10 Small-Cap Growth Stocks

Published: Apr 15, 2022
Updated: Apr 15, 2022

Our current millennium has underlined the stock market story the world over. Of course, economic and geo-political events – like the current Ukraine war – have had a major impact on stock market movements, but in the long term the markets have a happy knack of bouncing right back.

This, then, is the time for wise investors to focus on smallcap companies which have the potential to enter the big league. This is also the time for proper selection combined with lot of patience and close monitoring. Corporate India lists 10 small caps with distinct growth potential.

In our brave new millennium, stock markets have emerged as the best avenue for investments, with savvy investors getting sizeable – and even extraordinary — returns on their investment. Almost all other investment avenues, including company fixed deposits, real estate, precious metals, paintings, corporate bonds and deposits with banks, have lost their sheen in various degrees. If people select the right stocks at the right time, they can earn crores — and several investors have proved this. For example, renowned investor Rakesh Jhunjhunwala has become a ‘crorepati’ from being a lower middle-class person by investing in Titan when its stock was priced low in the past. Likewise, there are thousands of examples where investors have become ‘Richie Rich’ by investing a rather small amount in the past when the market price of the stock they purchased was very small, and then watching it skyrocket anywhere from the following year to 5-15 years later.

But the problem investors are face with today is that stocks which are worth buying are quoted at exorbitant levels. If, for example, one prepares a list of the top 100 shares, one will find that they have already reached very high levels, from where the chances of any further appreciation are negligible.

Hence, the current option for investors to make money is to look for small-cap stocks which have just entered the growth path. Unlike good mid-cap or largecap stocks, they are available at rather lower prices and neither are their immediate returns worth home writing about. But if investors patiently wait for these small plants to grow and graduate to mid-cap and further to largecap, they will be able to reap a rich harvest on account of compounding — which was described by Albert Einstein as “eighth wonder of the world”. Unfortunately, very few investors have the patience to wait for years for the expected outcome.

A stock is considered small when its market capitalisation refers to the market value of shares. The market price of a share multiplied by the number of total shares of a company yields the market capitalisation. Though such companies are small, if they have the potential for growth potential they will gradually go from small to medium to large-scale. Needless to say, this transformation make take anywhere up to even 15 years, but, as they say, patience pays.

Patience Pays

Now we need to focus on small-cap stocks which have the potential to enter the big league. Of course, all small-cap companies cannot graduate to mid-cap entities and even fewer are likely to grow into large-cap corporate entities. This is where proper selection, a lot of patience and adequate monitoring certainly helps. We are presenting here 10 small-cap stocks which seem to have the potential to grow. Study them carefully and make your selection. Here goes the list. Happy investing!

Sunflag Iron & Steel

Sunflag Iron & Steel company is a prestigious flagship of the Sunflag group which has set up a state-of-the-art integrated steel plant at Bhandara with a capacity of 3.40 lakh tonnes per annum of high-quality special steel. The modern plant, pulsating with world-class technology, expert human resources and a commitment to excellence, has succeeded in creating a distinct niche in alloy steel, stainless steel and micro alloy steel and has attained the position of market leader in the segment. Little wonder, the company is receiving prestigious orders from Japan, Korea as well as Far East, Afro-Asian and Middle East countries.

The company's product range includes rolled products, billet/bloom ingots and bright bars of varied shape and size. These products are used for manufacturing automotive transmission gears, drive shafts, steering systems, bearings, exhaust systems and other engine components. The company also supplies its products to Indian Railways, ordnance factories, power sectors and other general engineering areas to manufacture critical application components.

The company is going from strength to strength on the financial front. During the last 12 years, its sales turnover has advanced from Rs 1,245 crore in fiscal 2010 to Rs 1,892 crore in fiscal 2021 and has crossed the Rs 2,000- crore mark in fiscal 2022, with the profit at net level inching up from Rs 95 crore to Rs 141 crore during the 12-year period to 2021 and crossing the Rs 250-crore mark in fiscal 2022. The company's financial position is getting stronger with reserves at the end of March 2021 standing at Rs 1,353 crore - almost eight times its equity capital of Rs 180 crore.

