India's Smallcaps Join Bulls As Midcaps Maintain Sharp Recovery

The Indian equity market has witnessed an impressive bounce back from the correction seen in mid and small cap indices since April, which has seen the small caps join the bull phase and the midcaps nearing the same levels.

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The Nifty SmallCap 100 Index is up 23% since April, with its rally exceeding 20%, which is the usual criterion for identifying a bull run. The Nifty MidCap 100 Index has rallied 18% in the same time frame.

The bounce back comes after a long correction, which started in September 2024, where the mid and small cap stocks were dragged down due to high valuations, FII selling and geopolitical tensions arising from the West Asia conflict. The rise in crude oil prices was another factor affecting sentiment earlier in the year.

However, despite the recovery seen in the market, the benchmark indexes have been lagging behind, with the Sensex and Nifty indices failing to reach new highs.

Earnings Growth Supports Rally

March quarter earnings data showed stronger growth in midcap companies compared to largecap and smallcap peers. Around one-third of companies in the Nifty MidCap 100 recorded average earnings growth of 23% year-on-year in Q4 FY26.

Operating profit growth for midcaps stood at 23% year-on-year, while net profit growth came in at 21%, according to company earnings data. Large-cap earnings growth was lower during the same period.

As per reports, market participants also pointed to continued domestic liquidity support. Investments from high-net-worth individuals, portfolio management services and alternative investment funds increased after valuations corrected earlier this year.

Valuations Remain Elevated

Valuation levels in broader markets remain above historical averages. Currently, the Nifty MidCap 100 trades at 28.17 times forward price-to-earnings ratio, slightly above its ten-year average of 28 times.

Currently, the Nifty SmallCap 100 trades at 23 times forward P/E, which is more than its long-term average of 19.7 times.

Specialty chemical and power transmission stocks have attracted the attention of investors in the mid-cap and small cap segments. Companies in the speciality chemicals sector have expanded production capacities over the past few years as global firms diversified supply chains beyond China.

Crude Oil Prices Remain Key Risk

Global developments continue to remain a major factor for Indian markets. Crude oil prices have stayed elevated following renewed tensions between the U.S. and Iran, increasing concerns over inflation and India’s import bill.

Earlier this year, crude oil prices crossing $100 per barrel had triggered volatility in Indian equities, especially in broader market segments.

Despite the rally, other indices are yet to match their levels of September 2024, with markets keenly watching events elsewhere as well as oil prices.