After a bruising 2025 for smallcap stocks, market sentiment is shifting toward a more selective and quality-focused approach. CA Anupam Tiwari, Head of Equity and founding member at Groww Mutual Fund, expects 2026 to present better opportunities for smallcap investors, though he cautions against expecting broad-based rallies.

Niche Businesses Offer Attractive Growth Despite Challenges

Tiwari believes the growth trajectory for niche and specialized smallcap businesses remains attractive, albeit uneven. These companies typically address specific market gaps in components, processes, or services rather than broad end markets.

Key factors for success in niche smallcaps:

• Longevity of the business opportunity
• Company's ability to reinvest capital at high returns
• Balance-sheet discipline during growth phases

"Many smallcaps fail not because demand disappears, but because capital allocation or leverage goes wrong while scaling," Tiwari explained. The fund manager emphasizes that growth alone is insufficient in the smallcap space, requiring accompanying improvements in margins, healthy cash-flow conversion, and sustainable return ratios.

Investment Strategy Focuses on Quality Over Broad Exposure

While mid and largecap outlooks have improved, smallcaps continue to lag in both earnings growth and share price performance. Tiwari views the current phase as part of a historical pattern where periods of strong outperformance are followed by consolidation phases.

"Small caps continue to remain one of the most effective ways to participate in India's economic transformation," Tiwari noted, emphasizing that many sector changes are being driven by companies in this market segment.

Earnings Recovery Expected by FY27 with Structural Improvements

Looking toward FY27, Tiwari sees improving earnings visibility for smallcaps, driven more by structural changes than cyclical factors. India's economic transformation has enhanced how small businesses operate, with better access to capital, formalized supply chains, improved governance standards, and enhanced scaling capabilities.

However, he expects the earnings recovery to be selective rather than uniform across the segment. "The next phase of growth is likely to be selective rather than broad-based," with outcomes driven by company-specific execution rather than macro conditions alone.

Valuation Landscape Requires Nuanced Approach

Regarding current valuations, Tiwari emphasizes the need for nuance in assessment. While broad-level moderation has occurred, valuations are not uniformly favorable across the fragmented smallcap universe.

Groww's QGaRP Investment Framework:

• Quality: Non-negotiable focus on business model and management
• Growth: Emphasis on companies with longer runways
• Reasonable Price: Flexible valuations within defined comfort levels

"Bottom-up stock selection is critical to this segment—outcomes are driven far more by company-specific execution than by market-level trends," Tiwari explained. This philosophy guides the Groww Small Cap Fund, currently open for subscription.

2026 Outlook: Constructive but Selective Recovery

Tiwari expects 2026 to be more constructive for smallcap investors compared to 2025, primarily because expectations have become more realistic and excesses in various pockets have been corrected.

"A straight-line recovery should not be expected," he cautioned, noting that smallcaps may continue experiencing volatility. However, as earnings visibility improves and fundamentals reassert themselves, the environment becomes more supportive for quality-focused investing strategies that can compound value over full market cycles.

Shares of Billionbrains Garage Ventures Ltd., the parent company of discount broking platform Groww , surged as much as 10% on Friday, January 16, extending their rally following positive brokerage commentary and strong December quarter results. The stock momentum was driven by robust financial performance and a significant strategic investment announcement.

Strong Brokerage Support Drives Rally

Motilal Oswal maintained its 'Buy' rating on Groww and revised its price target upward to ₹190 per share. The brokerage highlighted the company's continued delivery of strong revenue growth, driven by rising user adoption across products and robust user activation. The firm noted that Groww's broking business is gaining market share across segments, supported by recent product launches including margin trading facility (MTF) and commodities trading.

The brokerage emphasized that the rising number of affluent customers is creating wealth management opportunities, with the ongoing integration of Fisdom expected to further strengthen this segment. Motilal Oswal raised its FY27 and FY28 EPS estimates by 2% each, factoring in strong expansion in the MTF book and better-than-expected rollout of the commodities segment.

State Street's Strategic Investment in Groww AMC

In a significant development, State Street announced a ₹580 crore investment in Groww AMC for a 23% stake. State Street, the world's fourth largest investment manager with $5.50 trillion in assets under management, structured the deal as follows:

The investment is strategically significant as it brings global expertise in passive and quantitative strategies to Groww while allowing the company to retain control through capped voting rights. The AMC currently manages assets worth ₹4,119.00 crore. Groww had acquired the AMC from Indiabulls in 2023 for ₹175.00 crore.

Impressive Q3 Financial Performance

Groww reported strong Q3 results marked by healthy growth across key metrics and rapid expansion in the MTF book. The company recorded its highest number of user additions in a year, demonstrating strong customer acquisition momentum.

*EBITDA declined year-on-year due to a high base in Q3FY24, which included a one-time reversal of ₹425.00 crore in long-term leadership incentive costs following the company's redomiciling exercise.

Adjusted Performance Metrics

When accounting for one-time items, the company's underlying performance showed consistent growth:

• Adjusted EBITDA: Rose 24% to ₹710.00 crore
• Adjusted Profit After Tax: Increased 24% to ₹547.00 crore

The MTF book's 38% sequential expansion was particularly noteworthy, aided by market share gains from a low base, indicating strong traction in margin trading services.

Market Response and Current Trading

Shares of Billionbrains Garage Ventures were trading 7.58% higher at ₹176.80, reflecting strong investor confidence in the company's growth trajectory and strategic partnerships. The stock's performance brings it back near post-listing highs, supported by both operational excellence and strategic value creation through the State Street partnership.