Little wonder, there has been a rush of investors to add these shares in their portfolios. The share price has zoomed from Rs 63 to Rs 118. There is a lot of steam left as yet in the scrip and the price is expected to cross the Rs 150-mark very soon.

Heidelberg Cement

Heidelberg India Cement Ltd (HCIL), formerly known as Mysore Cement Ltd, was set up by the SK Birla group in 1958. 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.

Subsequently, Heidelberg Cement expanded its global footprint and added to its R&D capabilities. In the significantly expanded Heidelberg Cement group, around 58,000 employees work at more than 3,000 production sites in around 60 countries on five continents. 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 6.26 million tonnes per annum by FY21.

The company's capacity utilisation in FY21 stood at 72%, which was at par with established cement companies (down from 91% in FY19 due to the impact of Covid-19.) The Government of India's focus on construction of roads (83,000 km to be built over the next five years), robust capex plans announced in budget 2021, affordable housing and increased rural demand bodes well for cement demand going forward.

On the financial front, the company is going from strength to strength. During the last five years, the sales turnover has expanded from Rs 1,717 crore in fiscal 2017 to Rs 2,117 crore in fiscal 2021, with the profit at net level inching up from Rs 76.21 crore to Rs 315 crore during this period. The company has reported an EBITDA per tonne of Rs 607 in Q3FY21 and an efficient cash conversion cycle of -27 days, which is among the best in small-cap cement companies in FY21.

Apart from this, the company has a good dividend track record and has consistently declared dividends of late, the rate for the last year being 80 per cent.

Ruchira Papers

Located in the pictureque surroundings of Himachal Pradesh, Ruchira Papers is an agroresidues-based company engaged in the manufacture of craft paper, writing and printing paper, and also high-strength, test liner, kraft liner based paper for textile yarn tubes. Its major focus is on profitable product segments, a superior production process and operating efficiency. Its white writing and printing paper is used to make notebooks and writing material, while the coloured paper is used in the fabrication of spiral notebooks, wedding cards, shade cards, children's colouring books, coloured copier paper and bill books.

The company has been maintaining pace with the changing technology in the paper industry. Since the start of commercial production in 1983, the company has been regularly upgrading its works.

Ruchira Papers has also demonstrated deep commitment to the cause of preserving the environment by adopting environmental-friendly practices leading to energy conservation and ultimately savings which add to the bottomline. The company also lays due emphasis on power conservation. A CII (Confederation of Indian Industry) energy audit team conducted a detailed energy audit of Ruchira Papers, including all thermal and electrical equipment. Various energy-saving proposals were suggested and since then the company has been in the process of implementing the proposals in a phased manner. Implementation of some of the proposals has resulted in reduced power consumption (per tonne of paper), which has added to the profitability and economic viability of the company.

The company is steadily improving its financial performance. During the last 12 years, its sales turnover has expanded from Rs 197 crore in fiscal 2010 to Rs 415 crore in fiscal 2021, and will cross the Rs 500-crore mark this year with the profit at net level zooming up by around 1,000 per cent. The company earned a net profit of Rs 40 crore in fiscal 2019, in striking contrast to a loss of Rs 4 crore in fiscal 2010 and a net profit of Rs 4 crore in fiscal 2011. However, after rising the net profit to Rs 40 crore in fiscal 2019, the Covid-19 pandemic spoiled the company's performance and the net profit slumped to Rs 5 crore in fiscal 2021. However, the trend has changed in the current year.

The company's financial position is getting stronger by the day, and with good earnings its debt burden is being reduced every year. During the last 12 years, its interest burden has been steadily coming down from around Rs 20 crore in fiscal 2012 to Rs 6 crore in fiscal 2021. The company has built up reserves worth Rs 261 crore (much higher than its debt amount) as on March 31, 2021, as against the equity capital of Rs 24 crore. It has been regularly paying dividends of late, the rate for the last several years being 23 per cent. Of course, for fiscal 2021, it had to be reduced to 10 per cent on account of Covid-19.

