Bloomberg News calculations. The company's next steps could bring more pain for bondholders, according to debt adviser PJT Partners Inc. During a recent call with bondholders, PJT said that it expects New World to pursue discounted exchanges as part of a potential liability management exercise. If such a development comes after the loan refinancing, it could cut recovery ratios to 30% from 68% for unsecured bond investors, PJT warned. Frustration among bondholders escalated after a recent decision by New World to delay some interest payments on perpetual notes. The move was a shock to holders, some of whom had been reassured in February, when Chief Financial Officer Edward Lau said on an earnings call that net cash flow from operations was almost enough to cover capital expenditures, net interest expenses and perpetual bond coupon payments. Many bondholders have run into dead ends when seeking information from the company, with messages to New World's investor relations manager getting no response, according to people familiar with the matter. Some have had to monitor the news closely to figure out what is going on with the company, they added. In contrast, New World has been actively engaged with more than 50 banks as it works to complete its refinancing deal. Bankers have been in close contact with the developer's finance team, receiving updates regarding the company's debt plans, other people said. New World didn't immediately respond to a request for comment. The company said in a press briefing earlier this year that it has complied with all disclosure requirements. While unhappy they have been kept at arm's length, bondholders largely still hope the loan refinancing goes smoothly. The refinancing 'is progressing well and, once completed, should enhance New World's liquidity position and provide the company with additional time to execute its business turnaround,' said Dhiraj Bajaj, Singapore-based chief investment officer of Asia fixed income and equities at Lombard Odier Investment Managers. New World, whose key Hong Kong projects include Victoria Dockside and the new 11 Skies shopping mall, has about $7.9 billion in outstanding bonds, according to Bloomberg-compiled data. While it doesn't have any US dollar notes maturing this year, it has two Hong Kong dollar-denominated bonds with a combined $168.5 million due in March next year. The next big test for the developer comes Monday when it has a $5.05 million coupon payment due on a 5.875% bond. If the company decides not to pay the coupon on that day, it would have a 14 day grace period, after which an event of default would be triggered, according to bond documents seen by Bloomberg News. More stories like this are available on