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Published: Dec 29, 2021
Updated: Dec 29, 2021

10 Small Cap Growth Stocks

With the stock market soaring on the back of global liquidity infusions, the common investor faces the dilemma of having to cough up big bucks for highpriced stocks even as there is uncertainty of how long the bull run will last. Thankfully, there is a pocket-friendly alternative – penny stocks. But even these should not be resorted to without proper study. The real test is to judiciously pick penny stocks which have promising growth potential. Otherwise, it will be the case of penny wise pound foolish. In fact, rather than looking wishfully at the top stocks (as in the BSE500), picking a penny stock that is trading at undervalued levels, even where the underlying business is good, can be a more rewarding exercise. Corporate India offers discerning retail investors a list of 10 penny stocks which are worth looking at from the dual viewpoint of risks and prospects.

With the stock market in general and leading stocks in particular surging to Himalayan heights, investors in general and retail investors in particular are facing a ‘budget’ dilemma. Global observers of the Indian stock market insist that Indian stock prices have turned too costly, while seasoned investors with past experience of bull-and-bear swings feel such prices may not be sustained. Quite clearly, many stocks on account of their stratospheric prices have gone beyond the reach of retail investors. One solution in these circumstances is to go for penny stocks – specifically those with promising growth potential. This will serve both objectives of retail investors – picking up affordable scrips and continuing to build their wealth. Penny stocks are, by definition, stocks that are available in the market at rock-bottom prices. Nonetheless, some of them have remarkable growth potential. In fact, there are hundreds of cases where penny stocks have graduated to the status of medium stocks and have subsequently been catapulted to the ranks of high-priced stocks.

Hence, the real issue is to find penny stocks which have the potential to grow. It is well-known that many penny stocks have remained at the same level for years together. And in some cases, these stocks have literally vanished from the market. Hence, if high-price stocks are risky because of the chances of downswing, penny stocks too come with their own risks. Moreover, it is difficult to define a low-price stock. To do so, one has to consider the face value of a share, its earning capacity (EPS) and its future prospects.

WIDEN STOCK-PICKING

However, penny stocks should not be shunned totally as some of them have good potential for growth. Some investors do not want to buy penny stocks and prefer to go by the BSE-500 Index, presuming that stocks in the BSE 500 Index have decent fundamentals and that any such stock which is trading at a low price must be undervalued. In some cases such assumptions may be vindicated, but in most cases will not help in selecting the right stocks. Moreover, by shortlisting only low-price stocks, a retail investor could be missing out on other stocks which, despite their high price, may still be undervalued. Experts point out instead of focusing only on BSE-500 stocks, it is necessary to look beyond. Why? Because by concentrating only on the top 500 stocks, one is actually missing out on a huge opportunity. There are 3,800-plus stocks listed on the National Stock Exchange (NSE) and 5,000-plus stocks listed on the BSE. If one is concentrating only on the top 500 stocks (as in the BSE-500), one is actually looking at 13.2% of all the listed stocks. The other 86.8% stocks (besides the BSE-500) are less traded and hence come with both high risk and high opportunity. There are chances that the fundamentals of these stocks are weak, even if the underlying business is good, and it is these stocks that are more likely to trade at undervalued levels (more than in the BSE-500 Index). In fact, penny stocks need greater study and analysis, but if one has selected the right scrip he can earn substantially. We have picked 10 small-cap stocks which have the potential to grow in due course. This does not mean that there is no risk. Investment in penny stocks is always risky. Your selection should be right and, not least, luck should favour you.

Here are 10 penny stocks which you can analyse and select, taking into account the prospects ahead and the risk element involved.

Samkrg Pistons & Rings

FACE VALUE    10
CMP   157.90
52   WEEK HIGH /LOW 169/70
BV   153.20

Samkrg Pistons and Rings (SAMKRG), a company promoted by SDM Rao in March 1985, is engaged in the manufacture and sale of pistons, piston pins and piston rings. The company largely caters to the two-wheeler and three-wheeler segments, whereas its supplies for fourwheeler parts and generator sets is marginal. With the revival of the auto industry, the company is likely to do very well going ahead.

The company has three manufacturing plants, one in Sangareddy district near Hyderabad, Telangana and two in Srikakulam district of Andhra Pradesh. While its main plant at Bonthapally (near Hyderabad) has the capacity to manufacture both pistons and rings, the Varisam plant in Srikakulam district has the capacity to manufacture rings, and the Arinama Akkivalasa plant at Srikakulam has the capacity to manufacture pistons. The company has an established market position in the piston and piston rings market in the country, catering to a strong and diversified customer base.

