Mid- and small-cap pressure persists as valuation concerns deepen: Harsha Upadhyaya

In a market defined by persistent Domestic Institutional Investor (DII) buying and continued Foreign Institutional Investor (FII) outflows, the sharper correction in mid- and small-cap segments has raised a pressing question: Who exactly is selling these pockets of the market? According to Harsha Upadhyaya, CIO, Kotak Mahindra AMC, the answer lies largely in valuations and earnings realities that investors can no longer ignore.

The recent weak spells in broader markets, he noted, are not without reason. “Clearly, the value worries on smallcaps and to certain extent even midcaps is playing out. As we have seen over the past couple of quarters the earnings deceleration in smallcap segment has been much more than what everyone anticipated,” he said in an interview to ET Now. The valuation premium in these spaces, he added, has only amplified the nervousness during corrective phases.

Smallcaps Still on a Tightrope
The pressure, according to Upadhyaya, is unlikely to ease anytime soon. Smallcaps, despite undergoing a correction in 2025, continue to trade at rich valuations. “This is the segment which is still trading at about 40% to 45% premium to a long-term 10-year average on a historical basis,” he pointed out, adding that earnings expectations for the next few quarters offer little reason for optimism.Largecaps and select midcaps, however, offer better footing. “It is not going to be a V-shaped recovery, but still it is going to be a decent recovery in our opinion. So, to that extent, large and midcaps would continue to be the places to be rather than smallcaps,” he said.

Banking, Financials and Consumption Remain Core Picks
Upadhyaya remains constructive on a few major sectors—even if he’s avoiding excessive concentration. “We continue to remain positive on banking and financials and consumption oriented sectors,” he said. These pockets, he believes, offer relative resilience during volatility due to healthier balance sheets and stable cash flows.

While IT may see intermittent rallies, he remains cautious on taking heavy exposure for now. “They will probably outperform on a sustained basis only when the business momentum comes back strongly… for a sustained outperformance you will still need to see a larger growth on the business side which is still elusive,” he observed.

Investors Must Stay Selective—No Sector Is an ‘Easy Buy’
When asked about areas to avoid, Upadhyaya did not mince words. “I do not think you can take very large sectoral bets at this point of time. You need to be more stock specific,” he said, stressing that domestic businesses, while more resilient, are not uniformly attractive from a valuation or growth standpoint.

The message: this is a market that rewards precision, not broad strokes.

Are There Any Favourable Bets in Mid- and Smallcaps?
Though broader caution persists, stock-specific opportunities do exist in midcaps, he acknowledged. But he warned against chasing growth at any price—especially in overheated pockets such as EMS. “Just because there is growth it does not mean that you can buy it at any valuation… there are not too many subsegments or sectors which are available at a reasonable valuation with growth exceeding market average earnings growth,” he said.

Only deeper corrections, he added, may open meaningful valuation comfort for investors willing to take selective risks.

For now, he recommends a diversified approach anchored in quality. “One needs to have a very diversified portfolio with a tilt towards largecaps and midcaps… and within that it has to be more on a bottom-up stock specific opportunities rather than going sectoral,” he concluded.