The assumption that US technology firms will continue spending on AI at an unabated pace is increasingly being challenged. Any pullback in capital expenditure could weigh on the share prices of Indian suppliers, even those whose order books are backed by genuine demand.
Smallcap investors have had plenty to cheer over the past year, despite an otherwise lacklustre market. But the gains have been far from broad-based: Only 97 stocks in the Nifty Smallcap 250 index have delivered positive returns over the period.
Among the biggest winners, Sterlite Technologies (STL) ranks second, with its share price surging nearly 526 per cent. HFCL has gained 180 per cent, while Aditya Infotech, Sansera Engineering, Acutaas Chemicals, Welspun Corp and MTAR Technologies have risen between 116 per cent and 194 per cent.
To varying degrees, these companies have benefited from heavy capital expenditure by US businesses building out AI infrastructure and data centre capacity.
There are notable exceptions to the trend: Shares of Cupid, a condom maker, have climbed 587 per cent; drugmaker Rubicon Research and electric scooter manufacturer Ather Energy have also posted substantial gains.
One fund manager summed up India’s position in the global AI race: The country may be on the wrong side of the AI trade, but on the right side of the AI capital expenditure trade. In other words, even if India is not yet a major contender in developing frontier AI models, its companies can benefit from the infrastructure spending of global technology groups, including investment in data centres within India.
The order books of some companies illustrate the scale of the opportunity. STL’s order book has expanded 4.6-fold since March to about ₹35,274 crore, supported by $1.2 billion (approximately ₹11,400 crore) in deals with hyperscalers, or large cloud and technology companies operating extensive data centre networks.
HFCL’s management has said that a large portion of its roughly ₹18,500 crore fibre and data centre order book also comes from hyperscalers.
The recent retreat in AI-linked stocks, however, suggests that investors are beginning to reassess the trade. Over the past month, six of the seven companies associated with data centres or allied AI businesses have declined — with the exception of Acutaas, which has expanded into semiconductor manufacturing.
A Business Standard analysis of the combined market capitalisation of MTAR Technologies, Sterlite Technologies and HFCL found a growing relationship between the three companies and the Nasdaq Composite.
An assessment of daily returns suggests that until March, the stocks moved largely in tandem with Indian smallcaps. By the July-September quarter, however, MTAR and HFCL had become more closely linked to the previous night’s Nasdaq Composite’s performance. A 1 per cent move in the US technology index was followed by a roughly 1.2 per cent move in their shares the next morning on the NSE. Over the same period, their relationship with the domestic smallcap index weakened by a third or more.
The shift was also evident in the stocks’ sensitivity to the American index movements, or beta (the price volatility of a stock or other asset relative to the market). Earlier in the year, their beta to the Nifty Smallcap 100 stood at about 1.35-1.38, while their beta to the Nasdaq was close to zero. By July-September, the relationship had reversed: The Nasdaq beta had risen to 1.03, while the smallcap beta had fallen to 0.62.
The pressure on Indian stocks has coincided with a broader correction in US technology shares. Over the past month, Alphabet, Bloom Energy and Meta have fallen 17 per cent, 26 per cent and 15 per cent, respectively. The Philadelphia Semiconductor Index, which tracks US chipmakers, has declined 17 per cent, while the Nasdaq Composite is down 7.5 per cent.
Analysts are consequently becoming more cautious about the growth prospects of these 10 smallcap companies. Institutional ownership patterns also point to a more selective approach: Mutual fund holdings have declined over the past year in HFCL, Sansera Engineering, Welspun Corp and Acutaas Chemicals.
The trend is not uniform. Sterlite Technologies, Cupid, Aditya Infotech, MTAR Technologies and Ather Energy have recorded an increase in mutual fund ownership in the September 2026 quarter compared with a year earlier.
Market participants caution that the recent gains should not be mistaken for a broad-based recovery in smallcaps, particularly as valuations across parts of the segment have become stretched.
“While smallcaps have done well this year, largely on the back of their superior growth profile compared with other segments and the emergence of new businesses, we have seen some meaningful corrections over the last few weeks,” said Amit Khurana, group chief executive officer (CEO) and head of institutional equities at Dolat Capital.
Raw material inflation remains a key challenge for the segment, he said. If cost pressures persist, company valuations could face a further reset in FY28.
Khurana advised investors to remain selective, focusing on the durability of earnings growth rather than past share-price performance.
Vikas Gupta, CEO of OmniScience Capital, said some of the stocks that have rallied sharply were overvalued, while others had yet to establish meaningful profitability. “Given this, we think it is unlikely that the same group of stocks would continue being the top performers,” he said.
Kotak Institutional Equities, in a research report dated October 11, said the outperformance of smallcap and midcap stocks over the preceding six months had been driven largely by earnings upgrades.
Capital goods, contract development and manufacturing organisations (CDMOs), defence and electronics manufacturing services (EMS) were among the sectors that benefited from favourable developments and the government’s push to expand domestic manufacturing.
But sustaining that outperformance will require companies to deliver on the earnings expectations already built into their share prices, Kotak Institutional Equities added.
The broader implications extend beyond the fortunes of individual stocks. If AI-linked ancillary companies stop outperforming, the popular argument that India could serve as a hedge against a global AI sell-off may also come under pressure.
Analysts at Bernstein challenged that thesis in a client note dated November 2, arguing that India was increasingly being presented as a hedge against the global AI trade. “We disagree. India is neither an AI beneficiary nor an anti-AI trade,” they wrote.
