Smallcaps have surged 2.3x since April 2023. Why Vikas Khemani still sees India’s next multibaggers here

The Quick Take

• Indian smallcaps have delivered 2.3x returns since April 2023, outperforming most asset classes
• Carnelian Capital's Vikas Khemani sees continued opportunity in selected quality smallcap names
• Earnings visibility and quality screening are key criteria in the current phase of the cycle

Synthesized from 1 source — full coverage, sentiment breakdown, and forward signals below.

India's small-cap universe has delivered exceptional returns since April 2023, with the category broadly gaining 2.3 times from its trough, outpacing large-cap indices and many global asset classes. Carnelian Capital's Vikas Khemani argues that while the easy gains are behind, the structural story for quality smallcaps remains intact, driven by domestic consumption, manufacturing shifts, and government capex multiplier effects flowing to smaller companies in capital goods and infrastructure supply chains.

The key differentiation in this phase is earnings quality over price momentum. Stocks that re-rated on valuation expansion alone face mean reversion risk, while companies with genuine revenue growth, operating leverage, and improving return on equity have scope for sustained outperformance. This shifts the smallcap playbook from broad market participation toward stock-specific research intensity, favouring fund managers with on-the-ground access to management teams.

Investor positioning in smallcaps carries elevated liquidity risk as mutual fund inflows into the category have drawn regulatory scrutiny around valuation froth. SEBI's stress-test requirements for small and midcap funds have forced managers toward higher cash buffers, which could dampen near-term NAV momentum. For investors entering now, staggered allocation and a three-to-five year horizon remain the recommended framework, with emphasis on sectors tied to India's infrastructure and domestic manufacturing expansion.