Smallcap Earnings Slump 11% in Q1, Midcaps Outperform with 24% Growth
Motilal Oswal's analysis of Q1 performance reveals a stark contrast in the Indian stock market. Smallcap companies faced an 11% year-on-year earnings decline, with 46% missing expectations. Key sectors like private banks, NBFCs, insurance, oil & gas, and automobiles contributed to this weakness. In contrast, midcap companies showed resilience with 24% earnings growth. The Nifty index reported single-digit growth, driven primarily by five large-cap companies: Bharti Airtel, Reliance Industries, SBI, HDFC Bank, and ICICI Bank. Analysts have revised Nifty-50 FY2026 estimates downward by 2%. Motilal Oswal adjusted its strategy, maintaining 70% allocation to large-caps and increasing midcap weight from 16% to 22%.
*this image is generated using AI for illustrative purposes only.
The Indian stock market witnessed a divergence in performance between smallcap and midcap companies during the first quarter, according to a recent analysis by Motilal Oswal. The report, which examined 132 smallcap companies, revealed a concerning trend for smaller firms while highlighting the resilience of their midcap counterparts.
Smallcap Sector Under Pressure
Smallcap companies faced significant headwinds, reporting an 11% year-on-year decline in earnings for Q1. The analysis showed that 46% of the companies in this segment failed to meet market expectations, indicating widespread challenges across the sector. Key industries contributing to this weakness included:
- Private banks
- Non-Banking Financial Companies (NBFCs)
- Insurance
- Oil & Gas
- Automobiles
This downturn in smallcap performance has raised concerns among investors and analysts about the near-term outlook for these companies.
Midcap Resilience
In stark contrast to the smallcap segment, midcap companies demonstrated remarkable strength. The sector posted an impressive 24% earnings growth, continuing its positive momentum for the second consecutive quarter. This robust performance was broad-based, with 17 out of 22 sectors showing growth, underscoring the resilience and adaptability of midcap firms in the current economic environment.
Nifty Performance and Key Contributors
The Nifty index reported single-digit growth for the fifth quarter in a row, with a notable concentration of earnings growth among a handful of large-cap companies. Five companies stood out as the primary drivers of this growth:
- Bharti Airtel
- Reliance Industries
- State Bank of India (SBI)
- HDFC Bank
- ICICI Bank
These five entities alone accounted for 77% of the earnings growth in the Nifty index, highlighting the outsized impact of top-tier firms on overall market performance.
Market Outlook and Adjustments
The disappointing results, particularly in the smallcap sector, have led to downward revisions in earnings estimates. Analysts have cut the Nifty-50 FY2026 estimates by 2%, reflecting a more cautious stance on future growth prospects.
However, market observers remain optimistic about potential improvements in the second half of the year. Factors expected to drive this turnaround include:
- Favorable monsoon conditions
- Improved liquidity in the market
- Anticipated lower interest rates
Additionally, the GST reforms announced by Prime Minister Narendra Modi have boosted optimism among brokerages, particularly for consumption-related sectors.
Investment Strategy Shift
In response to these market dynamics, Motilal Oswal has adjusted its investment strategy:
- Maintained a 70% allocation to large-cap stocks
- Increased midcap weight from 16% to 22%
This shift reflects a growing confidence in the midcap segment while maintaining a strong foundation in established large-cap companies.
Conclusion
The contrasting performance between smallcap and midcap companies in Q1 highlights the complex and nuanced nature of the Indian stock market. While smallcap firms face challenges, the resilience of midcaps and the continued strength of select large-cap companies provide a balanced perspective for investors. As the market looks towards the second half of the year, factors such as monsoon performance, liquidity conditions, and policy reforms will be crucial in shaping the trajectory of different market segments.
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