Why blue-chips are lagging behind as mid- and small-cap stocks rally

The rally that started in the Indian markets in April was led by mid- and small-cap stocks.

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26 Aug, 2025 12:21

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Many blue-chip stocks in India have failed to surpass their pandemic highs, with stagnant, single-digit or negative returns over the past two to three years, even after the stock markets have rallied since April amid improved macroeconomic conditions.

About 60 percent of the companies in the BSE 100 generated negative or single-digit returns over the past two years, and 25 percent of them had similar returns over the past three years, on a compounded annual growth rate (CAGR) basis, according to analysis by Moneycontrol.

Wipro has lost 24 percent over the past two years (CAGR), Vedanta and Divi's Laboratories Ltd have fallen by 22 percent and 17.5 percent, respectively, and Bharat Petroleum Corp and Avenue Supermarts lost 12 percent each. Tech Mahindra, Infosys, Reliance Industries, and Kotak Mahindra Bank are down by 6-10 percent. Bajaj Finserv, HDFC Bank and TCS are down by over 2-6 percent.

Over the past three years (CAGR), Reliance and Dr Reddy's Laboratories had gains of about just 2 percent and 3.5 percent respectively. Hindustan Unilever and Wipro gained 6 percent each, while Infosys, TCS and HDFC Bank advanced 8 percent while Kotak Mahindra Bank both had gains of about 9 percent.

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The rally that started in the Indian markets in April was led by mid- and small-cap stocks. Since then, the key Sensex and Nifty indexes have jumped by about 13 percent each, while the BSE MidCap and SmallCap indexes advanced 35 percent and 43 percent, respectively. The BSE 100 Index climbed 15.5 percent.

Valuation comfort

“The market, over the last few months, got more support from domestic funds and retail investors who preferred small and mid-cap versus large cap, given the valuation comfort over there. Moreover, with a pickup in government and private capex, a push towards indigenisation and several policy changes, various niche sectors captured the limelight,” said Sneha Poddar, associate vice president at Motilal Oswal Financial Services.

For IT companies, analysts cited weaker earnings because of reduced client spending across sectors globally on expectations that interest rates would stay higher for a longer period than initially anticipated. For pharma stocks, analysts said the sector's strong performance during the pandemic has faded, mainly due to high raw material costs, regulatory issues, and price drops in the US generics market.

The Reliance Industries stock experienced limited growth due to concerns over high capital spending, rising net debt, low returns on equity, and a sluggish pace of net profit and equity dividend growth compared to revenue and assets. Uncertainty over the demerger of the telecom and retail businesses also weighed on the stock. HDFC Bank faces a margin drop and a rise in bad loans after merging with parent HDFC. Analysts suggested soft earnings for the next few quarters.

According to Rajesh Palviya, an analyst at Axis Securities, investors are steering clear of certain stocks including Infosys and TCS because they lack confidence in their near-term earnings improvement. These stocks face shrinking businesses and potential margin declines, causing them to underperform. Instead, investors are choosing sectors with more clarity and better short-term and long-term earnings prospects.

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Meanwhile, some analysts predicted that large-cap stocks will outperform mid- and small-cap stocks in the second half of 2023 due to improved valuation confidence. However, others said blue-chip stocks might continue to underperform unless there's greater earnings clarity or visibility.

Stocks in major sectors such as IT and banking, and stocks like Reliance Industries will be vital to performance, going ahead.

Recently, there was a rally in mid- and small-cap stocks, drawing strong interest from buyers despite their higher valuations. The influx of orders, especially in the infrastructure and real estate sectors, made these areas attractive to investors. Some analysts proposed that smaller private banks, healthcare services (hospitals), and real estate should be re-evaluated for their potential.

“The broader markets outperformed, helped by steady inflows from foreign institutional players and domestic mutual funds,” said Raj Vyas, VP-research, Teji Mandi.

Further, the valuation comfort reflected rising investor confidence in the broader market as many mid- and small-cap companies traded below their historical valuations and fund managers met these companies after they delivered good and better earnings than expected, Vyas said.

Disclosure: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.