Small-cap stocks were the top losers on the bourses during the market correction on Wednesday with many individual companies losing more than 10 percent of their stock price during the day. This was reflected in the index and the BSE Small cap index was down 3.42 percent during the day, one of its biggest single-day losses in 2023.
The current correction in small-cap stocks is however a blip and this market segment has repeatedly out-performed the broader market by a big margin. The BSE Small Cap Index is still up 41.3 percent since the start of the 2023 calendar year compared to a 15.9 percent rally in the benchmark index during the period and a 28.5 percent rally in the mid-cap index during the period.
In all, the small-cap index is up 200 percent since the start of 2020 compared to a 71 percent rise in the Sensex and a 134 percent rise in the mid-cap index during the period.
This current correction in the stock market is a good opportunity for long-term investors to pick fast-growing and financially strong small-cap stocks at a reasonable valuation.
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Here are ten smallcaps with strong revenue and profit growth but relatively low valuations that offer attractive upside potential to investors in the longer term.
These stocks offer the best combination of strong business and profit growth in the last 12 months, a high double-digit return on equity, a strong balance sheet with low or minimum debt on their books and a relatively low valuation. The stocks are from the universe of the BSE Small Cap Index and exclude loss-making companies.
1. At the top of our list is the Kolkata-based West Coast Paper, one of the biggest writing and packaging paper makers in the country. The company's net profit was up 64 percent year-on-year in the last 12 months while its net sales were up 15.6 percent Y-o-Y during the period. It is a debt-free company with a return on equity of around 30 percent, more than twice the small-cap index RoE of 13 percent currently. The stock is trading at a trailing P/E of 5X and price-to-book value of 1.7X with a market cap of around Rs 4600 crore.
2. The Gurgaon-based non-banking finance company Satin Creditcare Network is next on our list with 31 percent Y-o-Y growth in gross interest income in the last 12 months, while its net profit grew to Rs 352 crore from a net loss of Rs 62 crore a year ago. The company reported a return on equity of 18.5 percent. It is trading a trailing P/E of 7.3X and a price-to-book value of 1.5X. Its current market cap is Rs 2500 crore.
3. The next is Bangalore-based Ujjivan Small Finance Bank which is trading at a P/E 10X and price-to-book value of 2.5X currently. The bank's net profits and gross interest income were 113 percent and 44 percent Y-o-Y respectively in the latest trailing 12-month period. The company's current MCap is around Rs 11,500 crore with an RoE of 26 percent.
4. The Mumbai-based shipping major Great Eastern Shipping is next on our list with a market cap of Rs around Rs 14,000 crore. The company's net sales were up 16 percent Y-o-Y in the last one year while its net profit was up 69 percent Y-o-Y in the period. The stock with a debt-to-equity ratio of 0.3 is currently trading at a P/E of 6X and price-to-book value of 1.5X. It reported an RoE of 25 percent in the last 12 months.
5. The Delhi-based paper maker JK Paper comes next with net profit and net sales growth of 31 percent and 21 percent respectively in the last 12 months. The company's balance sheet is moderately leveraged with a debt-to-equity ratio of 0.5X but it has a high RoE of around 25 percent currently. With its current market cap of around Rs 6500 crore, JK Paper is trading at a P/E of 5X and a P/B ratio of 1.3X.
6. The Mumbai piped gas utility Mahanagar Gas is the next company on our list. It is currently trading at a P/E of 10X and a P/B ratio of 2.5X. The company’s net profit and net sales were up 113 percent and 24.5 percent respectively in its latest trailing 12 months. It’s a debt-free company with a return on equity of 24 percent and a market cap of around Rs 14,000 crore currently.
7. The steel pipe maker Jindal Saw comes next with an earnings growth of 470 percent and net sales growth of 35 percent in the last one year. Its balance sheet is moderately leveraged with debt to equity ratio of 0.7X and RoE of 13 percent currently. With its current market capitalisation at Rs 14,000 crore, the stock is trading at a P/E of 12X and P/B of 1.7X.
8. The public sector lender Bank of Maharashtra is next on our list which reported a net profit of 107 percent in the last 12 months while its gross interest income was up 32 percent in the period. The bank reported an RoE of 18.4 percent in the last 12 months. With its current market cap at Rs 33,500 crore, the bank is trading at a P/E of 10X and P/B of 1.9X.
9. The Ahmedabad-based real estate developer Ganesh Housing Corporation is next on our list with a net profit and net sales growth of 282 percent and 13 percent respectively in the last one year. It’s a debt-free company with the latest RoE of 23 percent. The stock with a market cap of Rs 3,300 crore is trading at a P/E of 11X and P/B of 2.5X.
10. The Hyderabad-based pharmaceutical maker Natco Pharma is the last company on the list. Its net profit and net sales were up 177 percent and 44 percent respectively in the last one year. It’s a debt-free company and reported a return on equity of 21 percent in the last one year. With its current market cap of around Rs 14,000 crore, the stock is trading at a P/E of 13X and P/B of 2.7X.
(Disclaimer: This article is for information purposes only. Readers are advised to consult a certified financial advisor before investing in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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