CLSA Flags Elevated EPS Downgrade Risks For Smallcaps

Broader markets continue to see sharp swings after an earlier rally, raising fresh questions around valuations. Although the December quarter's headline earnings growth shows durability, its quality and scope seem inconsistent.

Because of this, international brokerage firm CLSA has reaffirmed its inclination for large-cap companies and warned that small-cap equities are more vulnerable to future earnings downgrades.

The brokerage said in its most recent India strategy note that there are substantial gaps between previous performance and growth projections, especially in the small-cap sector.

Are EPS Downgrade Risks Higher for Smallcaps?

According to the brokerage, earnings expectations for small caps remain elevated despite recent cuts. Analysts’ consensus estimates have lowered FY27 and FY28 earning per share (EPS) projections by 3.9% and 3.1%, respectively.

Even after these revisions, over 62% of small-cap companies are still projected to deliver profit after tax growth above 20% on a compound annual growth rate (CAGR) basis. By comparison, fewer than 40% achieved that pace in the trailing four quarters.

Small caps are currently forecast to post the fastest earnings growth among broader indices, with analysts’ consensus projecting a 28.4% CAGR for the NSE 250 small-cap universe over FY26–28.

The brokerage assesses that further downgrades remain a meaningful risk if earnings momentum does not accelerate.

How Do Large-Caps And Mid-caps Compare?

While small caps have seen notable estimate cuts, mid-caps have continued to lead on actual growth. Earnings for midcaps grew 19.6% year-on-year in Q3 FY26, marking the sixth consecutive quarter of outperformance over large and small caps.

That said, midcap earnings estimates were trimmed marginally by 0.3% for FY27, though FY28 forecasts were upgraded by 0.5%. The tone here is more measured than outright cautious.

Large caps, meanwhile, have seen the strongest upgrades for FY27 and FY28 among the three segments. Consensus expects NSE 100 large caps to grow earnings at a 13.4% CAGR over FY26–28. The brokerage continues to favour this segment, viewing it as relatively better positioned amid volatile conditions.

What Is Driving The Broader Market Caution?

The December quarter presented a mixed earnings picture. Sales growth for the NSE 500 reached a 10-quarter high of 12.9% year-on-year in Q3 FY26. Yet profit growth lagged, with PAT rising 9%, the weakest pace in five quarters. Part of this softness was attributed to one-time labour code provisions.

More notably, nearly 80% of incremental profit growth came from just two sectors: oil & gas and financials. Excluding these, overall growth was only 0.6% year-on-year. That concentration suggests limited breadth in earnings strength.

Analysts’ consensus currently expects NSE 500 earnings to compound at 16% over FY26–28, led by telecom, real estate and materials. And NSE 150 mid-caps are projected to grow at a 22% CAGR.

For now, the message is cautious. Large caps remain preferred, while small caps face the risk that expectations may need to adjust further.

Sources:

The Hindu Business Line
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