Shares in small companies have outshined their larger blue-chip peers in India over the past one year and, as earnings pick up momentum, should offer more opportunities to investors looking for bigger gains in the world’s fastest expanding major economy.

As India celebrates Diwali, the festival of lights, that marks the new trading year for the market fraternity, the signs are bullish. Heavy government investment in infrastructure, pay hike for government employees and pensioners, benign monetary policy and improved outlook for farm production promise better tidings in the coming year.

Reforms undertaken by Prime Minister Narendra Modi’s administration such as slashing red tape and making it easier to do business, opening the door wider to foreign investment in many sectors, bringing in a national tax system in place of multiple and cumbersome central, state and municipal levies should also accelerate growth.

A study done by the Economic Times found that the market value of 34 companies in the small-cap index more than doubled between last Diwali and now, meaning investors pocketed handsome returns on their investment. The stocks include Pricol Ltd, Borosil Glass Works, Orient Paper & Industries, Sudarshan Chemical Industries, Gujarat Narmada Valley, Bodal Chemicals, Shilpi Cable Technologies and Ramco Industries.

“Economic growth is at an inflection point, earnings are on the verge of staging a rebound and the investment cycle is poised to recover. These are some of the factors that favour the small-cap stocks,” the widely circulated business newspaper said.

Funds group Templeton owns $600 million of stock in small companies out of a total $2 billion it has invested in Indian equities.

The index for small cap companies climbed a fifth over the past year, compared with around 7.5 per cent gain in the top-30 Sensex.

The widely tracked Sensex should reach between 32,000 and 36,000 by next Diwali, according to a ETMarkets.com survey of 15 top brokerages, a rise of 14.5 to 28.8 per cent from Friday’s closing of 27,941.51.

Mid-caps rally

A few mid-cap stocks, including Manappuram Finance, Dalmia Bharat, Biocon, Edelweiss Financial Services and Sundaram Fasteners, too more than doubled their value. The mid-cap index is up about a quarter.

Some of the government’s initiatives, particularly in its push towards producing more military-related equipment in India, are set to boost the outlook for many mid-cap companies. Faster decision-making is already showing significant rise in orders for manufacturers.

Bharat Electronics, for instance, received orders worth Rs170.94 billion in 2015-16, up more than two times from the year earlier. The management expects order inflows of Rs100 billion to Rs120 billion in the current year, and “a few other potential bigger ticket orders make BEL an attractive investment opportunity”, according Vinod Nair, research head at Geojit BNP Paribas.

Auto-parts maker Bharat Forge is another company to watch. Its foray into defence-related segments and aerospace gives it added thrust areas in the coming years. Last year, the company signed a multi-year contract to supply titanium forgings to Boeing and did its first shipment in February. The pre-machined forgings, made at Pune and Baramati facilities, will be used for the Boeing’s B737 next generation planes, the company had said.

In March, Bharat Forge signed a joint venture with AM General of the US to make Light Specialist Vehicle in India for the army. Geojit’s Nair expects earnings growth of 37 per cent in the financial year 2017-18 as the new ventures, a drop in commodity prices and cost rationalisation improve margins to 19.2 per cent from 18.6 per cent currently.

Cheer time

Diwali is usually a time to rejoice, with market makers and investors in a mood to loosen their purse strings. As most companies and government undertakings pay annual bonuses to their staff before the festival, consumer spending peaks and bolsters sales of a wide range of industrial products, from cars to home appliances and electronic gadgets to luxury items.

Bountiful monsoon showers, after two successive years of deficit rainfall, have further provided an added impetus to the economy. Good rains help irrigate farms and boost agricultural output, raises incomes in rural regions where the majority of the country’s 1.3 billion people reside. Economic growth is expected to reach as much as 7.75 per cent in 2016-17.

Ideally, these factors should be sufficient for investors to build a portfolio. “India is in a very sweet spot. It is our top emerging-market pick at the moment,” Mark Mobius, executive chairman of Templeton Emerging Markets Group, said at an event in Mumbai last week. “One of the most exciting things about India is Modi’s reforms.”

Lingering concerns that a rate rise by the US Federal Reserve could trigger cash outflows and depress stock prices are exaggerated, according to the market guru, because local funds would swoop down to grab the opportunity. “The reason is domestic investors are becoming more important. Going forward, they will drive the market, not foreign investors.”

Costly prices would also not be a distraction. “Interest rates are going down and the economy is growing, putting that together you can justify higher valuations,” Mobius said.

Maruti Suzuki, which sells every second new car in India, posted a 60 per cent jump in September quarter earnings, beating analyst estimates, as it rode on higher volumes and lower expenses.

Tata: discordant note

Probably the only worry for investors is the uncertainty surrounding India’s largest industrial conglomerate, the Tata Group, which ousted its chairman in boardroom coup without citing any reason.

Cyrus Mistry, 48, who took over the mantle four years ago, was abruptly removed from his position in Tata Sons Ltd, the holding company of the fabled group. Former chairman Ratan Tata, 78, assumed temporary charge until a new head can be picked. The group controls some of the biggest companies, including Tata Steel, Tata Motors, Tata Consultancy Services, Tata Global Beverages, Indian Hotels Company, Tata Power, Tata Chemicals and Tata Tea.

“I have to say that the Board of Directors has not covered itself with glory,” Mistry said in an ominous letter. “To ‘replace’ your Chairman without so much as a word of explanation and without affording him an opportunity to defending himself in a summary manner must be unique in the annals of corporate history.”

He also claimed that the group may face Rs1.18 trillion, or about $18 billion, in write downs from unprofitable businesses, including Tata Steel’s Corus unit in Europe, Tata Motors’s Nano car, hotels operations and a troubled telecoms venture with Japan’s DoCoMo.

Shares in all Tata companies fell sharply and are likely to remain subdued until the heavy cloud of uncertainties clear.

Tata Steel shares dropped as low as Rs381 before closing at Rs404.45, down 5.3 per cent over the week, while Indian Hotels tumbled 12.9 per cent to Rs115.40 and Tata Global Beverages plummeted 8.6 per cent to Rs139.60. Shares in Tata Motors shed 1.6 per cent and Tata Consultancy Services lost 1.2 per cent. Both the Sensex and Nifty benchmark indices eased over the week.

The writer is a journalist based in India.