Rs 13 lakh crore boom, but Q4 sends a wake-up call to smallcap investors

Even as retail investors pour into smallcap stocks chasing a stunning Rs 13 lakh crore boom over the last two months, the Q4 earnings season saw smallcap segment companies suffering the most.

According to JM Financial, smallcaps recorded the highest proportion of earnings misses in Q4FY25—31% of companies underperformed expectations, compared to 28% in midcaps and just 17% in largecaps. Out of 143 smallcaps tracked, 45 missed estimates while only 32 met them.

The message from Motilal Oswal Financial Services (MOFSL) was even more blunt: “The smallcap segment has been a laggard, recording not only weaker-than-expected numbers but also a notable aggregate PAT decline of 16% YoY.”


Sales were up 5%, but EBITDA dropped 6% and PBT plummeted 22%. The pain points? Smallcap financials and retail took a heavy beating.

In the NBFC-lending segment, earnings collapsed by a massive 68% YoY, driven by weak revenue and poor asset quality—especially among microfinance institutions. This one segment alone accounted for over 92% of the total PAT decline in the smallcap universe.

Even smallcap private banks and insurers weren’t spared. Private banks posted a 21% drop in profits, while insurers like Star Health reported operating losses and a token PAT—down 100% YoY.

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Retail names in the smallcap space saw a 34% fall in profits, dragged by soft demand and restaurant chains slipping into losses—unlike their mid and largecap counterparts that delivered growth.

Autos (-23% PAT), Oil & Gas (-51%), and even Tech (-1%) added to the misery. Consumer names posted just 7% PAT growth, while Cement was flat at 3%, Motilal said.

And yet, there were pockets of strength. Capital Goods stood out with 49% YoY PAT growth, beating both mid and large peers. Chemicals rebounded with 36% profit growth. Other stars included Consumer Durables (+64%), EMS (+52%), Staffing (+61%), and Real Estate (+37%).

Still, the broader picture remains one of caution.

“Mid and smallcap stocks where growth is faltering but valuations are still high are in the penalty box,” said Trideep Bhattacharya, CIO – Equities, Edelweiss Mutual Fund. “At the end of the day, we are bottom-up stock pickers and we are fine with largecap valuations. Within mid and smallcaps, we advise selectivity as a strategy in the sense that wherever there is a valuation premium, we make sure that there is an earnings growth premium that comes along with it.”

Bhattacharya added that small and midcaps are currently trading 17–25% above their 10-year average valuations—unjustified unless backed by performance.

Krishna Appala, Fund Manager at Capitalmind PMS, echoed this view: “Largecaps currently offer a better balance of earnings visibility and valuation comfort. The current environment rewards discipline and fundamentals over broad-based exposure—especially when smallcap multiples leave little room for error.”

The takeaway: Smallcaps may be in vogue, but the Q4 scorecard shows that the rally isn’t built on solid ground—at least not yet.

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