Key Takeaways
- Small‑caps delivered a 22% YoY earnings jump, outpacing mid‑caps (15%) and large‑caps (14%).
- Revenue across the broader Equirus universe grew 10% YoY; EBITDA and PAT rose 14% and 15%.
- Three‑quarters of the upgrade cycle came from auto, banks, consumer durables, FMCG, EMS and IT.
- Rural demand revival and tier‑2/3 entrepreneurship are expanding the earnings base.
- Investors should weigh a bullish tilt to small‑caps against valuation stretch and policy‑driven rate risk.
The Hook
You’re missing the most powerful profit engine in India’s market right now.
Q3 FY26 marks the third straight quarter of double‑digit earnings growth for the Equirus universe of more than 250 listed companies, but the real story lies in the 22% year‑on‑year profit surge from 142 small‑cap firms. That’s not a blip—it’s a structural shift that could rewrite the risk‑reward calculus for anyone with exposure to Indian equities.
Small‑Cap Earnings Explosion: 22% YoY Growth Explained
The data released by Equirus Securities shows small‑caps leading the profit charge with a 22% earnings increase, dwarfing the 15% rise in mid‑caps and 14% in large‑caps. Revenue across the entire coverage universe grew 10% YoY, while EBITDA and profit after tax (PAT) jumped 14% and 15% respectively, indicating healthier margins and cost efficiencies.
Two forces are driving this outperformance:
- Pricing Power: A falling interest‑rate environment has eased financing costs, allowing firms to pass on price hikes without eroding demand.
- Operating Leverage: Many small‑caps have thin balance sheets and flexible cost structures, so incremental sales translate directly into higher margins.
For investors, the upside potential lies in the fact that a larger proportion of earnings are now coming from companies that historically trade at a discount to large‑caps, offering a value cushion.
Sector Trends Powering the Small‑Cap Rally
Three sectors stand out as the engine room of the earnings surge:
- Consumption: Rural disposable income is rebounding, boosting demand for two‑wheelers, consumer durables (especially air conditioners), and FMCG staples.
- Financials: Mid‑size banks and NBFCs are seeing stabilising margins and lower credit costs, partly thanks to improved asset quality and the RBI’s accommodative stance.
- Technology: IT services posted modest constant‑currency growth, driven by productivity gains and an expanding export pipeline.
Auto OEMs benefitted from festive demand and operating leverage, while two‑wheelers are poised to outpace passenger vehicles as replacement cycles accelerate in tier‑2 and tier‑3 towns.
Competitive Landscape: How Large‑Caps and Peers Are Reacting
While small‑caps have been the headline grabbers, large‑cap stalwarts like Tata Motors, Hindustan Unilever, and State Bank of India are not idle. Tata’s diversified portfolio is seeing modest margin recovery in its automotive and IT arms, and Hindustan Unilever is leveraging its extensive distribution network to capture rural FMCG growth.
Adani Group’s infrastructure and energy businesses are watching the infrastructure order flow monitorables highlighted for Q4 FY26, positioning themselves for a potential upside if order books swell.
Overall, the competitive dynamic suggests a “trickle‑up” effect: as small‑caps prove executional competence, larger peers may feel pressure to accelerate cost‑cutting and pricing strategies to preserve relative market share.
Historical Parallel: Small‑Cap Waves in Past Cycles
India’s equity history shows a similar pattern during the post‑global‑financial‑crisis era (2009‑2012). Small‑caps posted double‑digit earnings growth as credit conditions improved and domestic demand recovered. Those companies that survived the early volatility delivered outsized returns, with many becoming the next generation of large‑caps.
The key lesson is timing. Investors who entered before the 2009 inflection point captured a median 3‑year total return of over 250%, versus 120% for large‑caps. The current environment mirrors that backdrop: low‑interest rates, fiscal stimulus, and a demographic dividend fueling consumption.
Technical & Fundamental Definitions You Need
EBITDA: Earnings before interest, taxes, depreciation, and amortisation – a measure of operating profitability that strips out financing and accounting effects.
PAT: Profit after tax – the bottom‑line figure reflecting net earnings available to shareholders after all expenses.
Operating Leverage: The ratio of fixed costs to variable costs; higher leverage means revenue growth translates into larger profit gains.
Pricing Power: The ability of a firm to raise prices without losing customers, often a sign of strong brand or differentiated product.
Investor Playbook: Bull vs. Bear Cases
Bull Case
- Continued rural consumption recovery pushes two‑wheeler and durables sales.
- RBI maintains a dovish stance, keeping financing cheap for expansion.
- Infrastructure order books expand, benefitting small‑cap construction and engineering firms.
- Valuation gap narrows as earnings visibility improves, delivering multiple expansion.
Bear Case
- Global monetary tightening spikes the rupee, raising import‑linked cost pressures.
- Policy uncertainty around land reforms or GST compliance could hit thin‑margin operators.
- Liquidity crunch in the NBFC sector drags financials, increasing credit cost risk.
- Over‑optimistic earnings upgrades could lead to a correction if growth stalls.
Given the current data, a balanced approach could involve allocating 15‑20% of an India‑focused equity portfolio to a diversified basket of high‑quality small‑caps, while keeping a core holding in stable large‑caps for defensive stability.
What to Watch in Q4 FY26
Equirus highlighted several monitorables that could tip the momentum:
- Infrastructure order awards – a catalyst for construction and engineering small‑caps.
- Summer demand trends in consumer durables, especially air conditioners.
- Global developments affecting IT export pipelines and healthcare spend.
- RBI policy decisions – any shift toward rate hikes could compress margins for financially leveraged firms.
Staying vigilant on these indicators will help investors adjust exposure before the next earnings season.