Small caps see 5X jump in m-cap over 7 years; profit contribution rises 2.5 times

Small-cap segment has emerged as a powerful wealth creation engine over the past seven years, with market capitalisation growing nearly fivefold from ₹17 lakh crore in 2017 to ₹92 lakh crore by the end of 2024, according to a new study by Bajaj Finserv AMC. This performance translates into a compound annual growth rate (CAGR) of 27.6%, outpacing both large-cap (14.5%) and mid-cap (21.6%) counterparts during the same period.

The study also highlights that quality small caps have consistently outperformed broader indices. Notably, the Nifty Smallcap 250 Quality 50 TRI outperformed the Nifty Smallcap 250 TRI in 14 out of the last 19 financial years, reinforcing the value of selecting fundamentally strong companies within the small-cap space.

Over the past three years, the contribution of small-caps to overall market capitalisation has grown 1.4 times, while their contribution to India’s corporate profits has risen 2.5 times in the last four years. These metrics signal the rising prominence of small caps in India’s equity market and the expanding universe of opportunities for investors.

While the second half of FY25 witnessed a correction in small-cap prices, Bajaj Finserv AMC sees this as an opportunity for investors. As of April 2025, many small-cap stocks are still trading below their 52-week highs, making valuations attractive for long-term accumulation. Despite muted price movement—the small-cap index rose just 4% in FY25—corporate performance was robust, with profit after tax (PAT) up 38% year-on-year, from Rs 21,669 crore in FY24 to Rs 29,941 crore in FY25.

Furthermore, 74% of the top 250 small-cap companies reported double-digit Return on Capital Employed (ROCE), indicating solid financial health across much of the segment.

On the flip side, the study points to a range of 2017-era small caps that failed to scale, including names that declined into micro-cap territory due to poor governance or weak fundamentals, reinforcing the need for disciplined, quality-focused stock selection.

However, the study also flags the importance of stock selection. Around 50% of small-cap companies from 2017 have since slipped into the micro-cap category, highlighting the risk of poor-quality picks. Small caps have also dominated India’s IPO landscape, with 196 small-cap IPOs launched since 2020, but only four have graduated to mid-cap status, and none have entered the large-cap space so far.

The findings stress that while small caps offer high growth potential, investors must prioritise quality and conduct thorough due diligence to avoid volatility and value traps.