Small-cap stocks may look expensive compared with large caps on headline valuation multiples, but the comparison changes when companies are assessed for their exposure to India’s domestic economy, according to Vikas Khemani, founder of Carnelian Capital.
Domestic, non-financial large-cap companies trade at a median 42 times estimated FY27 earnings, compared with 30 times for small caps, Carnelian said in a recent investor letter. Small caps are also expected to deliver faster profit growth. This challenges the conventional view that large caps offer better valuation comfort after the sharp rally in smaller stocks.
Carnelian analysed 1,594 listed companies to demonstrate small caps derive 59% of their profits from India’s domestic, non-financial economy, compared with 32% for large caps. Large caps have greater exposure to financial services, global commodities and information technology, which account for a larger share of their earnings.
By market value, small and mid-caps have higher weightings in healthcare (12% versus 5% for large caps), industrials (17% versus 13%), consumer discretionary (15% versus 11%) and materials (14% versus 9%). Financials, energy, IT and utilities account for 51% of large caps, against just 30% of small and mid-caps.
Carnelian believes investors seeking exposure to India’s domestic growth may be paying a premium for it in large caps, even as smaller companies offer a broader pool of faster-growing businesses. Over FY23-26, large caps’ global businesses grew revenue by just 1.8% annually, while their domestic businesses grew 12.4%. Against a backdrop of geopolitical shifts, tariffs and a weakening rules-based global order, Khemani favours businesses tied to domestic India.