120 smallcaps deliver double-digit returns in a week. Is this the recovery everyone’s looking for?

More than 120 smallcap stocks delivered double-digit gains in the week gone by, marking one of the sharpest short-term rallies in the segment in recent months. The rally was broad-based, cutting across textiles, auto ancillaries, infrastructure, chemicals, consumer and capital goods.

Stocks such as VTM, Gokaldas Exports, Garware Hi-Tech Films, Faze Three and United Foodbrands surged between 35% and 45% in just five trading sessions, while several others posted weekly gains in the 20% to 30% range. Even traditionally steady names in pipes, engineering, auto components and consumer discretionary joined the rally, signalling a sharp improvement in risk appetite.

The move comes after months of relentless selling in small and midcaps, during which valuations corrected sharply despite earnings holding up in several pockets. Analysts estimate that over a third of the smallcap universe, representing nearly Rs 16 lakh crore in market capitalisation, is now trading at fair or even undervalued levels compared with historical averages.

According to Ponmudi R, CEO of Enrich Money, the overall market has entered a consolidation phase after digesting major policy triggers. “With the Union Budget 2026 and the RBI’s monetary policy decisions now largely priced in, investor focus has shifted to implementation, capex execution and the pace of actual spending,” he said, adding that sentiment remains cautiously optimistic and event-driven in the near term.

Currency movements and foreign portfolio investor flows are also playing a role. The recent recovery in the rupee from record lows, aided by the India-US trade agreement announcement, has improved near-term confidence. At the same time, easing foreign selling pressure has reduced the supply overhang that weighed heavily on smallcaps through the previous quarter.

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Arjun Guha Thakurta of Anand Rathi Wealth believes the recent correction created a disconnect between stock prices and business fundamentals. He points out that while many smallcap stocks fell sharply, earnings growth across the segment remained reasonably healthy. Much of the selling, he said, was driven by risk aversion, global uncertainty and foreign outflows rather than a collapse in underlying business performance.
“When weak hands have already sold, even modest improvements in confidence can lead to sharp recoveries, especially in segments that have underperformed for extended periods,” Thakurta said, cautioning, however, that selectivity remains crucial.
Not all experts are convinced that the rally marks the start of a sustained uptrend. Ravi Singh, Chief Research Officer at Master Capital Services, said investors should differentiate between structural stories and tactical trades.

“Smallcap companies typically operate with narrow product lines or concentrated business models. Benefits from policy changes such as lower tariffs will be meaningful only for companies with direct exposure to export-linked sectors,” he said.

Macro risks also remain on the radar. Investors are closely tracking January consumer price inflation data, which will be released using a revised base year of 2024 and is expected to offer a more accurate picture of consumption trends. Global developments, particularly geopolitical negotiations involving the US and Iran, could also inject volatility into commodity prices and risk assets if tensions escalate.

Data: Ritesh Presswala

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)