Investors seeking growth opportunities usually turn to small-cap stocks. These small companies have the potential for significant expansion and market outperformance.
Some of the best stocks to buy in the past 15 years had a humble beginning as a smallcap. Page Industries, the exclusive licensee of Jockey International in India, began as a smallcap.
Bajaj Finance, which has emerged as one of India’s largest and most valuable NBFCs, was a smallcap initially.
Small-cap stocks have the potential for significant growth, but not every smallcap becomes a giant. Investing in these stocks can be rewarding, but it also comes with its share of risks that are important to understand.
Here’s a close look at the top small-cap stocks that have generated high returns in the past.
#1 Sportking India
At the top of our list we have Sportking India.
The company is a textile manufacturer offering an array of products suitable for manufacturing woven and knitted fabrics for summer and winter wear.
It operates in the domestic and international markets, with exports accounting for over 47% of the total revenues in the quarter ended December 2022.
Sportking caters to some of the marquee brands in the apparel industry, such as Zara, Marks and Spencer, H&M, Jockey etc.
The company has added over 30% of its existing capacity in the past four years, funded via a mix of internal accruals and borrowings.
View Full Image
The business has been doing well in the past five years. While sales have doubled, the profits are up five times in the same period. This has boosted the return metrics of the company.
The return on equity is up four times in the past five years. And the return on capital employed has been strong, growing consistently from 16% in the financial year 2018 to 63% in 2022.
The stock performance, up 56 times in the past five years, reflects the stellar business performance.
At the current price, the stock is available at a PE multiple of 4.4 times, a premium of 41% to its 10-year median PE of 3.1.
#2 Indian Energy Exchange
Next on our list is the Indian Energy Exchange (IEX), India’s first energy exchange company.
IEX, a dominant player in the Indian power market, with about 95% market share in the energy exchange sector.
It operates a trading platform that enables participants to engage in electricity trading using various short-term contracts. These include 15-minute, intra-day, day-ahead, and daily contracts.
IEX is also actively involved in promoting the transition towards renewable energy sources. The company plays a crucial role in issuing renewable energy certificates (REC) to renewable energy generators.
View Full Image
In the last five years, the company’s revenue has clocked a compound annual growth rate (CAGR) of 13.6%, primarily led by growth in trading volumes. The net profit also jumped by 18.5% (CAGR). IEX is a zero-debt smallcap company.
This robust growth has boosted the return ratios. The RoE remains high at 45% over the past 5 years, and the RoCE has been between 55-60%.
At present, the stock trades at a PE of 48x, a 33% premium to its 5-year median PE of 36x.
#3 Computer Age Management Services(CAMS)
Third on the list is CAMS.
CAMS is the largest registrar and transfer agent of mutual funds in India, boasting a market share of more than 60% based on average assets under management in the mutual fund industry.
It offers a comprehensive range of services and plays a significant role in shaping and upholding the market perception of its clients.
Servicing 10 of the 15 largest mutual funds in the industry, the company derives 90% of its revenues from the mutual fund business. The balance 10% comes from the non-mutual fund side of the business.
View Full Image
The business has done well in the past 5 years, thanks to CAMS’s dominant position in the market. While the sales are up by 1.5 times, the net profits have doubled over the last 5 years.
This has allowed the return ratios to expand substantially. The RoE has jumped from 33% in the financial year 2018 to 46% in 2022. The RoCE has also followed suit, up from 51% in 2018 to 63% in 2022.
The stock is available at a PE of 37.7x, a discount of 15% to its 5-year median PE of 44.4x.
#4 Sanofi India
Fourth on our list is Sanofi.
Sanofi India, erstwhile known as Aventis Pharma, is a leading multinational pharmaceutical company.
The business covers a wide range of medicines for therapy areas such as diabetes, cardiology, thrombosis, central nervous system, and antihistamines.
The products manufactured by the company are distributed in India and exported to several nations. While 70% of the business comes from the domestic markets, the balance 30% comes from exports.
Sanofi India has aligned itself with India’s healthcare needs by building expertise, capability, and capacity.
It has achieved this with continued investments, strategic partnerships, and a commitment to patients. This is well-reflected in the business which has recorded robust growth and expanding return ratios.
View Full Image
While sales have remained stable, the net profits have nearly doubled over the last 5 years. The RoE and RoCE have improved substantially. While the RoE is up from 17% in the financial year 2018 to 51% in 2022, the RoCE is up from 28% in 2018 to 71% in 2022.
#5 Blue Dart Express
Last on our list is Blue Dart Express.
Blue Dart is a leading logistics company in India, specialising in courier and express delivery services.
It has established itself as a trusted name in the industry, offering an array of services, including domestic and international courier delivery, supply chain solutions, and e-commerce logistics.
The company has been constantly expanding its footprint. At present, it serves over 55,400 locations across India via its extensive network of over 700 retail stores.
View Full Image
The well-established business has performed exceedingly well over the last 5 years. While the sales have nearly doubled, the net profits have tripled.
As a result, there is an uptick in the RoE and the RoCE numbers. The RoE jumped from 27% in the financial year 2018 to 43% in 2022, and the RoCE from 30% to 68%.
This stellar performance comes on the back of the rapidly growing e-commerce industry in India and the company’s dominant position.
The stock of Blue Dart Express currently trades at a PE of 39x, a discount of 22% to its 5-year median PE of 50x.
Snapshot of Small-cap Stocks on Equitymaster’s Indian Stock Screener
Here’s a quick view of the above companies based on their financials.
View Full Image
In Conclusion
Investing in stable, fundamentally sound smallcaps offer investors a great opportunity to generate outsized returns.
Mainly because small businesses are more agile and have more room to grow in comparison to their larger peers. So once the company grabs a great opportunity, the business can quickly get on the fast track to growth.
But despite the strong prospects, you must do your due diligence and in-depth research. As attractive as smaller undervalued companies may seem, you must understand that the prospect of outsized returns comes in tandem with high volatility.
However, investing for the long term can take care of that. It enables you to ride out any short-term market swings and also gives the undervalued businesses enough time to realise their full potential.
Happy investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
Know your inner investor
Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Download The Mint News App to get Daily Market Updates.
More
Less
Updated: 26 May 2023, 11:30 AM IST