Future prospects for the company are quite promising. First of all, new capacity in the paper industry is not coming up. On the contrary, several small units have wound up and two units of Ballarpur Paper have been closed down. Secondly, being the manufacturer of paper based on agroresidues like wheat straw, bagasse, sarkanda and waste paper, it uses less energy, less water and fewer chemicals. Besides being an ecologically friendly exercise, this brings down the cost of production, while on the other hand the prices of kraft paper as well as writing paper are on the rise. In other words, going ahead the bottomline of the company will be going up besides the topline as it will be aided by favourable raw material prices. In fact, Ruchira Paper has the potential to report a healthy topline growth on the back of superior demand in the printing and writing paper and kraft paper segment.

Shares of the company are quoted around Rs 120 (face value Rs 10), and we feel this is a good price level to enter at. Discerning investors should go on accumulating these shares at every decline.

Visaka Industries

The second largest cement asbestos product manufacturer in India, Visaka Industries is also engaged in the manufacture of synthetic yarns for the textile sector. The Visaka and Shakti brands enjoy favourable recall across India's organised cement asbestos market. It has 11 manufacturing facilities in India with a total of 8.5 lakh tonnes of cement asbestos sheets and around 1.35 lakh tonnes of cement flat board. Prospects for the company are quite encouraging.

The company employs a unique business model for building the product segment. Its Asbestos Cement Sheet (ACS) finds extensive usage in urban and semi-urban interiors, while cement asbestos products like V-boards and panels largely address rural markets, allowing adequate geographic de-risking. The company's customers for V-panels and boards include GMR Group, Punj Loyd, Shapoorji Pallonji, Soma Enterprises, TCS, Gujarat Ambuja port, the Eenadu group, Uranium Corporation of India and Larsen & Toubro. The company's building products are marketed directly to retailers as opposed to the conventional company distributor-retailer model, resulting in a better marketplace understanding. It enjoys enduring relationships with an extensive network of agents and retailers.

The outlook for the building product segment is improving and sales as well as margins are expected to improve. The ACS sector, as a whole, was flat for the past 4 years. The crysotile fiber which accounts for around 65- 70% of total raw material costs is by and large imported from countries like Russia.

The company has diversified into the manufacture of synthetic yarn. It uses state-of the- art twin air jet spinning machines (Murata, Japan) and 31 MTS machines (equivalent to 55,000 ring spindles). The company's domestic textile clients comprise industry heavyweights like Grasim Industries, Siyaram Silk, S Kumar Nationwide, Shreekar Polyester, Puneet Syntex, Anand Silk Mills, GM Knitting Industries and DC Textiles.

The company has implemented a growth plan to take up a Rs 100-crore expansion project, envisaging the establishment of a new manufacturing unit for V-boards in Jhaggar district of Haryana. The new unit has enhanced the capacity by 50,000 tonnes.

The company is doing very well on the financial side. During the last five years, its sales turnover has expanded from Rs 967 crore in fiscal 2017 to Rs 1,146 crore in fiscal 2021, with the profit at net level inching up from Rs 41.15 crore to Rs 110.64 crore during this period.

The company's future prospects are highly promising as it has further growth plans on its anvil and will continue to grow in the years to come.

Elcid Investments

Elcid Investments is a Mumbai-based non-banking finance company and trades as shares. The company holds around 4.2 per cent equity stake in Asian Paints, as the promoter of the company Arvind Vakil was also one of the promoters of Asian Paints.

