As largecap benchmark indices remained range-bound, the real momentum has been building up at the bottom of the market cap pyramid, where smallcaps are shaping up as compelling opportunities for investors looking to build a long-term portfolio.
As the Q4 earnings season comes to a close, pockets of opportunities are emerging in the small-cap segment. In FY25, 74% of the top 250 small-cap companies reported a Return on Capital Employed (ROCE) in double digits, indicating sound business fundamentals and improving operational efficiency.
From a valuation standpoint, the current market view appears opportunistic. Many smallcap stocks are trading significantly below their valuations in specific niche sectors, offering investors the rare chance to accumulate on quality names at better valuations.
Smallcaps known for their high-risk, high-reward profile, have often been overlooked in investor portfolios. However, we are seeing a shift in the narrative. With volatility easing, there is a positive shift in the investor sentiment, as portfolios are opening up to a higher risk appetite. This transition was reflected in the broader indices. While the Nifty 50 gained a modest 2.6% over the past month, the Nifty Smallcap 100 gained an impressive 14.7%.
The long-term case for smallcaps is equally compelling. Over the past seven years, the smallcap segment has delivered a compounded annual growth rate (CAGR) of 27.6%, outpacing the other market segments. Smallcaps also offer exposure to a wide and diverse universe spanning sectors such as BFSI and healthcare, as well as FMCG and power, providing a broad range of high-potential investment opportunities. Further, several sectoral trends are proving to be favourable for the smallcaps. The recent RBI rate cut is expected to benefit small-scale NBFCs and tier 2-3 banks, as these are largely wholesale funded. On the global front, the reciprocal tariff negotiations have proven beneficial for the Indian economy by accelerating the China plus one strategy. This has prompted several multinational companies to pivot their supply chains towards India. As the country emerges as a global manufacturing hub, the resulting industrial expansion will pose a tailwind for smallcap manufacturing companies, promoting scalability and expansion for those poised for growth. Also read: Fund Manager Talk | How Mihir Vora picks stocks using Gorilla hunt and a LIM test
In today’s evolving market landscape, smallcaps offer a differentiated exposure, driven by earning potential and supported by macro tailwinds, and backed by attractive valuations. For investors with a long-term horizon and a risk appetite, the current markets appear opportunistic, with a chance to reassess portfolios and strengthen allocations in this diverse universe of small caps.
(The author, Sorbh Gupta, is Head – Equity, Bajaj Finserv AMC. Views are own)
