4 smallcaps with up to 332% PAT growth just surged 170%: Can the outperformance continue?

It was an unforgettable first quarter for smallcap stocks, as Smallcaps led the 1QFY27 earnings performance of the Nifty-500, with Nifty Smallcap-250 companies reporting 35% YoY growth. The segment continued to deliver strong earnings growth, with the Smallcap index climbing to new all-time highs.

But the real standout was the sharp earnings growth delivered by a handful of companies. Data from ACE Equities shows that four stocks reported a massive increase in YoY PAT growth of up to 332.5%. Aditya Infotech led the pack, with PAT surging and its stock rallying a staggering 170% over the same period. Netweb Tech was close behind, reporting 180% PAT growth as its stock jumped 171% year-on-year. Hindustan Copper and RR Kabel also more than doubled PAT, with growth of up to 168%, while their stocks rose as much as 142%.

These stocks have emerged as some of the clearest bright spots in a smallcap rally that is increasingly being backed by earnings.

Earnings provide support

The smallcap rally is not simply a story of rising stock prices. Earnings are providing the foundation for the move. Smallcap companies covered by Motilal Oswal delivered 31% year-on-year earnings growth in the June quarter, comfortably ahead of its 22% estimate. About 75% of the smallcap coverage universe met or exceeded expectations.

Financials and oil and gas led the earnings performance, while NBFC lenders, private banks, NBFC non-lenders and chemicals also added to the gains. Together, these sectors accounted for about 69% of the incremental year-on-year increase in smallcap earnings.

The earnings outlook also continues to favour smaller companies. FY27 profit growth is estimated at about 16% for the Nifty 100, 20% for midcaps and 34% for smallcaps, according to Venugopal Manghat, chief investment officer-equity at HSBC Mutual Fund.

“This provides room for mid and smallcaps to catch up with earnings,” Manghat said. “However, given that smallcaps continue to trade at a premium, selectivity remains critical, with a focus on balance sheet strength, cash flow visibility and sustainable returns.”

“Our preference remains a diversified approach across market caps, driven by stock-level opportunities rather than a binary large-cap versus mid-/small-cap call,” he said.

Strong inflows

The earnings story is being reinforced by a steady flow of domestic money into the segment. Tanvi Kanchan of Anand Rathi said domestic flows continue to chase smallcap and midcap performance. Smallcap mutual funds pulled in nearly Rs 7,768 crore in July alone even as large-cap funds saw outflows. At the same time, smallcap earnings momentum remains genuinely ahead of largecaps on fundamentals.

Demand momentum, government capex and operating leverage should support earnings for another couple of quarters, she added. But it is too early to say the broader earnings slowdown is fully behind us. With valuations in the SMID space already elevated, the scope for further re-rating is also limited.

Is it time to bet on broader markets?

For now, analysts remain bullish on smallcaps and believe the rally still has room to run. The fact that the index is close to its highs, they said, should not by itself determine the investment call. The underlying trend remains positive, backed by strong domestic liquidity, improving earnings and continued participation from domestic investors.

“Our view remains bullish on the segment, and existing investors can continue to hold their small-cap exposure. Investors with a longer-term horizon can also look to add selectively on market declines rather than waiting for a large correction. We expect the broader small-cap theme to continue performing as domestic liquidity remains supportive and earnings delivery improves,” Ravi Singh of Master Capital Services said.

Singh sees power as a promising theme within the smallcap universe. India, he said, is entering a multi-year power investment cycle, with electricity demand expected to rebound and substantial capacity and grid investments planned.

Rich valuations?

The earnings backdrop is strong, but valuations are making the smallcap story harder to ignore. Mid and smallcap stocks were the primary drivers of market performance in the first half of 2026, helped by retail and domestic institutional flows, resilient economic growth and improving earnings expectations. Manufacturing, capital expenditure, defence, infrastructure and consumption-linked companies were among the key beneficiaries.

The sharp appreciation, however, has left less room for disappointment, particularly in stocks where valuations already assume sustained high growth.

Pawan Bharaddia, co-founder and CIO at Equitree Capital Advisors, said the dispersion within market cap segments is now greater than the differences between them, making broad allocation calls less useful.

“The broad midcap segment is where we would currently exercise the most valuation discipline,” he said. “Median valuations remain high, median PEG ratios in our work remain above 2, and nearly seven out of ten companies in our analysed midcap universe were trading above 30x trailing earnings.”

Bharaddia continues to see mispricing opportunities among select small and microcap companies, particularly in the Rs 1,000 crore to Rs 5,000 crore market-cap bracket. But the opportunity in parts of the segment does not mean the broader smallcap universe is inexpensive.

Time to be selective

That is where the biggest warning signal in the smallcap rally lies. The index may be powering ahead, but the gains are becoming increasingly concentrated.

Only 37.2% of stocks in the Nifty Smallcap 250 have outperformed the benchmark in 2026, the lowest proportion in eight years, even as the index delivered the strongest return among large, mid and smallcap benchmarks, according to a YES Securities report.

In other words, the headline index performance is not being matched by broad participation. While 24% of smallcap stocks have gained more than 25% this year, most constituents have failed to beat the index. That raises the execution risk for investors trying to chase the segment's recent performance.

The picture is almost the reverse in largecaps. About 65% of Nifty 100 constituents are outperforming their benchmark, the highest level in eight years and sharply above 46.5% in 2025. This improvement in breadth has come even as the Nifty 100 has underperformed the broader market, indicating that weakness among largecaps is concentrated in a relatively small group of stocks.

Across the NSE 500, participation has improved materially. About 54.9% of constituents are beating the Nifty 500, up from 36.4% last year and the second-highest reading in eight years.

But even here, the payoff from picking the winners is shrinking. Median alpha generated by winning NSE 500 stocks has slipped to 18.3% from 19.1% in 2025 and remains well below the 37.5% peak recorded in 2021.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)