Valuations

The SMID premium finally grew an earnings leg

Aabhas TripathiAabhas Tripathi7 August 2026

We have argued on these pages that small and midcaps trade at a premium history struggles to justify. FY26 delivered the other side of that argument. Profit growth for the Nifty Midcap 150 came in at 27.2%, and the Smallcap 250 at 17%, against 9.9% for the Nifty 100 and 13.1% for the Nifty 500. Every segment accelerated over FY25, and the smaller the segment, the harder it accelerated.

Nifty 500 · FY25Nifty 500 PAT growth FY25 · 4.7%+4.7%Nifty 500 · FY26Nifty 500 PAT growth FY26 · 13.1% (15.9% excluding banks)+13.1%Nifty 100 · FY25Nifty 100 PAT growth FY25 · 2.5%+2.5%Nifty 100 · FY26Nifty 100 PAT growth FY26 · 9.9% (12.3% excluding banks)+9.9%Midcap 150 · FY25Nifty Midcap 150 PAT growth FY25 · 17.3%+17.3%Midcap 150 · FY26Nifty Midcap 150 PAT growth FY26 · 27.2%+27.2%Smallcap 250 · FY25Nifty Smallcap 250 PAT growth FY25 · 2.7%+2.7%Smallcap 250 · FY26Nifty Smallcap 250 PAT growth FY26 · 17.0%+17.0%
Profit growth, FY25 versus FY26, by index. Nifty 500 ex-banks grew 15.9% and Nifty 100 ex-banks 12.3% in FY26. Data: Kotak Institutional Equities.

Two things make the acceleration more than a base effect. First, breadth: 21 of 29 sectors recorded double-digit earnings growth in the March quarter, against 17 a year earlier. Second, the drag was concentrated in one place. Banks, whose margins compressed through the rate-cut cycle, subtracted from every aggregate; exclude them and the Nifty 500 grew 15.9%. The mid and smallcap universe, which carries more capital goods, manufacturing and healthcare and fewer large banks, was positioned on the right side of both effects.

This does not settle the valuation argument. A 27% premium to large caps against a 5% historical norm still needs years of superior delivery, and FY26 is one year. Growth this fast also invites its own reversal; midcaps accelerating from an already-high 17.3% base is the kind of streak that rarely runs three years unbroken. But the honest reading of the past twelve months is that the premium stopped being pure sentiment. The market was paying for growth it had not yet seen, and this year it saw some.

What we’ll watch: whether first-half FY27 keeps mid and smallcap earnings growth ahead of large caps, and whether the forward premium narrows toward history or gets re-earned quarter by quarter.

Source: Data: Kotak Institutional Equities; as of 30 June 2026.
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