Are small-cap stocks a smart bet after the stock market crash? Experts share how to find value picks

The recent correction in the Indian stock market has provided some valuation comfort, unlocking potential value opportunities across segments. Interestingly, many experts currently favour small-cap stocks over large-caps at this stage.

While experts anticipate continued short-term volatility due to heightened geopolitical tensions, a strengthening dollar, uncertainty surrounding President-elect Donald Trump’s policies, and the US Fed’s rate cut trajectory, they suggest this may be an opportune time to consider bottom-fishing in the small-cap segment.

The Indian stock market has experienced a significant correction over the past two months. However, the extent of the decline in the small-cap segment has been less severe compared to the large-cap segment. As of November 30, the Nifty 50 is down over 8 per cent from its all-time high of 26,277.35. On the other hand, the Nifty Smallcap 250 index has retreated about 5 per cent from its record-high level of 18,688.30.

A sharp decline in the Nifty 50 index was driven by heavy foreign capital outflows, a trend experts expect to persist amid the dollar’s rise and uncertainty around the Fed’s monetary policy and Trump’s trade moves.

However, small caps are expected to remain relatively resilient due to their limited exposure to foreign institutional investors (FIIs). This has led many experts to identify potential value opportunities within the small-cap segment.

We spoke to several experts to gain their insights on how to identify value picks in the small-cap segment. Here’s what they had to say:

G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd

I expect small caps to be strong, while large caps may remain weak in the short term. FIIs do not hold small-caps significantly, so their selling does not affect the small-cap segment.

Even though the overall valuations of small caps remain high, they have become very attractive in many pockets.

Even now, around seven lakh new investors are entering the capital market every week. This robust influx of investors also supports small-cap stocks.

There are unique sectors in small caps that are not there in the Sensex and the Nifty 50.

For example, building products, logistics companies, etc., are not in the Sensex. People should look at those unique stories in terms of growth, deep value, investor holdings, maximum acquisition possibilities, etc.

Vikas Jain, Head of Research, Reliance Securities

The recent correction was very swift in small caps, with a lot of stocks declining in the range of 20-30 per cent, which provides a good opportunity to invest.

However, one has to be very selective and follow a bottom-up approach for the small caps to outperform.

One must observe and wait for the next quarter’s earnings growth and management commentary, which was muted in the last quarter.

A reversal of interest rate cuts starting from next year will improve earnings.

We continue to be positive on the markets with a medium-term perspective and will await the domestic credit policy outcome next month.

On the higher side, 24,750-25,000, which is the band of averages, will act as resistance in the short term.

Starting Friday, the fresh additions of 45 stocks from midcaps and small caps in the derivatives segment could increase participation and volume breadth in the futures segment.

In terms of valuations, the small-cap index is trading at a 25 per cent premium to its long-term averages, while the Nifty 50 is trading in line with the 10-year averages, providing some comfort at current levels and could outperform current levels.

Manish Chowdhury, Head of Research, StoxBox

While we do see a sea-change in fundamentals, our sense is that the kind of correction witnessed in small-cap stocks from their tops has led to some valuation comfort in select pockets.

We believe that markets are seemingly pricing a much better earnings performance by small-cap companies in H2FY25 than in H1FY25.

From a medium to long-term perspective, we believe that select PSU stocks in defence, shipping, power and railways offer a favourable risk-reward opportunity after the recent sharp correction.

With a strong order book, expected pick-up in government spending in H2FY25 and improved execution track record, we prefer the beaten-down PSU themes from a one-year perspective.

Ajit Mishra, SVP of research at Religare Broking Ltd

Large-cap indices have seen their valuation multiples correct closer to long-term averages, presenting a better risk-reward profile.

In contrast, small-cap and mid-cap indices continue to trade at a premium to their historical averages. However, the small-cap space cannot be entirely dismissed, as certain segments still offer reasonable valuations.

At this stage, a more selective, bottom-up approach is crucial. Investors should focus on companies with strong earnings visibility and attractive valuations, as these are better positioned to navigate the current market environment.

Balancing exposure between large-cap stability and selective small-cap opportunities can optimize portfolio performance.

Atul Parakh, CEO, Bigul

The recent corrections in the small-cap segment signal a necessary market recalibration, but valuation comfort remains elusive.

Current market dynamics suggest further downside potential before a meaningful value opportunity emerges.

Earnings challenges, with Nifty EPS estimates cut by 1.2 per cent for FY25 and overall earnings growth projected at a tepid 5 per cent, underscores the segment’s vulnerability.

Retail investor panic and profit booking are likely to persist. However, selective opportunities may surface in railways, fertilizers, agriculture-related stocks, and public sector enterprises ahead of the upcoming Union Budget.

Investors should remain cautious, focusing on resilient sectors like financials, healthcare, and select discretionary segments while awaiting more attractive entry points.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.