Smallcap valuations mixed, earnings visibility key; bullish on lending, healthcare, says Mirae Asset’s Varun Goel

June 28, 2025 | Mumbai — The smallcap segment of the Indian stock market is witnessing a phase of mixed valuations, with investors navigating an uneven earnings landscape and rising stock dispersion. According to Varun Goel, Director and Head of Multi-Asset Investments at Mirae Asset Investment Managers, a strong emphasis must now be placed on earnings visibility and sector-specific growth potential, rather than a blanket approach to smallcaps.

Goel expressed optimism over select sectors, notably financials—especially small and mid-sized lenders—and healthcare, citing strong balance sheets, structural tailwinds, and a long growth runway as key reasons behind Mirae’s bullish stance.

Mixed Bag in Smallcaps: Valuation Divergence in Focus

Over the past year, Indian smallcap indices have delivered robust returns, riding high on domestic macro stability and strong inflows from retail investors. However, Goel warned that the exuberance in some corners of the smallcap universe might not be entirely justified.

“The smallcap index has seen significant re-rating over the past 12–18 months, but the valuation story is not uniform,” Goel stated. “While some companies have strong fundamentals and earnings momentum, many are pricing in aggressive growth assumptions without delivering consistently.”

According to data from the NSE, the Nifty Smallcap 250 index is trading at a trailing P/E of nearly 30x, compared to its 10-year average of around 20x. Goel noted that this premium is sustainable only for companies with proven business models and clear visibility of future earnings.

Earnings Visibility is the Core Filter

In a market where the rising tide no longer lifts all boats, Mirae Asset is increasingly leaning toward bottom-up stock picking with a focus on earnings consistency. Goel emphasized that companies demonstrating sustained revenue growth, margin stability, and return on capital employed (RoCE) above cost of capital will remain investible, even if overall valuations remain rich.

“We are not avoiding smallcaps altogether,” he clarified. “But in this environment, earnings visibility is the single most important variable to watch. A quality bias and cash flow-based screening are more critical than ever.”

Sectors like capital goods and industrials—darlings of the market in 2023 and early 2024—are now witnessing some investor fatigue as earnings have started to miss lofty expectations.

Lending Sector: Sweet Spot for Long-Term Investors

One of Mirae’s top overweight themes in the smallcap and midcap space is financial lending, particularly among high-quality NBFCs and small private banks. Goel explained that many of these institutions have undergone significant balance sheet repair and are now entering a healthy credit cycle, supported by robust demand from MSMEs and retail segments.

“Credit growth remains strong at over 14% YoY. Asset quality has improved across the board. We are looking at select NBFCs with niche lending strategies and risk-aware underwriting processes,” he said.

The sector is also expected to benefit from the Reserve Bank of India’s accommodative stance on liquidity, despite the possibility of gradual rate normalization in the second half of FY26.

Healthcare: Resilience Meets Growth

Healthcare, another favored theme for Mirae Asset, offers a blend of defensive strength and growth potential. Goel highlighted that the sector's margin profiles have improved post-pandemic, while Indian pharma companies are expanding their presence in high-margin specialty segments and global contract development and manufacturing (CDMO) markets.

“Domestic healthcare consumption is rising steadily, and exports are picking up again. Diagnostics, hospitals, and specialty pharma are our top bets,” he noted.

Recent consolidation in the sector has also created opportunities for market share gains and improved pricing power. Mirae expects the sector to outperform on the back of rising insurance penetration, digital health transformation, and policy support.

Market Context: Flows Favoring Quality

With Indian equity markets sitting near all-time highs, institutional investors are increasingly rotating capital toward quality names with a margin of safety. According to data from AMFI, SIP inflows hit a record ₹21,800 crore in May 2025, with a sizable portion flowing into multi-cap and smallcap funds.

However, Goel cautioned that while flows are strong, risk management is becoming more vital given the macro uncertainty from global inflation trends, geopolitical tensions, and election-related volatility in key markets like the US.

“We continue to advise investors to maintain discipline in asset allocation. Chasing momentum in overheated names can be dangerous,” Goel added.

Investor Outlook: Stay Selective, Stay Long-Term

Looking ahead, Goel believes investors should adopt a more nuanced approach. While the smallcap space still offers compelling opportunities, the path ahead demands heightened scrutiny, patience, and a fundamental framework rooted in quality and earnings visibility.

“This is not the time to be passive. We are in an environment where selective alpha is possible, but index-level returns may moderate,” he concluded.

For retail investors, Mirae recommends diversified exposure via mutual funds with a consistent track record of managing risk-adjusted returns in the small and midcap space.