Though the company's authorised capital is Rs 25 lakh, its issued capital is only Rs 2 lakh. This means there are only 20 lakh shares. Interestingly, the promoters - the Vakil family - were holding around 80 per cent stake, but thanks to the new SEBI rule that promoters cannot hold more than a 75 per cent stake in their company, they had to sell around 4.75 per cent shares which were offered at a price of Rs 5,000 a piece. Thus, the available floating stock in the market is only 25 per cent. This means that the floating stock in the market is less than 5,000 shares. And no shareholder would like to sell his/her shares at the current market price of Rs 17-18 a share.

The management is keen to delist the stock from the market and has offered to buy back these shares at a price of - believe or not - Rs 1,61,023 per share of the value of Rs 10 which is quoted around Rs 17. Of course, there is a huge queue of investors who are keen to buy these shares, but the stocks are not available. The existing retail shareholders of the company are not ready to sell their shares in the market and observers feel that they may not sell their shares even to promoters at the offered price of Rs. 1,61,023 because the real value of the share is over Rs 6 lakh per share on account of the company's huge holding in blue chip Asian Paints.

In these circumstances, even if the company does not get delisted, it's virtually impossible to get the shares from the market. But it is advisable to wait and watch and catch the opportunity of buying these shares at any price up to Rs 5 lakh a piece.

20 Microns

Vadodara (Gujarat)-headquartered 20 Microns produces micronised minerals which are required as functional filters in the paints, paper, rubber and plastics industries. Started by Chandresh Parikh and others way back in 1988 at Waghodia near Baroda with a plant capacity of 2,000 tonnes per annum, the company has grown 200 times to 4 lakh tonnes per annum today, with eight manufacturing facilities located at Waghodia, Vadodara and Bhuj (Gujarat), Alwar, Swaroopgunj and Udaipur in Rajasthan, and Hosur and Tirunelveli in Tamil Nadu. These factories are strategically located closer to customers. With a view to emerging as a fully integrated conglomerate, the management went for backward integration. It obtained mining leases at Chhotaudaipur and Mamuara (Gujarat) for dolomite and China Clay respectively, Moras in Rajasthan for calcite and Tirunelveli in Tamil Nadu for lime stone. Interestingly, these mining licences are a critical entry barrier for new entrants.

Owing to well-equipped laboratories and the most advanced control instruments, 20 Microns produces minerals of the highest standard of quality and consistency. A dedicated R&D centre is the focal point of innovations that leads to formation of advanced quality products. Experienced and competent chemists, geologists and engineers make up the workforce at the R&D centre and quality control laboratory.

From textiles, plastic, rubber, adhesive and paints that add colour, to the world to paper and printing ink that set thought and life in motion, to the agro-chemicals that keep the agriculture industry in shape, 20 Microns is reaching the lives of millions everyday.

The paints industry is the major consumer for the company's products and its competitive strength in this segment is well-reflected by its ability to strengthen its relationship with its clients in the paints segment. Akso Nobel, one of the big players in the segment, sources almost 90 per cent of its requirement of micronised minerals from 20 Microns. Kansai Nerolac, the largest manufacturer of industrial paints in the country, sources over 40 per cent of its requirement from the company.

The expanding operations of the company are well reflected in its financial performance. During the last 12 years, its sales turnover has steadily moved up from Rs 179 crore in fiscal 2010 to Rs 484 crore in fiscal 2021, with the profit at net level zooming from Rs 6 crore to Rs 23 crore. The company's intention is to transform its business mix in such a manner that the bulk of its business comes from retail channels (under its brand), while there is lower dependence on B2B sales. The shift will be driven by a portfolio of products which it has been developing through in-house R&D efforts. Key products that are ready for a retail push include a water-proofing agent and a natural mineralbased fertiliser for the agriculture industry. The soft launch of their fertiliser brand has been made and the response from farmers is highly encouraging. 20 Microns has also tied up with an Indian company to leverage its rural presence for distribution of the fertiliser

Its future prospects are all the more encouraging. The company has implemented a Rs 70-crore capital expenditure programme, which in turn will give a boost to its topline as well as bottomline.

