Mid, small-caps underperform large-caps in H1 as investors run for cover

Market experts believe that small-caps hold promise from a long-term perspective, provided investors do their homework diligently

Small and midcap indices underperformed their frontline peers in the first half of calendar year 2025 (H1CY25), falling 1.7 per cent in BSE Smallcap and a marginal 0.2 per cent rise in BSE Midcap index. The Sensex and the Nifty moved up 8 per cent each.

  Analysts said small and midcaps underperformed (SMIDs) in H1CY25 due to US tariff decisions, geopolitical concerns, and tepid corporate earnings in the December 2024 quarter (Q3FY25). These events made investors run to the safety of largecaps, regarding them as a safer bet in choppy markets.

  However, March quarter earnings (Q4FY25) and ensuing commentary infused confidence and investors lapped up SMID stocks over the next few months, said analysts.

  In Q1FY26, the BSE Midcap, BSE Smallcap, Nifty Midcap 100, and Smallcap 100 outperformed the market by recording double-digit returns in the range of 12 per cent to 18 per cent. In comparison, the BSE Sensex and Nifty 50 index gained around 8.6 per cent and 9 per cent, respectively.

  “The March 2025 quarter (Q4FY25) earnings season and the commentary for most mid and smallcaps were good. It is due to this earnings performance that DIIs (domestic institutional investors), too, poured in money in stocks of these segments. However, one needs to be stock specific now,” said Kranthi Bathini, director – equity strategy, WealthMills Securities.

The market value of 501 stocks in the mid and smallcap indices jumped over 18 per cent in Q1FY26. Of these, 75 stocks surged over 50 per cent. Lumax Auto Technologies (up 112 per cent), Suven Life Sciences (up 111 per cent) and NACL Industries (104 per cent) doubled investors’ money. 

The smallcap segment has delivered healthy growth in seven years, according to Bajaj Finserv AMC. The basket’s market capitalisation has grown fivefold – ₹17 trillion in 2017 to ₹92 trillion by the end of 2024 — reflecting a compound annual growth rate (CAGR) of 27.6 per cent during this period.   

Largecap and midcap segments recorded a CAGR of 14.5 per cent and 21.6 per cent, respectively, in the same period, according to Bajaj Finserv AMC. 

  Road ahead 

Market experts believe that smallcaps are promising from a long-term perspective, provided investors are diligent and invest in quality stocks and stay put.

 

“I continue to believe India is a smallcap market. While the headline indexes – the BSE Sensex and the Nifty 50 – may not deliver much return for the next couple of years, at smaller levels there are amazing companies in India,” said Shankar Sharma, founder of GQuant Investech. 

Analysts at Bernstein were for a year cautious about small and midcaps in the backdrop of macro earnings risks and valuations.  

They have now upgraded midcaps within their SMID coverage to ‘neutral’, with room for some outperformance in the near-term.

“Current valuations for Midcap 150 are at 28x FY26 earnings from 39x FY25 in September 2024, reflecting the ongoing reset. With margins stabilising and macro tailwinds, we believe it’s prudent to shift from a negative to a neutral — or mildly positive — stance on midcaps,” wrote Venugopal Garre, managing director and India head of research at Bernstein, in a recent 

coauthored note. 

Coforge, KPIT Technologies, Persistent Systems, Delhivery, Paytm, Max Financial, HDFC AMC, Jubilant FoodWorks, and Devyani International are Bernstein’s top picks in the SMID universe.