Small-cap shares in India are now priced at nearly twice the level of the Nifty 50, highlighting a widening valuation divergence across market segments that may signal an upcoming market correction, according to VK Vijayakumar of Geojit Investments.
Small-cap shares in India are now priced at close to twice the level of the Nifty 50, a gap that underscores how sharply valuations have diverged across market segments, according to VK Vijayakumar, chief investment strategist at Geojit Investments. Speaking to ANI, Vijayakumar said the spread between large-, mid- and small-cap stocks is unusually wide and unlikely to remain fixed if market conditions continue to normalise.
He pointed to current trailing price-to-earnings ratios of 19.7 for the Nifty 50, 29.9 for the Nifty Midcap 100 and about 34.4 for the Nifty 100 Smallcap index. Independent valuation trackers show that the small-cap segment remains expensive by its own history as well: one analysis put the Nifty SmallCap 50 at 31.87 times earnings on September 18, while another showed 31.71 times earnings on September 22, both above longer-term medians. A separate data set from the Economic Times placed the same index at 44.92 times earnings, further highlighting how stretched valuations can appear depending on the benchmark used.
Vijayakumar said the usual hierarchy has been turned on its head. In a more settled market, he argued, large companies generally trade at a premium because of their stability and deeper earnings visibility, with mid-caps and then small-caps priced below them. Instead, investors have been rewarding growth stories, especially in digital and newer platform businesses, where future expansion prospects are being valued more aggressively than current profits.
That gap may not last indefinitely. Vijayakumar said reversion to the mean could eventually pull valuations back towards historical norms, particularly if earnings catch up in parts of the large-cap market. He cited banking, financials, capital goods and diversified companies as areas where stronger growth could justify higher multiples. Historical valuation data also suggests that small-cap prices are already elevated relative to their own recent range: one tracker placed the Nifty SmallCap 50 above its five-year median and near the top of its monthly readings since 2021, while another said the index was in an expensive zone compared with its longer-term record.
Foreign portfolio flows may prove decisive in whether that recalibration happens smoothly. Vijayakumar noted that overseas investors sold around $19 billion of Indian equities last year, before briefly turning net buyers in July and August this year and then selling again in September. He said sustained foreign buying would depend on the strength of India’s growth outlook, the earnings cycle, softer crude prices and lower bond yields.
Despite the valuation split, Vijayakumar remained constructive on the broader economy. He said gross domestic product growth of about 7 per cent in financial year 2027 is achievable and that Nifty earnings could rise by 12 per cent to 14 per cent. The message, in effect, is that India’s market story still rests on solid macroeconomic expectations, but prices in the faster-moving corners of the market may already be assuming a great deal of that future strength.
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