Bajaj Consumer Care

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 leader in the light hair oil (LHO) category with a volume marketshare of 7.2% and a value marketshare of 10.6% as of Dec 2021.

The company's flagship brand, Bajaj Almond Drops Hair Oil (ADHO), is the leader in the LHO category, 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 anti-marks 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 4.1 million retail outlets in the country.

The company has been engaging with customers to improve its crucial portfolios so as to maintain its marketshare. Back in 2019, it relaunched its flagship hair oil product Bajaj Almond Drops Oil to catch the attraction of the new-age population, due to which the value marketshare in the total hair oil segment touched an all time high of 11.1% in Feb 2021. The penetration of Bajaj Almond Drops has gone up from 20% to 21% as of Feb 2020 with a rise of 1% in penetration within one year (FY20).

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 reputed consultant Bain & Company to help grow its hair oil brands faster. On the financial front, Bajaj Consumer Care, being a small-cap FMCG company, has registered a tepid 3.3% CAGR growth in its topline over the past 3 years and a profit CAGR growth of 0.85% over the past 3 years due to flat/inconsistent sales and over-dependency on the hair oil category. Despite this, it has managed to maintain an average Return on Equity and Return on Capital Employed of 38.5% and 47.1% respectively over the last 5 years -- this shows the consistency of returns given by this company

Additionally, Bajaj Consumer is a debt-free company and it is currently trading at a valuation of 12.7x as against the industry valuation of 30.7x, making it an attractive bet.

The company is steadily growing on the financial front. During the last five years, its sales turnover has advanced from Rs 793 crore in iscal 2017 to Rs 915 crore in fiscal 2021, with the net profit inching up from Rs 222 crore to Rs 224 crore during the same period. Future prospects are rated all the more encouraging.

Elegant Floriculture and Agritech (India)

A tiny floriculture company with an annual turnover of less than Rs 1 crore is going to stage a dramatic turnover if the company's plan meets with success. The Mumbai headquartered company has a 10-acre farm in Maval near Pune where it cultivates roses. Its sales turnover which had moved up from Rs 57 lakh in 2010 to Rs 1.93 crore in 2017 once again came down to Rs 53 lakh in fiscal 2021 on account of the pandemic. Likewise, its net profit which had shot up from just Rs 1 lakh in fiscal 2010 to Rs 92 lakh in fiscal 2017 has come down to Rs 45 lakh in fiscal 2021.

But the company, with a highly fertile land extremely useful for rose cultivation, has attracted the attention of a leading Japanese floriculture company which is keen to cultivate its roses on this land and is ready to invest Rs 50 to Rs 100 crore. This will change the fortunes of Elegant as the Japanese company will not only cultivate roses on this land but will also take up the responsibility of marketing these roses.

The development has had an electrifying impact on the share price which has already shot up from Rs 12 to Rs 35 by now. Experts expect the price to move up further with the progress of cultivation.

Vodafone Idea Ltd.

The chances of Vodafone Idea surviving have improved considerably of late. On one hand, the government has decided to convert interest on spectrum dues into equity and as a result, the government of India will be the single largest shareholder of Vodafone Idea with an equity stake of around 36 per cent - ahead of Vodafone (around 28 per cent) and the Aditya Birla group (around 17 per cent). This will be a boon for the company, which is crushed under heavy debt and facing a severe liquidity crisis.

he company is the third largest mobile telecom network in India and the 10th largest mobile telecom network in the world. With a view to further improving liquidity, it has planned to increase the promoters' contribution as well as to bring out a public issue.

At the same time, eyeing growth in average revenue per user (ARPU), the company has made a foray into the online gaming segment in partnership with Nazara Technologies. The company wants to strategically build the gaming ecosystem through this partnership. Again, the company plans to launch e-sports in a month or two, followed by social gaming in the next 4-5 months.

Again, Vodafone and A5G Network have joined hands to set up a pilot private network in Mumbai utilising the existing 4G spectrum.

Observers feel that the chances of the survival of the company have improved considerably.