India’s stock market, viewed through the lens of its largest companies and Nifty 50, appears to be struggling. Look, instead, at its smaller firms and a different picture emerges—one of vigorous growth, expanding profits and buoyant demand. The contrast, noted in a piece I wrote in late-February this year (Small Caps: A Silver Lining), has not only persisted but become more pronounced.
In the March quarter, operating profit for Nifty 50 companies rose by just 4.1% year-on-year (y-o-y), while net profit increased a meagre 4.5%. It was the eighth consecutive quarter of single-digit earnings growth. By contrast, companies in the broader Nifty 500 index delivered operating-profit growth of 9.2%, while adjusted net profit jumped 16%.
What makes this divergence more striking is that both groups recorded sales growth of roughly 11%-12%. But the smaller firms were better able to protect margins and absorb rising costs, defying the conventional wisdom that scale confers resilience.
The dominance of India’s largest companies is gradually eroding, too. Their share of the profits of all listed firms has fallen steadily, from 51.8% in the March quarter of FY24-25 to 49.8% in the preceding quarter and 47.1% in the latest one. As in previous quarters, the most eye-catching performance came from micro-cap companies. Their sales rose by 17.5%, while operating profit increased by more than 22%. Even these figures probably understate the strength of the segment.
Many of the fastest-growing and highest-quality small firms remain outside the benchmark indices that investors follow. The persistence of such strong performance is surprising because the broader economic backdrop has deteriorated. Net tax revenues fell by 6.3% last month, largely because of softer goods and services tax (GST) receipts. Yet, many smaller companies continue to flourish.
The explanation lies in a shift that receives little attention outside the community of analysts and keen-eyed investors. India today possesses an unusually rich ecosystem of listed smaller companies operating in sectors with powerful and long-lasting growth drivers: pharmaceuticals, engineering, capital goods, defence and power infrastructure are among the most important.
Power: India’s projected peak electricity demand is expected to approach 460GW (gigawatts) by 2032. Meeting that requirement will necessitate vast investments in transmission infrastructure, including more than 120,000 circuit kilometres of new lines, additional substations and a gradual grid upgrade from 220kV (kilovolt) to 400kV and 765kV networks.
The theoretical requirement runs into several lakh crore rupees. Not all of that investment will materialise; inefficiency and delays are unavoidable. Yet, even a fraction of the planned expenditure represents an enormous opportunity for the small-cap companies that manufacture transformers, switchgear, circuit breakers, insulators, voltage regulators, capacitors, protective relays, cables and smart meters.
Pharmaceutical services: This constitutes another powerful source of growth. India’s contract development and manufacturing organisations (CDMOs) and contract research and manufacturing organisations (CRMOs) have evolved from low-cost suppliers into strategic partners for global drug companies. Estimates place the size of the Indian CDMO market at US$19bn-US$23bn (billion), with growth rates of around 12% annually, potentially sustainable for many years.
Indian facilities can often be commissioned far more quickly than their Western counterparts and operate at costs that are 70%-80% lower. India also has the largest number of US FDA (food and drug administration)-compliant manufacturing plants outside America. This is not an industry dominated by pharmaceutical giants. It is a knowledge-intensive business in which smaller, specialised firms often possess a competitive advantage.
Data centres: Demand for digital infrastructure continues to surge, and the sector is expected to expand by around 30% this year. The Union Budget for 2026-27 sweetened the proposition by offering a tax holiday until 2047 for eligible foreign cloud-service providers.
Globally, investment in data centres is expected to exceed US$180bn in 2026. The benefits mainly accrue to suppliers of various gear, power equipment, cooling systems, cabling and other supporting infrastructure. Here again, most of the beneficiaries are small firms.
Engineering (Capital Goods, Defence): Government capital expenditure (capex), defence indigenisation, rising demand for precision tools, factory automation and export opportunities have combined to create a sustained expansion cycle. Many firms expect double-digit growth for years. Several already possess order books stretching three years into the future. Most remain well below the radar of big institutional investors, especially the foreign ones.
Services: For decades, the listed services companies were largely synonymous with software exporters. But rising incomes, urbanisation and the aspirations of a wealthier middle class have given rise to a growing array of listed service businesses comprising finance (wealth management, asset management, brokerage, insurance, depositories, registrars, exchanges), healthcare (diagnostics, hospitals), and retailing (app delivery, retail chains, online stores). Every year, dozens of new service businesses are entering the listed space. Most of them are small companies outside the indices.
India’s macroeconomic challenges remain formidable. The fiscal position is under pressure. In April, subsidies rose by 52%, driven by higher food and fertiliser support. Interest payments increased by 18%, while other expenditure surged by 27%.
Such pressures will undoubtedly affect some businesses, particularly those dependent on government contracts or discretionary public spending. But despite two major external shocks, America’s punitive trade tariffs imposed last year and the three-month closure of the Strait of Hormuz, demand is robust and order pipelines intact.
The remarkable rise of small-caps, therefore, reflects the emergence of a broad set of specialised businesses operating in industries where the sectoral tailwinds remain considerably stronger than the macroeconomic headwinds.
(This article first appeared in Business Standard newspaper)
This is actually good news in a way that the system rewards entrepreneurship. Of course, a lot more could be done to make it easier for such companies to not only thrive but scale up as well. Let's see.
It is such a pleasure and relief to read that Indian companies are doing well.
I loan money to borrowers from RangDe, rangde.in, where borrowers from villages, cities, from all walks of life, borrow small sums for their businesses. RangDe has been growing steadily. The borrowers are housewives setting up small businesses, small farmers getting loans, etc. RangDe borrower default rate is less than 5%. The money paid back can be withdrawn but most simply re-loan to additional borrowers.
If only more people in India would support these small entrepreneurs, they have the potential to become small cap businesses eventually.
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I loan money to borrowers from RangDe, rangde.in, where borrowers from villages, cities, from all walks of life, borrow small sums for their businesses. RangDe has been growing steadily. The borrowers are housewives setting up small businesses, small farmers getting loans, etc. RangDe borrower default rate is less than 5%. The money paid back can be withdrawn but most simply re-loan to additional borrowers.
If only more people in India would support these small entrepreneurs, they have the potential to become small cap businesses eventually.