India’s small cap stocks will remember 2025 as a forgettable year.
India’s small cap stocks have suffered from a good run over the past two years.
The company’s woes are exacerbated by its high valuations and earnings missed.
The majority of stocks also trade below their 52 week highs.
Can investors in small caps shake off their underperformance to stage a return by 2026?
Stock picking is recommended by analysts as an alternative to index-based investing. They suggest that you look for undervalued and fundamentally sound stocks.
Smallcaps’ underperformance
India’s Nifty 50 benchmark index underperformed Asian peers, but it still registered a 10% increase in 2025.
The Nifty Small-Cap 100 Index had its worst year in three years in 2025 after 2022, when it fell by 14%.
India’s small cap stocks have been a great investment for investors in the past 2 years. They returned 47% in 2023, and 25% in 2020.
After a strong run in smallcaps, the valuations increased. However, the earnings did not meet expectations.
Overvaluation and earnings miss
MotilalOswal reported that almost 40% of small-cap companies failed to achieve their expected earnings in the second fiscal quarter.
Small caps’ earnings fell 5% from last year, against expectations of 3%.
JM Financials reports that 32% of small-cap firms under their coverage failed to meet its Q2FY26 earnings forecast.
The high beta stock underperformed due to this earnings disappointment, combined with the high valuations.
OmniScience Capital Advisors’ data shows that small-cap companies are likely to grow earnings by 11.7% over the next two years.
The index trades at 29.5 P/E multiples.
The report stated that “small-cap stocks are overvalued in relation to their fundamentals” when combining growth with valuation.
OmniScience also states that 63% companies in the smallcap sector, representing around Rs 28 lakh cr, are undervalued.
Analysts attribute the profit booking to small-cap stocks.
Kranthi Babini is the Director of Equity Strategy at WealthMills Securities.
The small cap stocks are low beta. Contrary to popular belief, small and mid caps outperformed largecaps in the past 18 months. At the end of last year, large caps started to outperform, while midcaps and smallcaps saw profit booking. There are many reasons for this. The first is the valuation issue. Large-cap stocks seem to have a fair value compared with mid and small cap shares. “The margin of safety in large cap stocks is much higher than that in mid-caps and small-caps.”
Stocks below their highest price
Trendlyne data shows that 87% of stocks within the Nifty Small Cap index are trading at a discount greater than 10% to their 52-week highs.
The average price of these stocks is 30% lower than their 52-week peak.
In 2025, major companies that surged during the rallies of 2023-24 have crashed.
Reliance Power and Ola Electric were down more than half their 52-week highs.
Reliance Power’s gains of 194% and 202.4% between 2023-2025 fell to 11%.
Tejas networks experienced a similar situation with an increase of 95% in just 2 years, and then a decline by 61% in 2025.
According to data from shareholders, India’s retail investor’s own a high percentage of some of these shares.
According to the data on shareholdings until September 2025, public shareholders hold 58% of Reliance Power’s free float and 48% in Ola Electric.
Retail investors burned their fingers after buying these stocks, after seeing their massive rallies.
Smallcap stocks: Analysts recommend bottom-up selection
Analysts see that investors can still make money by picking individual stocks, rather than investing the index.
Bathini said that he would look for specific stocks among smallcaps in 2026.
OmniScience Capital’s report stated that 36.3% (or Rs 16 lakh crore) of small-cap stocks are undervalued or fair valued.
The report also states that 230 other companies, outside of the 250 largest companies in the world are undervalued.
These pockets, according to the firm, “offer plenty of opportunities for active investors who want to generate alpha.”
What can small-cap investors expect?
Experts say that investors can also clean their portfolios of overvalued and underperforming stocks.
Vikas, Chief Investment Strategist and CEO of OmniScience Capital said: “It would not make sense to buy at the bottom.” If you own small-caps that have a P/E above 50 and aren’t confident they will maintain their growth rate then it is time to sell.
Gupta says that investors should not worry about the “sunk costs fallacy”.
Don’t think of it as if you had bought something at 100 rupees and then it rose to 150. Now it is 60 rupees. What matters is that it doesn’t. If the P/E is above 50 for either current or future-looking, then you need to sell. “You aren’t going to earn that much.”
He adds, however, that if you’re expecting to see a growth of 15% and a current stock price is 20 P/E, it would be better to add to or hold the position.
When you reassess, look first at the basics before making a decision. It is important to remove from your portfolio companies with high leverage, companies that have low ROE, companies that are not growing, or companies which are overvalued. Gupta stated that you must sell the companies and take losses.
Investors should be looking for undervalued stocks that are fundamentally sound in 2026, as India’s Small-Cap Stocks had an unremarkable year.
The post Can India’s Smallcaps beat torrid 2025? may change as new information becomes available.
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