Two months of West Asia war: Analysts see smallcap's outperformance continuing

Indian small and midcap stocks are demonstrating remarkable resilience and outperformance against largecap indices, driven by attractive valuations, robust domestic institutional support, and a promising earnings recovery cycle, even amidst geopolitical uncertainties.

Small and midcap stocks have outperformed the markets, erasing the losses they made after the West Asia conflict began late February.

The Nifty Smallcap 100 index has rallied 6.2 per cent from its February 27 level, while the Nifty Midcap 100 gained 2.2 per cent.

In comparison, the Nifty 50 index and BSE Sensex are down 4.7 per cent and 5.3 per cent, respectively.

Reasons for Outperformance

Analysts expect small and midcap segments will continue their good run and outperform largecaps in the months ahead, despite the conflict.

One reason small and midcap stocks are doing well is that they comparatively underperformed in 2025, said G Chokkalingam, founder and head of research at Equinomics Research.

Valuations in the two segments are relatively attractive and have dipped since February 2026 due to the West Asia conflict.

"Another reason is a tepid primary market.

"Money with retail investors chased secondary market stocks, especially in the small and midcap segments amid a lack of investing opportunities in the primary markets.

"We continue to suggest investing especially in SMC (small and midcap) stocks on declines.

"Foreign institutional investors (FII) selling and the rupee's weakness have less impact on these stocks.

"Hence, we expect SMC stocks to perform better going ahead," he said.

DII Support and FII Outlook

While FIIs withdrew about Rs 1.7 trillion from Indian equity markets between February 27 and April 27, data from the National Securities Depository Limited shows domestic institutional investors (DIIs) supported the markets with an inflow of nearly Rs 1.9 trillion.

U R Bhat, cofounder and director of Alphaniti Fintech, said he does not expect FII flows to return to India with "animal spirits" soon.

"For them, relative valuations of India versus other markets matter, as do the forex (rupee-dollar) rates. Stocks of companies that can withstand the oil price shock will do well in the short to medium term," he said.

Sectoral Performance and Future Outlook

The Nifty Energy index was the top gainer among sectoral indices, surging 10.7 per cent between February 27 and April 28. Nifty Metal index followed the next with 6.6 per cent rally.

The Nifty Realty, Consumer Durables and Pharma indices are up in the range of 1 per cent to 2 per cent, data shows.

Public sector banks were the top losers in this period, with the Nifty PSU Bank index plunging 11.8 per cent from the February 27 level.

The Nifty Auto and Nifty Private Bank indices slipped 8 per cent each, followed by Nifty IT (down 5.4 per cent) and Nifty Oil & Gas (down 4.7 per cent).

The "small-cap story" will continue for the next 12-18 months amid a rebound in earnings, said Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors.

He expects smallcap stocks to give returns of 20-25 per cent compounded over the next two years — much sooner than the largecap earnings growth of 16 per cent.

From a fundamental viewpoint, small-caps trade at a one-year forward price-to-earnings ratio of 19.8x, in line with the five-year average of 19.9x, analysts said, but still at a 15 per cent premium to the long-term average of 17.3x.

Similarly, on a price-to-book ratio, small-caps trade at 2.4x, below the five-year average of 2.8x, but at a 10 per cent premium to the long-term average of 2.2x.

"Smallcaps' balance sheets are in much better shape.

"Given an earnings recovery cycle and improved balance sheets, we regard this as a reasonable risk-reward proposition despite the valuation multiples," Jaipuria said.