Whalesbook
Institutions Focus on Select Small Caps
Despite a tough market for small-cap stocks, foreign and domestic institutional investors are selectively buying shares in certain Indian companies. This comes as the broader small-cap index faced its worst year in seven years during 2025, dropping about 7.5%. This move away from general market trends shows investors are focusing on company fundamentals, seeking undervalued firms or those with strong growth potential despite wider sector challenges. In the March 2026 quarter, FIIs and DIIs increased their holdings in KSH International, Jana Small Finance Bank, VST Industries, and Repco Home Finance, betting on these specific companies.
KSH International Ltd: Riding the EV Wave
KSH International, an Indian maker and exporter of magnet winding wires, saw its FII ownership grow to 5.05% (from 3.81%) and DII holdings climb to 13.89% (from 11.72%) by March 2026. These wires are key parts for electric vehicle (EV) motors, a sector boosted by government support and clean energy initiatives. KSH International's wide export network to 24 countries and domestic links with major vehicle makers back its growth story. However, the company has a high P/E ratio of around 43.03. This suggests the market expects high growth, already factored into its price. Rivals like Precision Wires India and Ram Ratna Wires are in the same market, but KSH International's strong exports and EV focus could give it an edge.
Jana Small Finance Bank Ltd: Navigating Growth in Financial Inclusion
Jana Small Finance Bank also drew institutional interest, with FII ownership rising to 4.31% and DII holdings reaching 16.27% in the March 2026 quarter. The bank's strong performance over the past 18 months, fueled by loans for affordable housing, gold, and vehicles, is a key driver. With a stable deposit base and plans to cover its unsecured loans with a guarantee scheme by March 2027, Jana SFB targets steady profits. Its P/E ratio is about 13.4x, similar to public sector banks like State Bank of India and Axis Bank. However, small finance banks often get higher valuations due to their growth prospects. A major challenge for small finance banks like Jana SFB is managing regulatory rules and keeping loan quality high during economic shifts.
VST Industries Ltd: A Tobacco Sector Re-rating
VST Industries, a major cigarette maker in India, saw its FII stake grow to 1.34% and DII holdings reach 6.63% by March 2026. This buying follows price increases by cigarette firms to counter higher taxes, a move expected to lessen the effect on profits. VST Industries' P/E ratio of about 15.3x is similar to competitors like Godfrey Phillips India and British American Tobacco, suggesting a fair market price for the sector. The company's 'Roadmap 2030' strategy, which includes shifts to renewable energy and EVs, shows a sustainability focus. However, its main business faces ongoing regulatory checks and environmental, social, and governance (ESG) issues common in the tobacco sector.
Repco Home Finance Ltd: Valuations and Operational Upgrades
Repco Home Finance, which offers housing loans mainly in South India, saw its FII stake climb to 13.37% and DII stake to 24.27% in the March 2026 quarter. The company's low P/E ratio of 5.6x-6.1x, much lower than the housing finance sector average of 30.98, makes it appear attractively valued. This suggests it's seen as a 'value stock'. While upgrades to its IT systems aim to boost efficiency and lower defaults, its performance against peers is a key area to watch. Repco faces tough competition from major players like HDFC Ltd in the housing finance market.
Benchmarking Against Peers and Sector Headwinds
The Indian small-cap market overall has struggled, with the Nifty Smallcap 250 Index falling 6.0% in 2025. This came after a strong run fueled by high valuations and earnings that couldn't keep up, as about 32-40% of small-cap firms missed earnings forecasts in Q2 FY26. Despite this weakness, the chosen stocks show diverse valuations: KSH International has a high P/E of 43.03x, reflecting high growth expectations; Jana SFB trades at 13.4x; VST Industries at 15.3x; and Repco Home Finance stands out with a low P/E of 5.75x, looking like a value investment. This selective buying by institutions likely means they are picking solid companies that have been unfairly sold off, rather than backing the whole small-cap sector.
Risks and Concerns
Even with institutional support, risks remain. KSH International's high P/E requires continuous strong growth to justify its price, and its ties to industries sensitive to economic cycles, like transformers and motors, can cause volatility. Jana Small Finance Bank operates in a tough regulatory space, with its growth depending on its loan portfolio, especially unsecured loans. VST Industries faces long-term challenges in the tobacco sector, including tougher regulations and changing consumer tastes, plus potential ESG issues. Repco Home Finance, though cheap, must tackle operational hurdles and strong competition from bigger companies. The broader small-cap market also risks valuation drops and changes in available cash, as shown in 2025 when over 1,000 small-cap stocks dropped over 50%. FIIs were net sellers of Indian stocks in March 2026, with DIIs buying most of what was sold, suggesting domestic cash is playing a larger role in the market.
Outlook and Investor Caution
Current institutional buying in specific small caps points to a selective strategy during market dips. However, the small-cap sector's history of sharp corrections after fast rises means caution is needed. While the chosen companies have unique growth factors, investors must do thorough research. Valuations, the ability of earnings to last, how they stack up against competitors, and management skill are crucial. The difference between Repco Home Finance's low P/E (value) and KSH International's high P/E (growth) shows the varied approaches. As the market potentially recovers in 2026, focusing on strong, undervalued companies, rather than just following general market moves, will be important. Small caps offer higher potential returns but also carry greater risk, making careful stock selection essential.