Small IPOs, big gains: 2026’s smaller issues outshine bigger listings with 17% returns

India’s IPO market is witnessing a shift in investor appetite, with smaller public issues outperforming their larger counterparts on listing day even as the broader stock market struggles to maintain momentum.

Small IPOs, with issue sizes below Rs 1,000 crore, have delivered weighted-average listing gains of 17 per cent so far in 2026, significantly ahead of the 13 per cent recorded by mid-sized offerings and the 4 per cent return from large IPOs, according to a report by Kotak Institutional Equities dated October 11.

The findings point to growing investor interest in smaller businesses, although the brokerage has warned that sustaining these gains will depend on whether companies can deliver the earnings growth already priced into their shares.

The trend extends beyond the primary market. Over the past six months, the Nifty Smallcap 100 has climbed 16 per cent, while the Nifty Midcap 100 has gained 3 per cent. The benchmark Nifty 50, meanwhile, has fallen 5 per cent, highlighting the widening performance gap between smaller stocks and large-cap companies.

Manufacturing themes fuel small-cap rally

Kotak attributed the outperformance partly to investor interest in select sectors, including capital goods, contract development and manufacturing organisations (CDMOs), defence and electronics manufacturing services (EMS).

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These industries are attracting attention amid India’s push to expand domestic manufacturing and build capabilities across specialised industrial segments. However, the brokerage noted that the rally remains concentrated in particular stocks and sectors rather than reflecting a broad-based improvement across the market.

The enthusiasm is also visible in IPO subscription and listing trends. Around 40 per cent of IPOs in 2026 have delivered listing gains exceeding 25 per cent, compared with 22 per cent in 2025. The proportion stood at 47 per cent in 2024, indicating that investor enthusiasm for new listings has varied considerably over the years.

India has recorded 96 IPOs raising approximately $12 billion so far in 2026, Kotak’s report showed. In comparison, 103 IPOs raised $20 billion in 2025, while 91 offerings mobilised $19 billion in 2024.

Although the number of public issues remains substantial, the funds raised so far this year are below the totals recorded in the preceding two years.

The composition of fundraising also raises questions about how much capital is reaching businesses for expansion. Approximately 60 per cent of IPO fundraising in 2026 has come through offers for sale (OFS), under which existing shareholders sell their stakes without bringing fresh money into the company.

Among the stated uses of IPO proceeds, debt repayment accounted for 40 per cent, while expansion, new projects, plants and machinery received 23 per cent. Capital enhancement and working capital together represented another 9 per cent, according to the report.

The figures suggest that a significant part of the fundraising activity is being used to provide exits to existing investors or strengthen corporate balance sheets, rather than directly finance new capacity.

Why Kotak is flagging risks

The brokerage’s central concern is that valuations across parts of the mid- and small-cap universe increasingly depend on expectations of stronger future earnings.

An analysis of the top-performing 10 per cent of small- and mid-cap stocks in the Nifty 500 indicated that their outperformance was supported by upward revisions to earnings estimates and higher valuation multiples.

While earnings upgrades can justify higher share prices, a valuation rerating means investors are willing to pay more for each rupee of expected profit. If actual earnings fall short of these expectations, stocks could face pressure from both weaker profit forecasts and declining valuations.

Kotak also highlighted uncertainty surrounding the earnings outlook for several larger companies amid economic, policy and regulatory challenges.

For investors, the report underscores the difference between short-term market momentum and sustainable returns. Smaller companies may offer growth opportunities, particularly in industries benefiting from structural changes in the economy, but they can also be more vulnerable to earnings disappointments and shifts in market sentiment.

Strong listing gains, therefore, should not be treated as a guarantee of future performance. Investors need to assess valuations, business fundamentals and the intended use of IPO proceeds, while mutual fund investors should evaluate whether their portfolios have become excessively concentrated in mid- and small-cap stocks.