Over the years, the company has built a long-standing relationship with major two- and three-wheeler OEMs as well as independent engine manufacturers and tiller manufacturers. Its OEM client list includes Honda Motorcycles & Scooters India, Royal Enfield, TVS Motors, Bajaj Auto, Kawasaki, Mahindra & Mahindra, Piaggio/Vespa and Atul Auto. The company also caters to OEMs such as VST Tillers, Greaves Cotton, Kirloskar Electric and Honda SIEL Power Equipment in the domestic market and Knorr-Bremse in the overseas market. It also has products for diesel and CNG engines and is continuously looking for new opportunities/breakthroughs across automotive segments. The company plans to increase its presence in the export market and has reported increased traction in this segment. For exports, the company focuses on developed markets such as the UK, France, Germany, Spain, Russia and other European countries, as well as Brazil in Latin America, driven by its superior-quality products and technical expertise from Japanese and German consultants. The company has plans to reach a 20% growth in sales turnover during the next 2 years, from about 15% in FY19. It also has a leading market position in the replacement market, operating through a strong and wide network of dealers and distributors across India. As on March 31, 2020, the company has zero longterm debt and short-term borrowings of Rs 14.72 crore (down from Rs 17.47 crore at end of March 2019) against a net worth of Rs 149 crore. We expect the company to register an EPS of Rs 15.3 for FY21 and Rs 25.5 for FY22.

Jyothy Labs.

FACE VALUE    01
CMP   150.05
52 WEEK HIGH /LOW   166/86
BV   36.60

Jyothy Labs, formerly known as Jyothy Laboratories Limited, is a multi-brand, multi-product company focused on the fast-moving consumer goods industry. The company is mainly engaged in manufacturing and marketing of fabric whiteners, soaps, detergents, mosquito repellents, scrubbers, bodycare and incense sticks. It operates through three segments: Soaps and Detergents (which includes fabric whiteners, fabric detergents, dishwash bars and soaps, including ayurvedic soaps), Home Care products (which includes incense sticks, scrubbers, dhoop and mosquito repellents), and Others, which includes bodycare, tea and coffee. Its products are under various brands, which include Henko, Mr White, Ujala, More Light, Chek, Pril, Exo, Maxo, Margo, Fa, Neem, Fabric Spa, Snoways, Busy Easy and Wardrobe. JLL has a leadership position in the fabric whitener segment in India, whereas it ranks number two in the dishwash bar, liquid, and mosquito repellent coil categories. Going forward, long-term strategies undertaken to enhance growth include winning through innovations in the fabric wash segment, leveraging rural penetration in the dishwash segment, increasing its footprint, and relevant extensions in the household insecticide (HI) and personal care segments. Its large presence in the essential and hygiene segment will help the company drive nearterm growth in the continuing pandemic situation. Resurgence in the HI segment will help drive growth in the medium term.

Brand extension or new product launches remain one of the core growth strategies for the company. JLL launched Exo Bio Fresh, a 100% organic vegetable and fruit cleaner, in response to market demand in Kerala in Q2FY21. Both products are gaining good traction since their launch. The company also sells products such as floor/toilet cleaners in the southern markets, which have gained good traction in the recent past. The company expects the contribution from new product launches to be 3%-5% in the coming years.

With double-digit growth likely to sustain in categories such as dishwashing and personal care and 100% recovery in the core fabric whitener category, the management is confident of maintaining a steady growth momentum going ahead.

In the September 2020 quarter, revenue grew 6.2% (FMCG sales up by 7.6% and volume up by 8.5%). PAT at Rs 60.1 crore, as against Rs 53.6 crore, increased by 12.2%. For the six months, sales grew 4.5% (FMCG sales up by 6% and volume up by 7.3%). PAT increased 21% to Rs 110.1 crore. We expect the company to register an EPS of Rs 4.0 for FY21 and Rs 6.5 in FY22.

Cords Cable Industries

FACE VALUE   10
CMP   43.15
52 WEEK HIGH /LOW   53/22
BV   110.10

CCIL designs, develops and manufactures a varied range of power, control, instrumentation, thermocouple extension/ compensating and communication cables. It manufactures instrumentation and control cables as well as power cables that find applications across industries; viz, power, oil & gas, hydrocarbons, fertilizers, metal & cement, airports, railways, metro rail and smart cities, amongst others. Since its start in 1991, the company has expanded its product portfolio, which at present includes instrumentation cables, control cables (upto 1.10 KV) and low tension (LT) power cables (upto 1.10 KV). Currently about 76% of the company's cable comprises instrumentation and control cables and the balance 24% comprises power cables. Over three decades of market presence, the company enjoys a strong brand image in the B2B segment. CCIL has carved a niche in manufacturing customized cables as per the customer's specifications. 95% of the company's orders are based on customer specifications.

