The Indian equity market concluded November with a distinctly split personality. While benchmark indices scaled new heights, a significant segment of the market faced intense selling pressure. The month was characterized by a dramatic divergence, with large-cap strength sharply contrasting with pronounced weakness in the small-cap space.
A Tale of Two Markets: Large-Cap Rally vs. Small-Cap Fall
The headline numbers from November paint a clear picture of this divide. The Nifty 50 index rose 1.8%, extending its rally and closing at fresh all-time highs. The Nifty Midcap 100 also posted a gain of 2% for the month. In stark opposition, the Nifty Smallcap 100 index fell more than 2.5%, cementing its position as the clear underperformer among major indices.
This trend was fueled by institutional activity. Foreign Institutional Investors (FIIs) remained net sellers for the fifth consecutive month, offloading equities worth ₹17,500.31 crore in November. Domestic Institutional Investors (DIIs), however, continued their unwavering support, injecting over ₹77,000 crore, marking a 28-month long buying streak. The preference of FIIs for safer, liquid large-cap stocks and a more selective approach from DIIs left smaller companies vulnerable to selling.
Performance Snapshot of Small-Cap Constituents
The breadth of the decline within the small-cap universe was broad. Out of the 100 constituents of the Nifty Smallcap 100 index, a majority of 66 stocks declined during the month, while only 34 managed to post gains.
Jyoti CNC Automation emerged as the top gainer, surging 15%. On the opposite end, Whirlpool India was the biggest loser, tumbling 28%. Other significant drags on the index included BEML, KEC International, Olectra Greentech, and Kaynes Technology, each witnessing declines exceeding 15%.
Key Factors Behind the Small-Cap Correction
Market analysts point to a confluence of factors that led to the November slump in small-cap stocks.
Stretched Valuations: Even before the recent correction, valuations in the Nifty Smallcap 100 were at unsustainable levels. Despite nearly a year of consolidation, these valuations remain elevated, keeping many investors on the sidelines. Experts believe a meaningful acceleration in earnings is essential to bring valuations to fair levels and attract broader participation.
Muted Earnings Momentum: The September quarter (Q2 FY26) earnings season highlighted a growing disparity. While large companies reported robust profits, small-cap earnings were disappointing. Approximately 90 companies within the Nifty Smallcap 100 index reported a meager 1.5% growth in consolidated net profit. This pales in comparison to the 7%-8% growth posted by the Nifty Midcap 100 and Nifty 50, keeping small-cap valuations high and deterring fresh institutional money.
Persistent FII Outflows and Cautious MF Activity: The continued exit of FIIs from India's broader markets over the September and November quarters disproportionately impacted small-caps due to their lower liquidity. Mutual fund activity has also shown a preference for midcaps. Data indicates that over the past year, mutual funds added significant positions in 25 midcap stocks compared to only 18 smallcaps, reflecting a cautious stance.
Profit Booking and Shift in Leadership: Following a euphoric rally that peaked in late 2024, small-cap stocks have been undergoing a prolonged time correction. As large-cap stocks reclaimed market leadership and offered steadier returns, investors naturally shifted capital away from riskier segments. This rotation is a typical market response after a period of excessive valuation expansion.
Market Outlook: Is a Recovery on the Horizon?
Several market experts suggest the recent correction has laid the groundwork for a healthier environment for long-term investors. Viraj Gandhi, CEO of SAMCO Mutual Fund, observed that the "excess froth has cooled" and valuations have normalized, making the segment healthier than during last year's euphoric phase. He emphasized that this phase offers a favorable entry window for patient investors looking to build a high-conviction small-cap portfolio with a five-year horizon.
While near-term volatility may continue, improving macroeconomic stability, easing inflation, and strong domestic fund flows are expected to provide a cushion. However, a sustained recovery for small-cap stocks will ultimately hinge on a demonstrable pickup in earnings strength, supportive liquidity conditions, and rational valuations. These factors will be crucial in determining whether small-caps can reclaim market leadership in 2026.
Disclaimer: The views and recommendations mentioned are those of individual analysts or broking companies. Readers are advised to consult certified investment experts before making any financial decisions.
