Small-cap stocks lead the charge as Indian market rebounds in March. Time to bet on them again?

Stock Market Today: Indian small-cap stocks have staged a strong rebound in March, driven by improving market sentiment, return of FPIs, and easing valuations, causing the segment to reclaim some of the momentum it enjoyed in the first half of the previous calendar year.

The much-awaited rebound in these stocks has rekindled optimism among retail investors, as they witnessed their favourite segment crash amid a sustained sell-off. The five-month losing streak in small-cap stocks has brought their valuations down to more reasonable levels, encouraging value buyers to step in.

Smallcaps outperform Nifty 50 in March rally

The Nifty Smallcap 100 index has rebounded 10% in March so far, and from the month's low, the index has regained 15%, outperforming the Nifty 50 index, which has gained 7% in the current month so far.

This marks a strong rebound from February's rout when the index crashed 13%, recording its worst monthly drop since the Covid-19 pandemic. Some sectors, such as defence, oil and gas, NBFCs, and metals, are leading this revival.

The signs of economic improvement and rising expectations of a turnaround in corporate earnings in the March quarter, along with speculation that the RBI may announce a second repo rate cut at its MPC meeting on April 5, have supported the market’s upward momentum.

In addition, easing trade tensions have added another layer of support to the recovery rally in local equities, as reports suggest that Donald Trump’s next round of tariffs may be more measured than previously suggested, further boosting sentiment. On Monday, Trump said that he may give "a lot of countries" breaks on reciprocal tariffs.

Trump also stated that auto tariffs were imminent, but not all of the threatened levies would be imposed on April 2, and some countries may receive exemptions, which improved risk-on sentiment.

Analysts believe that if the Trump administration announces reciprocal tariffs on India, the impact would be minimal given the country's low export dependency. Domestic brokerage firm Bernstein stated that India could benefit from a potential U.S. recession due to its unique economic trajectory and resilience, driven by strong domestic factors.

In recent weeks, concerns over a slowdown in the U.S. economy have been exacerbated by weakening consumer sentiment data, sending major markets into correction territory at one point.

Is it time to bet on small caps again?

Harshal Dasani, Research Analyst at Invasset PMS, believes that given the macroeconomic backdrop, a balanced portfolio tilt toward small-caps, complemented by large-caps for stability, appears prudent. He noted that small-caps, represented by the Nifty Smallcap 100, have underperformed year-to-date with a decline of 13.77% but have shown signs of a strong comeback, gaining 8.64% over the last week and 11.53% in the past month.

Their current P/E ratio of 27.7, although elevated, remains below the 10-year median P/E of 32, suggesting further room for re-rating, especially after the recent correction reset valuations to more reasonable levels.

Dasani highlighted that mid-caps have also rebounded, with the Nifty Midcap 100 gaining 7.74% weekly and 9.7% monthly. However, their current P/E of 35.2 exceeds the 10-year median of 30.2, indicating limited valuation comfort at these levels. Meanwhile, large caps, represented by the Nifty 50, provide relative stability, with a current P/E of 20.8 and recent gains of 4.26% weekly and 6.68% monthly.

Given this landscape, Dasani recommends a focus on high-quality stocks across market segments, particularly those with strong fundamentals, competent management (“stable jockey”), structural tailwinds, and significant valuation corrections.

He emphasised that selectivity is key, with a preference for companies poised to benefit from underlying economic shifts and market recovery momentum.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.