The clientele of the company is diverse and across sectors, including hydrocarbons, automobiles, cement, power, and freight corridors. In the domestic market, some of the key clients are Larsen & Toubro, BHEL, Bombardier, Delhi Metro, Engineers India, GE, Alstom, ABB, ONGC, Cairn and Alstom Transportation. CCIL has a low customer concentration risk as the top 5 customers contributed around 24% (PY 33%) of net sales in FY20. In FY20 about 69% (54% in FY19) of the revenue came from the hydrocarbon sector with contributions from metro/railways at 5% (down from 11% in FY19) and power at 6% (down from 19% in FY19). The company aims to be a leading global player, providing products and services, offering comprehensive solutions to the electrical, data and signal connectivity requirements of businesses as well as household users. The company is also an approved vendor for Abu Dhabi National Oil Company for instrumentation & control cables, OFCs and LV power distribution cables, and with Samsung Engineering Company for Instrument, Control, Thermocouple, FF and Fire Survival cables.

The order book of the company as of November 25, 2020 was Rs 132 crore (hydro carbon 71.7%, power 13%, railways including metro 5.6%, fertilizer 5.1%), which is executable over the next 3-5 months. The order book last year (as of September 30, 2019) was Rs 148 crore (hydro carbon 64.4%, power 16.3%, railways including metro 5.1%, cement & metals 7.5%). The short execution cycle of its order book provides near-term revenue visibility. Overall the company is the major beneficiary of investment in modernization and fresh capacity creation in both the industrial and infrastructure segments of the country. The company is well-placed to sustain growth momentum as CCIL continuously strives to achieve higher efficiencies, cost control and better preventive maintenance, and focuses on improving its product mix to attain economies of scale.

Bajaj Consumer Care

FACE VALUE   01
CMP   251.35
52 WEEK HIGH /LOW   284/117
BV   49.70

Bajaj Consumer Care Ltd is a part of the Shishir Bajaj group, one of India's leading producers of hair oil. It is the third-largest producer of hair oils in the country and an undisputed leader in the light hair oil (LHO) category with a volume marketshare of 60% and value marketshare of upto 64%. The company's flagship brand Bajaj Almond Drops Hair Oil (ADHO) is the leader in the LHO category, and it commands one of the highest per unit prices in the industry and accounts for 90% of total revenue. With the Nomarks acquisition in 2013, Bajaj forayed into the antimarks category. On a company level, the brand has shown an impressive growth of 14% on an annual basis. The marketshare of the brand in the anti-marks category segment is at 8.6%. Its distribution network has been its major strength as it implemented the latest technologies to improve efficiencies in its sales force and networks. Its products are distributed through a network of more than 4 million retail outlets in the country. The company has been restaging its crucial portfolios to maintain its marketshare. In 2019 it relaunched its flagship hair oil product, Bajaj Almond Drops Oil, to catch the attention of the new-age population due to which the performance of the brand in the total hair oil segment touched an all-time high of 10%.

The penetration of Bajaj Almond Drops has gone up from 17.6% to 20.1%, which is an impressive rise of 2.5% in penetration within one year (FY19). It also launched new age products like 'Bajaj Cool Almond Drops' in the cooling hair oil segment. To improve the company's product strategies it has also appointed a reputed consultant, Bain & Company, to help it grow its hair oil brands faster. On the financial front, being a small-cap FMCG company, it has registered a healthy 6.5% CAGR growth in its topline over the past 5 years and 8.2% CAGR growth over the past 5 years. It has also maintained consistent Return on Equity and Return on Capital Employed of 42% and 52% respectively over the last 5 years, which is also quite similar to its 3- years growth. This shows the consistency of returns given by the company. Additionally Bajaj Consumer is a debtfree company. It is currently trading at a valuation of 17.6x as against the industry valuation of 74.7x, making it an attractive bet. The company may face big risks if it fails to revive growth in its hair oil category as the Covid-19 led lockdowns have impacted its volumes.

Heidelberg Cement India

FACE VALUE   10
CMP   228.60
52 WEEK HIGH /LOW   245/120
BV   56.90

Heidelberg India Cement Ltd (HCIL), earlier known as Mysore Cement Ltd, was set up by the SK Birla group in 1958. Today, HCIL is a subsidiary of Cementrum BV (a company incorporated under the laws of The Netherlands, which is 100% controlled by Heidelberg Cement AG). After taking over the controlling stake from the Birlas in July 2006, the Heidelberg group's capabilities and global experience in the cement business played out as a turnaround story for them. Heidelberg Cement expanded its global footprint and added to its R&D capabilities. In 2009, the company undertook a brownfield capacity expansion in Central India to increase its cement manufacturing capacity from 2.1 million tonnes per annum to 5.4 million tonnes per annum. Over the years, the company has consistently and steadily increased the capacity utilisation from about 78% in FY15 to about 70% in FY20. Going ahead, the Government of India's focus on construction of roads (83,000 km to be built over the next five years) and affordable housing, and robust rural demand bodes well for cement demand going forward.

