Boiling over? Small and midcap multiples bubble, but PEG keeps lid on

Surface froth looks intense, yet expected growth tempers risk

Despite trailing the benchmark Nifty 50, small and midcap (SMID) stocks appear pricey on a 12-month forward price-to-earnings (P/E) basis. The Nifty trades at roughly 21x forward earnings, compared with around 28x for both the Nifty Smallcap 100 and Nifty Midcap 100 indices. 

But growth-adjusted valuations tell a different story.

 

On a P/E-to-growth (PEG) basis, the broader market looks more reasonably priced. Goldman Sachs reports that the Nifty Smallcap 100 trades at a PEG of 1.3x and the Nifty Midcap 100 at 1.1x, compared with 1.5x for the Nifty 50.

 

“India’s high valuation has long been a primary investor concern. At about 23x 12-month forward earnings, India remains the most expensive market in emerging markets. We expect a moderate derating of 5 per cent in our base case and 9 per cent in a bear-case scenario over the next two years,” Goldman Sachs said in a note. “While SMIDs are more expensive than largecaps, they look reasonable in terms of PEG ratios when adjusted for expected earnings growth.”

 

Ambit Capital, in a recent note, observed that over the past three years, large, mid, and smallcaps have posted compound annual growth rates of 14 per cent, 24 per cent, and 25 per cent, respectively.

 

A strong PEG profile indicates SMIDs are expected to generate superior earnings growth, even though Ambit forecasts Nifty Smallcap earnings to decline in 2025-26 — the first contraction in five years.

 

Analysts caution that while SMID bets can be rewarding with outsized returns, their earnings are more volatile, making careful stock selection essential.