Amid geopolitical headwinds and concerns over the impact of US tariffs, the December quarter (Q3) earnings of Indian corporates largely remained on expected lines.
Experts highlighted that large-caps and small-caps delivered in-line results, while mid-caps’ performance was slightly below expectations.
“The Nifty delivered a 7% YoY PAT growth versus our estimates of +6%. Nifty reported a single-digit earnings growth for the seventh consecutive quarter since the pandemic (Jun’20). Large-caps and small-caps deliver in-line results, while mid-cap performance misses our estimates,” said brokerage firm Motilal Oswal.
Small-cap stocks deliver stable performance
Most experts highlight that Q3 FY25 earnings in the Indian small-cap universe indicate a phase of normalisation rather than acceleration.
Ravi Singh, Chief Research Officer at Master Capital Services, pointed out that Q3 earnings in the small-cap segment have been mixed but relatively better than what the broader sentiment suggests.
Singh underscored that many small-cap companies reported double-digit revenue growth, and in several cases, profit growth outpaced sales due to operating leverage.
“While large caps delivered steady but moderate earnings expansion, small caps showed stronger growth momentum in select sectors like manufacturing, capital goods, and niche financial services. That said, margin pressure remained visible in companies exposed to raw material costs,” said Singh.
The BSE Smallcap index, despite earnings resilience, has been volatile and remains below its peak levels. Overall, earnings quality has improved in pockets, but performance is not uniform across the entire space.
Bhavik Joshi, Business Head of INVasset PMS, pointed out that earnings dispersion in the small-cap space has widened. Several companies have reported stable toplines but lower incremental margins, suggesting that profitability improvements are more cost-led than demand-driven.
Moreover, Joshi added that working capital cycles in parts of the small-cap space have lengthened modestly, and although balance sheets are structurally stronger than in previous cycles, smaller companies remain more exposed to liquidity conditions and shifts in risk appetite.
Should investors increase exposure
The small-cap space has corrected significantly in the recent past, reducing froth. However, many pockets in the space are still commanding premium valuation.
Experts say investors must be selective in the segment.
According to Abhishek Jain, Head of Research, Arihant Capital Markets, investors can consider gradually increasing exposure to these segments, but only with a medium-term horizon of at least two to three years.
“The focus should remain on companies with strong earnings visibility, sound balance sheets, and sustainable growth prospects. The March to May period will be crucial in terms of earnings momentum, and over the next couple of years, well-managed small and mid-cap funds could deliver meaningful returns for disciplined, long-term investors,” said Jain.
Singh of Master Capital Services recommends a selective approach at the current juncture.
Singh highlighted that small-caps tend to outperform when liquidity is strong and earnings visibility is clear.
He said while Q3 numbers show resilience, valuations in some pockets are still elevated relative to earnings growth.
“The BSE Smallcap index has corrected meaningfully from highs, which offers opportunities, but volatility remains high. Investors with a 3–5 year horizon can gradually accumulate fundamentally strong businesses with clean balance sheets and consistent cash flows. However, broad-based exposure without stock selection could remain risky in the near term. Patience and quality filtering matter more than speed right now,” Singh said.
Joshi of INVasset PMS, too, believes from a valuation standpoint, the recent correction has reduced extreme froth, but multiples remain above long-term averages on forward earnings, leaving limited room for disappointment.
“At this juncture, broad index-level exposure appears less attractive than selective allocation. Structurally, small-caps remain a fertile alpha segment, but incremental exposure should be gradual and focused on cash-flow durability, balance-sheet strength and earnings visibility. Volatility is likely to stay elevated, and dispersion, not beta, will drive outcomes,” said Joshi.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
