Small-cap stocks outpace mid & large caps in 3QFY26 earnings rally
Small cap companies emerged as the standout performers, posting a robust 22% year-on-year (YoY) earnings surge – outpacing their mid-cap and large-cap counterparts.
With earnings upgrades outpacing downgrades and small caps leading growth, the outlook for Indian equities remains constructive. (AI Image)
India Inc.’s earnings momentum remained resilient in the third quarter of FY25-26, with small-cap companies emerging as the strongest contributors to earnings growth, according to a report analysing the third quarter performance of listed companies by Mid-market specialist financial services group Equirus. In the report Equirus Securities one of the top institutional equity brokerages in India highlights broad-based earnings upgrades, steady operational performance, and improving sectoral outlooks across key segments of the economy.
The 3QFY26 Earnings Review reveals that the Equirus Universe of over 250 stocks delivered a third consecutive quarter of double-digit earnings growth.
Small cap companies emerged as the standout performers, posting a robust 22% year-on-year (YoY) earnings surge – outpacing their mid-cap and large-cap counterparts and signalling a broadening of India’s corporate earnings recovery.
Strong Earnings Upgrades Drive Momentum
The quarter showed that 36% of companies under coverage received EPS upgrades because their fundamental business operations improved together with their ability to maintain strong market demand across various sectors. The sectors which enable these upgrades consist of Auto and Banks & NBFCs and Consumer Durables and FMCG and Electronic Manufacturing Services (EMS) and IT.
Earnings downgrades were concentrated in Building Materials, Cement, Infrastructure, Chemicals, Realty, and Retail. The trend indicates growing investor confidence and improving forward earnings visibility across market capitalisation segments.
Small-cap companies led the earnings surge through their operating leverage and growing market needs and their particular industry advantages. The Equirus Securities report shows small capitalization companies achieve better earnings growth than larger organizations because they improve their financial position and gain access to new market prospects.
Across the Equirus coverage universe of 262 companies, revenue grew 10% YoY, while EBITDA and PAT each rose even faster at 14% and 15% respectively — both ahead of market expectations. The faster margin and profits recovery indicates return of pricing power and cost efficiencies realised by India Inc, in a falling interest rate environment.
Small Caps (142 companies) led with 22% YoY earnings growth, followed by Mid-Caps (63 companies) at 15% YoY and Large Caps (57 companies) at 14% YoY. Excluding BFSI, PAT grew 17% YoY, while on an ex-BFSI and ex-OMC basis, Revenue, EBITDA, and PAT each grew 12%, 11%, and 11% YoY respectively.
“The results illustrate a trend we have been observing across Bharat, of entrepreneurship booming outside of the mega metros. More and more firms from tier 2 and tier 3 towns have been tapping the capital markets, as founders look to grow and scale their businesses. A broadening recovery across mid and small caps will help boost employment and lays a strong foundation on the march, to the Viksit Bharat of our dreams,” said Ajay Garg, Managing Director, Equirus group.
Sectoral Leaders: Consumption, Financials and Technology
Auto, Banks & NBFCs, Consumer Durables, FMCG, EMS, and IT reported strong operational metrics, demand visibility, and margin stability.
Financial services companies demonstrated steady asset quality trends and loan growth momentum, while consumption-linked sectors benefited from improving discretionary spending patterns.
EMS and IT companies saw sustained deal momentum and execution strength supporting earnings outlooks. EMS diversified export-led players outperformed on strong execution, localisation benefits, and healthy order books.
IT Services achieved stable growth through constant currency rates which led to better profit margins because of operational efficiency improvements while their deal acquisition process stayed strong.
The Auto OEM industry received advantages from GST reduction and seasonal buying trends during festivals which helped them manage their raw material expenses through operating cost scaling. The two-wheeler market will outpace passenger vehicles because rural areas will regain strength and people will need to replace their vehicles between fiscal years 2026 and 2027.
The banking sector experienced stable profit levels together with decreasing loan default numbers which PSU banks and mid-sized banks showed better performance than other banks in the industry. NBFCs experienced a strong recovery in their loan distribution activities while their asset quality showed improvement and their debt costs decreased through positive liability repricing.
Consumer Durables saw improved RAC demand driven by inventory normalisation and pre-buying ahead of summer. FMCG reported gradual demand stabilisation with improving volume-led growth and steady margins, with alcobev outperforming on premium-led growth.
Wires & Cables too remained robust on infrastructure tailwinds.
“The 3QFY26 results reinforce a broadening earnings recovery across India’s corporate landscape. Small caps leading the charge — with 22% YoY earnings growth — is a structurally positive signal. The combination of domestic consumption recovery, rural demand revival, and government capex supports our constructive view on Indian equities heading into FY27,” said Maulik Patel, Director & Head of Research, Equirus Securities.
Earnings Performance in Line with Expectations
Overall earnings performance for the quarter remained largely in line with expectations, signalling stability in corporate profitability despite global uncertainties. Margin trends were supported by cost efficiencies, pricing discipline, and operational optimisation across sectors.
The Equirus Securities report notes that earnings growth continues to be supported by structural drivers including domestic demand resilience, capex momentum, and sector-specific growth catalysts.
Outlook: What to Watch in 4QFY26
“Looking into 4QFY26, key monitorables include the pace of NHAI order awards for construction companies, the summer season demand cycle for consumer durables, US market dynamics and gRevlimid contributions for healthcare names, and RBI rate decisions that could influence BFSI NIM trajectories,” said Patel. “Price hikes and demand momentum in Cement offer near-term support, though new capacity additions may pressure utilisation rates. Logistics remains supported by EXIM recovery and DFC connectivity improvements,” he added.
Investment Outlook
With earnings upgrades outpacing downgrades and small caps leading growth, the outlook for Indian equities remains constructive. The Equirus Securities report highlights that earnings visibility across key sectors, coupled with stable macroeconomic indicators, supports a positive medium-term growth trajectory for corporate India.
Investors should actively watch for emerging sector opportunities which result from India’s economic growth through consumer spending increase, financial industry growth and technological progress.
