CY26 SMID outlook remains constructive, says Pradeep Gupta of Anand Rathi

India’s small and mid cap (SMID) universe has once again emerged as one of the strongest pockets of the equity market in FY26 so far, materially outperforming broader benchmark indices. While large caps have delivered relatively measured gains amid global uncertainty, SMIDs have benefited from a powerful combination of earnings resilience, domestic liquidity, improving industrial activity, and thematic sector tailwinds.

 

Importantly, the rally is no longer merely liquidity driven. Unlike previous cycles where speculative participation dominated smaller companies, the current phase of outperformance appears increasingly anchored in earnings delivery, balance sheet improvement, and structural growth visibility across sectors such as capital goods, defence, railways, EMS, renewable energy, financials, and manufacturing-linked themes.

 

 

One of the key drivers behind SMID outperformance has been the broadening of India’s capex cycle. After nearly a decade of subdued private sector investment, India is witnessing synchronised growth across government infrastructure spending, manufacturing investments, and energy transition-related capex. Smaller and mid-sized companies, particularly in engineering, EPC, industrial components, cables, transformers, and niche manufacturing, have emerged as key beneficiaries of this trend.

 

Order books across several mid-sized industrial companies remain at multi-year highs, aided by strong tendering activity in transmission and distribution, railways, defence indigenisation, data centres, renewable energy, and urban infrastructure. More importantly, execution has improved alongside ordering, supporting both revenue growth and operating leverage. This has resulted in sustained earnings upgrades across several SMID industrial names over the last few quarters. 

 

 

Another major factor has been the domestic nature of earnings for many SMID companies. At a time when global growth remains uneven and export-oriented sectors continue to face demand uncertainty, several domestically linked mid caps are benefiting from relatively stronger Indian macro fundamentals. India continues to remain one of the fastest-growing large economies globally, supported by resilient consumption, improving rural demand, formalisation, and public infrastructure spending. This has created a favourable backdrop for companies exposed to domestic manufacturing, retail finance, healthcare, logistics, and building materials.

 

Liquidity dynamics have further amplified the rally. Persistent SIP inflows into mutual funds, rising retail participation, and increasing allocation toward mid- and small-cap-focused schemes have provided strong domestic institutional support. Domestic flows have also remained resilient despite intermittent foreign institutional investor volatility. The growing financialisation of household savings continues to structurally benefit equities, with SMIDs often attracting a disproportionate share of incremental retail interest due to their higher perceived growth potential.

 

An equally important contributor has been the improvement in corporate balance sheets. Many SMID companies entered this cycle with significantly lower leverage compared to previous upcycles. Years of deleveraging, better working capital management, and stronger cash flows have enhanced return ratios and reduced financial risk. As financing conditions improve, these companies are now better positioned to participate aggressively in the ongoing investment cycle.   

 

Looking ahead, the outlook for SMIDs for the remainder of CY26 remains constructive, though returns are likely to become more differentiated compared to the broad-based rally seen earlier. The continuation of government-led infrastructure spending, improving private capex intentions, transmission investments, renewable energy deployment, and manufacturing localisation initiatives should continue supporting earnings growth across select SMID sectors.

 

At the same time, lower bond yields and expectations of a relatively benign domestic rate environment could further support equity valuations, particularly for growth-oriented mid cap businesses. If rural demand recovery sustains alongside urban consumption resilience, sectors linked to discretionary spending, housing, and retail lending could also see continued momentum.

 

That said, valuations remain an important debate. Several SMID segments are trading above long-term historical averages, especially within manufacturing and energy transition themes. While premium valuations reflect strong growth expectations, they also leave limited room for execution disappointments. Any sharp global slowdown, commodity volatility, geopolitical escalation, or delay in domestic execution could trigger corrections, particularly in overheated pockets of the market.

 

Overall, the SMID outperformance story in FY26 reflects more than just liquidity exuberance. It is increasingly tied to India’s evolving economic structure, characterised by manufacturing expansion, infrastructure creation, energy transition, and domestic demand resilience. While the easy gains from re-rating may now be behind us, the broader structural opportunity for high-quality SMID companies remains intact. The next phase, however, is likely to reward disciplined execution, balance sheet strength, and sustainable earnings growth rather than momentum alone.  ========================================== 

Disclaimer: This article is written by Pradeep Gupta, Chairman & MD, Anand Rathi Share and Stock Brokers Limited. Views expressed are his own.