On the financial front, the company has reported topline CAGR growth of 12% in the last three years. Its bottomline has grown at a CAGR of 35% in the last 5 years on the back of cost-efficient techniques. It has reported EBITDA per tonne of Rs1,122 in FY20 and an efficient cash conversion cycle of 27, days which is among the best in small cap cement companies in FY20. Apart from this, the company has a good dividend track report and has consistently declared dividends for the last 5 years. In FY20 its dividend yield was at 3.5%. On the negative side, a strong demand revival in the real-estate and other construction related sectors is crucial as construction activities start to recover from the Covid19 lockdowns. The recovery in the construction sector may take some more time, which will be a key risk for this stock. If the rise in fuel cost sustains for more time, it may hurt the company's efficiency in the near term.

Indian Energy Exchange

FACE VALUE   01
CMP   295.10
52 WEEK HIGH /LOW   323/111
BV   15.90

IEX Ltd is the one of the first and largest energy exchanges in India, which provides a nationwide automated trading platform for physical delivery of electricity, Renewable Energy Certificates and Energy Saving Certificates. This exchange platform enables competent price discovery and increases the availability and transparency of the power market in India while also enhancing the speed and efficiency of trade execution. More than 6,600 participants are registered on IEX from 29 states and 5 UTs. Over 4,800 registered participants were eligible to trade electricity contracts and over 4,400 registered participants were eligible for trading Renewable Energy Certificates (RECs). Despite a 20% decline in power demand during the lockdown period in April and May 2020, IEX registered electricity volume growth of 19%. This was supported by lower spot prices resulting in higher participation, mainly from discoms. IEX has also launched its own Gas Exchange (India's first) as gas is similar to electricity in terms of logistics and complexity in trade. This launch has further deepened the prospects of growth for the company. IEX reported 78.3% EBITDA margin (down 120 bps yoy) with a net profit margin of 68% in FY20. Over the last 5 years the company delivered a sales growth of 8% and profit growth of 16%. It also reported a healthy CAGR growth in Return on Equity and Return on Capital Employed of 49% and 70% over the past 5 years. So overall, the company is very efficient in terms of its financials and future growth prospects. On the negative front, IEX faces risks in terms of any adverse regulatory changes and increasing competition intensity from existing new platforms.

Manali Petrochemical

FACE VALUE   05
CMP   48.00
52 WEEK HIGH /LOW   54/8
BV   28.60

The Chennai-based Manali Petrochemical Ltd (MPL) is a petrochemical company engaged in marketing propylene glycol and polyols. Annually it produces 27,000 tonnes of propylene oxide, 14,000 tonnes of propylene glycol and 15,000 tonnes of polyether polyol and system polyol. The company has a good debt to equity ratio of 0.03 and a good dividend yield of around 2.19%. The stock has high historical volatility. For the last 10 years, this stock has been moving from Rs 6 to 40 and has an average daily volume of 3.5 lakh shares.

During the last five years, its sales have moved up from Rs 579 crore in fiscal 2016 to Rs 702 crore in fiscal 2019 before declining to Rs 676 crore in 2020, with net profit rising from Rs 38 crore to Rs 48 crore.

Affle (India)

FACE VALUE   10
CMP   5321.00
52 WEEK HIGH /LOW   5617/908
BV   106.40

Affle is India's leading digital advertising platform provider which offers a highly efficient unique interplay -- a Digital + Mobility + analytics theme that can offer multi-year high growth opportunities. The company generates most of its consolidated revenue (90% of total revenue) by the CPCU model (cost per converted user). In this model, Affle charges its client only when the user or target customer performs an action very close to the transaction.

The company has developed strong algorithms and leverages big data analytics to understand the client's behaviour in an accurate manner (through ML & AI). It has developed a Data Management Platform (DMP) having a large data set with more than 250 billion data points, more than 21,000 million connected devices and 35.1 million converted users. So shopkeepers get ample data points to target customers precisely. The company's management is expecting e- commerce shoppers to increase by 20.7% CAGR upto 2025 compared to 2017. Thus it sees an increase in shoppers by leaps and bounds where the company compares its numbers for the period 2017 to 2025. Affle has also developed a strong mFaaS platform to rectify any frauds and prevent fraudulent transactions. This also provides a cushion for customers for larger and repetitive transactions.

Tata Steel BSL FACE VALUE   02
CMP   43.25
52 WEEK HIGH /LOW   46/15
BV   166.20

Tata Steel BSL, earlier known as Bhushan Steel will soon be merged with Tata Steel.