A quick analysis of the earnings performance across India Inc highlights that the midcap companies have extended their earnings leadership for a sixth straight quarter, but small-caps are facing prospects of sharp earnings downgrades even as expectations for future growth remain high. This is according to a 25 February 2026 strategy report by CLSA.
The CLSA review of Nifty 500 companies shows that while midcaps delivered stronger profit growth in the December quarter, small-caps saw meaningful earnings cuts for FY27 and FY28. At the same time, consensus forecasts still expect small-caps to post the fastest earnings growth over the next two years. CLSA says this gap between expectations and recent performance increases downgrade risk in the segment.
CLSA has said it continues to favour large caps and sees higher earnings downgrade risk in small-caps.
Midcaps lead for sixth straight quarter
CLSA’s quarterly review shows that midcaps remained the strongest earnings performers in Q3FY26.
Across the Nifty 500 universe, profit after tax grew 9% year-on-year (YoY). However, when broken down by market capitalisation, mid-caps delivered 19.6% PAT growth, compared with 6.6% for large caps and 12.9% for small-caps.
“In terms of PAT growth, this marks the sixth straight quarter of leadership for midcaps,” CLSA said in its report.
The report notes that midcaps were also the core driver of incremental profit growth during the quarter. While sales growth across the broader Nifty 500 rose to a 10-quarter high of 12.9% year-on-year, profit growth moderated.
“Across market caps, mid-caps were once again the core driver, with profit after growth of 19.6% YoY, the sixth straight quarter of leadership,” CLSA said.
However, CLSA also pointed out that earnings growth across the broader universe has narrowed. Nearly 80% of incremental profit growth came from oil & gas and financials, indicating that earnings strength was concentrated in a few sectors.
“The earnings breadth narrowed sharply,” the firm said, adding that excluding energy and banks, PAT growth was only 0.6% year-on-year.
Small-caps see steepest earnings cuts
While mid-aps delivered stronger growth, small-caps have seen the most significant earnings downgrades.
According to CLSA, consensus cut FY27 and FY28 earnings for small-caps by 3.9% and 3.1%, respectively, during the quarter. This marked the third straight quarter in which small-caps were the clear outlier on downgrades.
“Small-caps remained the clear outlier for the third straight quarter, with sharp cuts of 3.9%/3.1% for FY27/28,” CLSA said.
The firm noted that large caps, in contrast, saw upward revisions of 0.6% and 0.9% for FY27 and FY28. Mid caps saw a small trim for FY27 but an upgrade for FY28.
“Small-caps continue to see steep downward revisions,” the report stated.
CLSA added that despite the not-so-bad quarterly print, equity markets have fallen as earnings have not been able to surprise.
“Despite a not-so-bad quarter, the equity market has fallen as earnings have not been able to surprise,” CLSA said.
Expectations remain elevated for small-caps
Even as earnings are being cut, consensus still expects small-caps to grow the fastest over FY26–FY28.
CLSA’s data shows that small-caps are forecast to deliver a 28.4% earnings CAGR over the next two years, compared with 22% for mid caps and 13.4% for large caps.
The brokerage house pointed to a gap between trailing performance and forward expectations.
“Nearly 62% of small-caps are expected to deliver a 20%+ earnings growth annually on a compounded basis over the next two years, versus only 39% that have actually achieved this over the trailing four quarters,” CLSA said.
For 30%+ growth, the divergence is also visible. While 26% of small-cap companies delivered 30%+ growth in the trailing four quarters, 35% are expected to do so over the next two years.
“Froth continues to build in small-caps as 35% of companies in the universe are expected to deliver 30%+ growth over the next two years versus 26% that have actually delivered it,” CLSA said.
The report also noted that 36% of small-cap coverage gave negative returns in the trailing four quarters.
Why CLSA prefers large caps
Given the divergence between expectations and actual delivery, CLSA has flagged higher downgrade risk in small-caps.
“We see high EPS downgrade risks in small-caps and continue to favour large caps,” the firm said.
Consensus expects Nifty 500 earnings to compound at 16% over FY26–28. However, CLSA has cautioned that limiting earnings downgrades will be critical.
“Limiting EPS downgrades will be very important,” the report stated.
CLSA said that while growth expectations remain elevated, the burden of expectation, along with elevated valuation, limits the scope of large upsides.
“We see a clear burden of expectation along with elevated valuation limiting the scope of large upsides,” CLSA said.
Conclusion
CLSA’s latest India strategy report presents a clear divergence between midcaps and small-caps. Midcaps continue to deliver stronger earnings growth and have extended their leadership streak to six quarters. Small-caps, meanwhile, are facing the steep earnings cuts even as forecasts continue to price in aggressive growth.