India's small-cap segment witnessed a fivefold rise in market capitalisation in the last 7 years, jumping from ₹17 lakh crore to ₹92 lakh crore by the end of 2024. This translates to an overall surge in compound annual growth rate (CAGR) of 27.6%, as per a report by Bajaj Finserv AMC. In contrast, during the same period, large-cap and mid-cap segments recorded a CAGR of 14.5% and 21.6%, respectively.
In the last 3 years, the contribution of small-cap stocks to the overall market capitalisation has also increased 1.4 times. The segment's contribution to India Inc.'s profits has surged 2.5 times, during the past 4 years. "This trend reflects the increasing prominence of the small-cap segment and the broader range of investment opportunities it now presents," Bajaj Finserv stated in its recent report.
The second half of the previous fiscal year (FY25) witnessed a sharp correction in small-cap space after a long period of euphoria. However, this correction eventually brought the segment to more reasonable valuation levels. As per data, the majority of the small-cap stocks are currently trading below their 52-week high.
"While the small-cap index gained only 4% since FY24, profit after tax (PAT) grew by 38%, highlighting the segment’s unrealized value. Despite the price correction, small-cap profits rose to ₹29,941 crore in FY25 from ₹21,669 crore in FY24," the report added.
Stock-Picker's Market
Even as the small-cap segment continues to display strong performance, the high-risk factor has consistently prompted D-Street players to raise the caution banner.
Despite attractive returns on the D-street, the market remains a stock-pickers play. Nearly 50% of small-cap companies have slipped into the micro-cap category over the past seven years. Even in the primary market, out of around 196 listed small-cap firms (since 2020), only four have transitioned to the mid-cap status and none to large-caps.
