Small Caps Enter Favorable Zone as Earnings and Valuations Outperform Large Caps

India's Small- and Mid-Cap Stocks Attract Investors Amid Strong Earnings and Valuation Corrections

India's small- and mid-cap stocks are poised to benefit from a combination of stronger earnings, price corrections, and improving valuations, making them more attractive than large-cap stocks. This sentiment is shared by Hiren Dasani, chief investment officer for emerging markets at Singapore-based WhiteOak Capital, which has a global asset under management (AUM) of $11.23 billion, with 40% of its assets allocated to India.

According to Dasani, the real opportunity lies in companies tied to powerful structural themes such as manufacturing, supply-chain diversification, defense, energy infrastructure, and AI-linked global capital expenditure. These themes are better represented in the broader market than in the large-cap universe. Despite elevated crude prices and foreign outflows, the long-term growth story of domestic markets remains intact, according to WhiteOak.

Market performance shows a divergence. India's Nifty 50 and Sensex have declined 8.3% and 10.5% respectively in 2026, while small-caps and mid-caps have gained 2.6% and 2.2% respectively.

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Foreign portfolio investors have offloaded domestic stocks worth $23.86 billion in 2026 so far, surpassing last year's record annual outflows. However, Dasani views the selling as a valuation reset rather than a rejection of India's fundamentals. He believes that India's 10%–12% earnings growth outlook remains intact, but investors are reassessing it against improving earnings visibility in other emerging markets such as Korea and Taiwan, driven by AI-led capital expenditure.

Record buying by domestic mutual funds in small- and mid-caps in April remains a key supportive factor for these segments, according to WhiteOak Capital. The fund house favors industrials, manufacturing, and select financials, citing strong momentum in engineering firms, auto ancillaries, and capital-goods companies, with multi-year growth visibility.

WhiteOak also sees opportunities in non-banking financial companies, MSME lenders, and microfinance firms, where credit costs appear to have peaked. However, it is cautious on IT services as AI-driven productivity gains intensify pricing pressure.

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WhiteOak has significant exposure to Indian small- and mid-cap stocks, with its flexi-cap, multi-cap, and special opportunities funds managing 79.07 billion rupees ($829.09 million), 34.21 billion rupees, and 15.39 billion rupees respectively.