Earnings are holding up, but stock prices aren’t: PMS managers see widening gap in H1 FY25

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In India’s markets, a growing number of small- and mid-cap companies are posting healthy earnings growth even as their stock prices have sharply corrected in 2025. At PMS AIF World's latest Alpha Investment Summit, panellists Pawan Bharaddia and Arun Subramanyam said this disconnect has widened in the first half of FY26 and is now a key driver of short-term underperformance across parts of the PMS–AIF space.

“There is a clear divergence between how our companies are performing and how the market is pricing them,” said Pawan Bharaddia , co-founder and CIO of Equitree Capital, who shared numbers to show the extent of the gap.

According to him, 12 of the 15 companies in Equitree’s concentrated small- and micro-cap portfolio delivered a median 24 percent year-on-year earnings growth in FY26 Q2, on top of 19 percent in Q1.

“These are businesses compounding at 20–25 percent. But in smallcaps, two soft quarters in sentiment can pull prices down 20–30 percent even when fundamentals haven’t changed,” he said.

He added that the portfolio trades at around 17x FY26 earnings, levels he said are in line with long-term averages for these companies. With an average market cap of about Rs 2,500 crore, Bharaddia said price discovery in these stocks tends to be far more sentiment-driven in the short run. “This year, despite the earnings print, prices haven’t reacted. That’s what has kept one-year returns flat.”

Ampersand Capital co-founder Arun Subramanyam echoed the mismatch, noting that his portfolio’s operational performance diverged from price action through the first half.

“Our companies grew earnings by 21–22 percent in FY26 Q1, while the BSE 500 saw single-digit growth. Q2 has been better from a business standpoint, but the market reaction hasn’t followed,” he said.

Agarwal attributed part of the divergence to a rotation into low-volatility, mega-largecap stocks, which has drawn flows away from midcaps and thematic growth names. “Markets have gravitated to the least volatile pockets. Even strong midcaps have been ignored. Earnings recognition will happen — but the timeline is unpredictable.”

“Equity investing is all about investing for three to five years... our investment strategy, which has paid off over eight years, cannot be distorted because of a six to nine month period of underperformance,” Subramanyam said.

He cited Trent, which he said has been among the worst-performing Nifty stocks over the past 12 months, as an example of how price behaviour can diverge even for established companies. Ampersand has trimmed its exposure after competitive pressures and weaker quarters altered the near-term narrative.

Both managers stressed that the present divergence appears more sentiment-led than structural. “If the issue is business-related, we exit. If it’s market mood, we stay the course. That distinction is important,” Agarwal said.

Bharaddia added: “Eventually, prices converge to earnings. The gap between fundamentals and stock performance right now is not unusual in smallcaps, it’s just sharper this year.”