Time to be constructive; small, midcap correction clears market excesses, says one of India’s best mid-cap fund managers

Time to be constructive; small, midcap correction clears market excesses, says one of India’s best mid-cap fund managers

One of India’s best mid-cap managers feels that the with excesses in small and midcap stocks having largely corrected, it’s time to be constructive now. In an exclusive interview with Moneycontrol, Pankaj Tibrewal of Ikigai Asset Management said, “The market is acknowledging the excesses built over the past year and with the recent correction many of the frothier pockets have been taken out,” he said. “After a long time, value is emerging in pockets.”

The recent correction that has seen India’s small and midcap stocks see their sharpest fall since Covid, with broad-based declines of 20% and deeper losses in sectors like media, energy, and metals. Individual momentum stocks have seen cuts of up to 50% in the swift sell-off this year.

Tibrewal pointed to multiple factors behind the recent downturn, including election-related uncertainties, extended monsoons, a decline in government payments until November, tight monetary policy, and a liquidity deficit. “When you look at June and September quarter results, growth for NSE 500 companies was just 2-3% on average. Clearly, valuations were sky-high, and the data wasn’t catching up in terms of earnings,” he said. “The market is acknowledging the excesses built over the past year.” But now, with much of the froth removed, Tibrewal sees reasons to turn constructive.

“For the first time in a long while, the central bank is stepping in, both on the monetary and liquidity front,” he said, noting that RBI’s measures—including open market operations and forex swaps—are pushing liquidity into neutral territory. This is a positive for banks and the broader economy.

Additionally, after five years, RBI has begun a rate-cut cycle, a move Tibrewal calls “very, very good news.” High interest rates had been hurting private capex and consumption, and easing financial conditions should provide relief.

Government spending, which had been sluggish through November (-12% YoY), rebounded sharply in December with Rs 1.7 lakh crore spent in a single month, turning the fiscal trajectory positive (+1.8%). “For the government to meet its revised capex target, spending in Jan-March must grow at 20% YoY, implying a sharp acceleration,” he said.

Corporate earnings are also showing signs of improvement. The third-quarter results were stronger than the first two quarters, with NSE 500 companies posting earnings growth of 8.5-9%. While FY26 earnings estimates may still need to be revised downward—consensus expects 15% growth, while Tibrewal projects 11-12%—he believes the trajectory is improving.

High-frequency indicators signal a pickup \in economic activity, he added, citing rising demand for cement, steel, wires, cables, batteries, GST collections, toll revenues, and electricity generation. The Reserve Bank of India has also projected Q4 GDP growth of 6.6-6.7%, reflecting a strengthening economy.

Tibrewal further said, “We expect Q4 FY25 and Q1 FY26 numbers to be far better than the past three quarters... Many opportunities are now emerging, and this is the time to accumulate as stocks shift from impatient to patient investors.”